By: Momentum Investments

Case study 1: Local is lekker

Thabang is as South African as can be. He loves nothing more than a braai and believes that there is no place like home – South Africa! He does however worry about the South African economy as the gross domestic product (GDP) has been low and growth prospects have been contracting over the last few years. He wants to get exposure to different, faster growing economies that are less dependent on the state of the South African economy and its cycles.Thabang doesn’t have large investments and his marginal tax rate is 18%. His estate is not too complicated – he’ll leave everything to his wife.Thabang’s need is a long-term international investment but since his cost of living is and long-term needs will be in rand, he is comfortable to invest in a rand-denominated investment fund. He also doesn’t want to go through the foreign exchange process.He will need exposure to offshore investments and a mixture of suitable asset classes.

The choices available

To gain exposure to offshore investments (in rand or foreign currency) Thabang can invest in rand using the Momentum Wealth local platform (our local platform that offers both rand- and foreign currency-priced funds) into either:

• the Flexible Investment Option (FIO); or
• the Flexible Endowment Option (FEO) – but with limited liquidity.

The proceeds of both these options will be in rand.His choice: The FIO with the Momentum International Balanced Feeder Fund

Why does he choose the above?

Thabang will be investing in rand, and therefore he chooses the Momentum Wealth local platform.Thabang’s financial adviser explains to him that purely from a tax perspective, he wouldn’t gain by investing in an endowment. Thabang wants to know that he has easy access to his money (even though he strongly believes he won’t disinvest as this will more than likely be to his detriment).The Momentum International Balanced Feeder Fund aims to provide steady capital growth over the long term by giving investors exposure to a diversified portfolio of asset classes in international markets and exposure to various currencies.

What happens if Thabang dies?

As this is a local investment product (even though it is a rand-denominated international fund), this investment will be treated exactly like any other flexible investment. The investment will form part of his estate and executor fees of up to 3,5% plus VAT may apply.Foreign death taxes or so-called situs or inheritance or estate tax and probate doesn’t apply to the FIO when rand-priced investment funds are used. Situs tax is only applicable to offshore shares (and in some cases exchange-traded funds (ETFs) – refer to the addendum regarding situs tax and probate, a process to validate a will and settle potential disputes.)

Case study 2: The Mathosa Trust

The Mathosa Trust is a South African trust. The trustees want to change the trust’s investment strategy from a purely local focus to getting more exposure to offshore assets.This may imply that they have to liquidate certain assets or do a fund switch. Their aim is to reach close to 50% offshore exposure as these types of investments may be more fitting to the eventual needs of the trust’s beneficiaries, which is to study and live abroad for a few years.The Mathosa Trust’s need is a long-term investment with high offshore exposure.The yearly offshore allowance is not available to trusts.

The choices available

The Mathosa Trust trustees have the following options:

• The Momentum Wealth local platform using the FIO or the FEO (in rand-priced funds)
• The Momentum Wealth local platform using the FEO (in funds priced in foreign currency)*

*The option to invest rand into funds priced in foreign currency are not available to trusts when using the FIO, as a trust cannot convert rand to foreign currency.They choose to use the FEO with some allocation to a local fund and some to rand-priced offshore funds, and the remainder of the allocation to offshore funds priced in foreign currency. The trustees wanted to invest a portion with a specific international fund manager.

Why did they choose the above?

The decision to use an endowment was mainly due to tax considerations.The tax payable on endowments are payable by the life company according to the five-funds taxation approach. Since the beneficiaries of the Mathosa Trust are all natural persons, the individual policyholder fund was used for the purposes of five-fund taxation within the endowment. This meant that interest is taxed at 30%, capital gains at 12% and dividend tax is withheld at a rate of 20%.This is better than the rates of 45%, 36% and 20% respectively that the trust would have paid when using a FIO.

Did you know:

Many individuals whose needs don’t warrant them to go through the foreign exchange process, but who want to invest all or some of their assets with international fund management brands, can use the FEO (in funds priced in foreign currency) on the Momentum Wealth local platform.When using the FEO (and most of the other products), they can simultaneously use components (of various natures) priced in rand or foreign currency in one product.

Case study nr 3: The Kruger family

The Kruger family wants to emigrate. The husband, Frank, has been working in Australia for a few months of the year on projects for the international company he is working for. Frank and his wife, Elly, have decided they will only emigrate once their son, Matthew, has completed school.Frank decides to convert part of his discretionary offshore allowance every year, when his situation permits it, until such time that they will emigrate officially. He wants to invest this money so that he will have enough for a deposit on a house in Australia in a few years’ time. As such, he would like to ensure that the investment keeps its value in Australian dollar terms.Frank is a high net-worth individual and has specific requirements for his estate. Frank’s need is a medium- to long-term direct offshore investment.Frank wants exposure to an Australian-domiciled fund (that invests mostly in Australia) and a mixture of suitable asset classes. He is willing to go through the currency exchange proses. Even though he will convert his money to for instance US dollar to make the payment to Momentum Wealth International (MWI), he can still invest in a fund denominated in Australian dollar.

The choice

The MWI platform using the International Endowment Option (IEO) with a foreign-priced component (Australian dollar).

Why does he choose the above?

Frank wants his eventual payout to be in a foreign currency. He doesn’t want to go through the foreign exchange proses again with the full investment amount when he emigrates.To do this Frank can invest his foreign currency into:

• the Momentum Wealth local platform using the FIO or
• the Momentum Wealth International platform using either:

• the International Investment Option (IIO)
• the International Endowment Option (IEO) (capital redemption bond) or
• the International Endowment Option (IEO) (life insurance bond).

He chooses the MWI platform using the IEO (life insurance bond). By using this offshore endowment, Frank’s investment is taxed under the five-funds approach. The tax rates applied on income and capital gains under this approach is lower than the rates that Frank (being a high net-worth individual) would have paid in his own capacity. The IEO also offers sufficient liquidity due to the number of underlying policies being issued within the IEO. The IEO simplifies his tax affairs and it ticks the boxes when looking at the fiduciary considerations, covered below.Frank hasn’t yet emigrated. If he had already been an Australian resident, he could be paying tax within the IEO (five-funds approach in South Africa) and then again on the proceeds of the policy in Australia. In this instance, he would probably have selected the IIO. The IIO doesn’t pay tax to any tax authority but provides tax statements that the investor can use to report to any tax authority he or she may be obliged to.

What happens if Frank dies before he has officially emigrated?

The IEO offers the option to add multiple insured people and multiple investment owners. The investment would therefore remain in force with his wife as the owner.The IEO will be a deemed asset in his estate.As this is an endowment, there are no situs tax implications and grant of probate is avoided due to for instance the multiple contract owners.Grant of probate can also be avoided, eg by appointing beneficiaries for proceeds.

Offshore wills

By the time Frank starts to buy that house in Queensland, he will have to consider an offshore will. To understand what he is in for, he should get advice from experts in the jurisdiction where the house is.When he dies, the IEO can be transferred directly (due to a number of product features like the joint and survivorship option, successor investment owners and beneficiaries for proceeds). He has to consider these features for his offshore will. It may also be to the family’s advantage to enable wealth transfer and asset protection.

Offshore trusts

Offshore trusts are somewhat more complicated and also a matter of personal preference. The benefits need to be weighed up against the costs of administering the structure and the additional complexity from a tax perspective. An offshore fiduciary specialist should ideally be consulted to give advice on the structure.(Please refer to the addendum.)

Case study nr 4: Consolidating matters

Nomfundo wants to invest into an international outcome-based fund. These funds of Momentum Global Investment Management (MGIM) have been appealing to her since she first heard about them from the family’s financial adviser.She already has a FIO on the Momentum Wealth local platform and prefers to keep all her financial matters with this financial adviser and at Momentum, a brand she has entrusted with most of her financial affairs for years.At present, she won’t be able to meet the minimum investment amount required to invest directly with MWI.Nomfundo’s need is a long-term investment into a fund denominated in a foreign currency She needs exposure to foreign currency and a mixture of suitable asset classes.

The choice

The Momentum Wealth local platform using a FIO with an international outcome-based fund.

Why does she choose the above?

Nomfundu wants to invest in a fund priced in foreign currency. By investing into the FIO, she keeps all her reporting in one place. She is also in a low tax bracket, which means from a tax perspective she wouldn’t benefit from using an endowment.She has to go through the foreign exchange process to get access to the FIO on the Momentum Wealth local platform.

What happens if Nomfundo dies while the investment is in force?

As this is a local FIO (with an international fund in a foreign denomination), this investment will be treated exactly like any other flexible investment. The investment will form part of her estate and executor fees may be payable.There is no situs tax when investing in collective investment schemes and probate doesn’t apply. (Grant of probate will only apply to the IIO and the IEO if they aren’t structured correctly).

Addendum

What is Situs tax?

An equivalent type of tax to South African Estate Duty levied in many other jurisdictions and is dependent upon the “situs” of the assets. The word “situs” simply refers to the source or location of that asset.

• When investing in Shares there is a Situs Tax implication, however not when investing in an endowment structure.
• When investing in ETFs there might be a Situs Tax implication, however not when investing in an endowment structure
• There is no Situs Tax when investing in collective investment schemes

What does Grant of Probate mean?

The probate process is supervised by a court determining the validity of a will, settling disputes over who is to inherit and distributing assets. It is an additional process in terms of the SA executor fulfilling his duties. A timely process involving additional cost. How Grant of Probate can be avoided by making use of options available through our product offering?

• Ensure that every investment with a value of USD 20,000 or more has an overriding contractual arrangement e.g.
• International Endowment Option Additional contract owner / successor contract owner / beneficiary / joint and survivorship provision (spouses only) not automatically incorporated
• International Investment Option Additional contract owner with joint and survivorship provision automatically incorporated