Discretionary Allowance – Offshore Property a hedge against Local Volatility

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If you haven’t already used your annual offshore allowances for 2015, now might be a good time. In my last article I concluded that South African investors should be asking whether offshore investing is part of their strategy instead of questioning what the Rand will do.
Every year South Africans receive a discretionary offshore allowance of one million Rand and a capital allowance of R10 million. As the end of the year approaches, it is important to ensure that you have made use of these allowances if you intend on investing offshore. Let’s take a look at how you can use your discretionary allowance by investing in offshore property and why that’s a good idea.

The benefits of using your discretionary allowance
It’s quick and easy. All you have to do is book your exchange rate with Sable Forex and two days later, we will have your funds in the offshore account of your choice. You don’t need a tax clearance from SARS so there is very little administration. Besides this, the money can be used for anything, including foreign investment. If you are married and haven’t used your 2015 allowance, you could move up to R4 million between now and early January 2016.

I recommend you make use of these allowances while they are still available. If the current trend of disinvestment and Rand decline continues, the government may well impose some tighter capital controls in the future.

Offshore property investing as a hedge against local volatility
South Africa has always been deeply integrated into a capitalist international political economy.  As a result, external factors in the global economy have an influence on our economy domestically. The very government that manages our economy today was born from the party that used internal tactics to influence market dynamics abroad. In the late 20th century, these strategies had powerful effects, eventually coercing the previous regime to make changes to our political landscape.

Ironically, the current government is now being punished by international markets in a similar way. The disregard for the capitalist disciplines of a modern globalised economy, in favour of a blatantly communist system based on patronage and abuse of power, influence international market dynamics where South Africa is concerned.

With this in mind, one needs to understand that as much as we may love South Africa, our local volatility is being further accentuated by this poor economic management. Post 1994 South Africa entered an era of excitement at the prospects of the rainbow nation flourishing. This has soured somewhat since then. The ANC, while in exile, learned the doctrines of a failed communist system. This, coupled with mis-governance and sometimes a total lack thereof, in combination with the end of the commodity boom and dwindling protection from a friendly international community, leaves South Africa very exposed. The country is heading for an investment crisis.

“The 100 largest companies on the JSE are sitting on a cash mountain of R403 billion, suggesting corporate unease at the state of the investment climate both at home and abroad.” Ciaran Ryan | 23 November 2015

Borderless-Investments
Foreign investors are also shying away due to policy uncertainty surrounding the rights of land ownership, as well as tough and unclear BEE guidelines and a very militant labour force. Whilst the Rand is “cheap”, our labour productivity is so uncompetitive that potential returns for the perceived risk are simply not worth it. The ANC is business-unfriendly and dislikes Western powers unless, of course, they need something from them.

Tax payers are put under massive strain in SA whilst the government wastes billions of Rands through incompetence and corruption. Disposable income is at an all-time low. An offshore investment should be viewed as a possible yield-generating asset that can derive a hard currency income. This would not only be good for South Africa as hard currency returns are brought back home, but good for the investor too.

With all the above in mind, seeking a good offshore investment may be expensive in the short-term, but it could well pay handsome returns long-term.

How to manage your mortgage: Be wary of your gearing
If you use your investment funds to purchase an offshore property and you apply for a mortgage bond abroad, you need to be sure that you will always be able to service your payments from a Rand-based income. Be aware that as international interest rates climb, the Rand could well devalue and this could put you in dire straits financially.

Conclusion
On the current trajectory, South Africa is heading for a crisis and it will no longer be able to meet its obligations on its current income projections. Any further ratings downgrades will make borrowing money from the bond and capital markets unaffordably expensive.
In a country where most citizens are peaceful and looking for a simple life, any bail-out will put the Marxist ANC into a corner. Things will have to get worse before they get better and when SA emerges from this cycle, it will be a better place. Meanwhile, use your allowances while you have them available to hedge yourself and your wealth.

By Andrew Rissik

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