01 March 2018
A non-resident who disposes of immovable property (or an interest in immovable property) in South Africa is liable to declare this sale in his tax returns to the South African Revenue Service (SARS). SARS realised that it was probably losing out on capital gains tax (CGT) or, in the case of people who trade in property, Income Tax in respect of properties that are bough and sold by non-residents of South Africa.
Legislation, which came into effect on 1 September 2007, ensures that foreigners who enjoyed the benefits of owning property in South Africa are brought into the tax net along with the other resident taxpayers.
By law, if a buyer buys a property from a non-resident where the purchase price is more than R2 million, (even if the buyer is a non-resident himself), he must withhold a percentage of the purchase price, which must be paid over to SARS. This tax is called a Withholding Tax (WHT). The percentage that the buyer must withhold (and pay over to SARS) is as follows, if the seller is a:
The seller may obtain a directive from SARS stating that it is not necessary for him to pay the tax. In such a case, he must supply the buyer with proof thereof. The seller can apply for a directive on a directive form obtainable from SARS.
This WHT is not payable on properties with a selling price of R2 million or less.
Payment of the tax to SARS must be accompanied by the relevant SARS form, and must be paid over to SARS within 14 days of it being withheld if the purchaser is a South African resident and within 28 days if the purchaser is a non-resident.
Although the tax must be withheld from payments made to the seller, the mere payment of a deposit to the seller does not trigger the WHT.
A buyer MUST establish whether the seller of the property he intends buying, is a South African resident. If the seller is a non-resident, and the buyer does not identify this in time, the buyer could be liable to pay tax on the purchase on behalf of the non-resident-seller, out of his own pocket, as well as any penalties and/or interest.
The estate agent and conveyancing attorney involved in the transaction must inform you, in writing, if they are aware that the seller is not a resident, and in failing to do so, given that they should reasonably have known that the seller was a non-resident, they will be personally liable for the payment of the tax and the seller will not be liable. The liability in this regard of the estate agent or attorney will be limited to their fees in respect of the transaction. They can only lose the amount that they have charged for their services in respect of this particular transaction, but not more. If thereafter there is still a shortfall in the amount payable to SARS, the buyer will not have to make up the shortfall.
The buyer, estate agent and attorney can go back to the seller and ask him to refund the money. The problem is that if the seller is a non-resident that the amount will never be recovered, and even if you do manage to do so, the legal costs of recovery could be high.
A non-resident seller, who is a natural person, who purchased a property for R2 million and sold it for R2.5 million will have to pay WHT of R25 000,00. However, if the seller was a South African resident, the seller will be liable to pay CGT of R32 000,00 (assuming that the profit was made from an investment property and that he is on the maximum marginal tax rate of 41%. If the seller had no other income for which he was liable to pay tax, this figure might even be less.)
The WHT is merely a temporary safety measure that SARS has put in place. It is an advance payment of TAX. The seller may receive a portion of the tax paid back as a refund. If a non-resident seller has a tax obligation in South Africa, he must register for tax and submit a calculation of the correct amount of CGT payable with his income tax return and on assessment, obtain a refund of the balance. Alternatively, as mentioned above, the seller may apply to SARS for a directive, advising the purchaser that no amount or a reduced amount, of tax must be withheld from the purchase price and paid to SARS. SARS will, however, only issue this directive if it is satisfied that the CGT will be paid.
A foreign seller must be aware that this law exists, in order to prepare himself for the fact that he may receive a lower cash amount than he had anticipated upon selling his property.
The SARS forms that need to be completed with the Transfer Duty payment do have a space for the seller's passport number if he is a non-resident. The forms do not specify that the seller must declare his tax residency. The seller may not even know himself whether he is resident for tax purposes.
If the seller lives overseas permanently, it would be clear that he or she is a non-resident. But what if, for example, the seller currently lives in South Africa and has done so for the past four years? Unfortunately, you can't simply assume that the seller is a resident or non-resident. Circumstances may vary greatly and one would be advised to obtain professional advice in this regard from SARS, a tax consultant or a lawyer to ascertain the tax residence of the seller. This is determined by using two 'tests' called The Ordinarily Resident Test or The Time-Based Physical Presence Test. These processes are extremely complicated and should be handled by professionals.