April 2, 2005

By Deborah Tickle

If you buy a property in future, you will have to know whether the seller is a resident or a non-resident for tax purposes.

The South African Revenue Service (SARS) has realised that it is 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 bought and sold by foreigners.

Thus legislation, which will come into effect on a date to be determined by the President in the Government Gazette, is being introduced to ensure that the tax due on property transactions involving foreign sellers does not slip through the net.

The new rules are to be welcomed. They will ensure that such foreigners make their contribution to South Africa for having enjoyed the benefits of owning a property here.

In addition, they will largely ensure that foreign sellers are brought into the tax net along with their resident taxpayer counterparts.

The legislation states that if you buy a property from a non-resident for more than R2 million, you must, unless the seller provides you with a directive from SARS saying this is not necessary, withhold five percent of the purchase price if the seller is a natural person, 7.5 percent if the seller is a company, and 10 percent if the seller is a trust. The amount that must be paid to SARS is known as a withholding tax (WHT).

The WHT must be paid within 14 days after it has been withheld (in other words, after enough of the purchase price has been paid over to the seller to cover the WHT; payment of a deposit does not trigger the WHT) if the purchaser is a resident, and 28 days if the purchaser is a non-resident. The WHT must be accompanied by the relevant SARS form, which, presumably, is in the process of being designed.

If you do not do this, and should reasonably have known that the seller was a non-resident, you will be held personally liable for the amount of the WHT, and must pay it within the same period as set out above. If you do not do so, you will be charged, in addition to the WHT, a penalty of 10 percent of the WHT amount and interest on the WHT amount.

You may think that penalty seems rather harsh, because generally you leave all the work relating to the transfer of a property to the conveyancer. Furthermore, you would think the estate agent should warn you about the WHT.

SARS has recognised that some responsibility must lie with these parties. Thus, if an estate agent and/or a conveyancer are involved in the transaction, and they receive a fee for the work they perform, he or she must inform you, in writing, that the seller is not a resident.

If the estate agent or conveyancer does not do this, and they should reasonably have known that the seller was a non-resident, they will be personally liable for the payment of the amount, but their liability will be limited to their fees in respect of the transaction.

Of course, all three of you can always go back to the seller and ask him or her to pay the money which you have laid out on his or her behalf. But since the seller is a non-resident, you take the risk that you will never recover the amount, and even if you do, the costs of recovery could be high.

As a non-resident seller, you may consider the rules to be harsh. For example, if you purchased a property for R2 million and sell it for R2.5 million, you (as a natural person) will pay WHT of R125 000.

However, if you were a resident seller, and were to submit a tax return, your CGT liability would only have been a maximum of R50 000 (assuming you are on the maximum marginal tax rate of 40 percent).

If you have no other income for which you are liable for South African tax, this figure could have been as little as R20 770 (based on the 2005 tax tables and assuming you are under 65).

So, what can non-resident sellers do? The WHT is merely an advance payment of tax. If a non-resident has a tax obligation in South Africa, he or she must register for tax and submit a calculation of the correct amount of CGT payable with his or her income tax return and, on assessment, obtain a refund of the balance.

Alternatively, you may apply to the Commissioner of SARS to issue you with a directive that you can give to the purchaser, his or her estate agent and conveyancer, advising them 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.

To ascertain this, SARS will take the following into account:

Any security that has been provided for the amount of tax actually payable;
Any other assets you may have in South Africa;
Whether any tax will in fact be payable in respect of the sale of the property; and
Whether the amount of tax that will be payable will be less than the amount payable in terms of the WHT.

Once the purchaser has the directive, he or she need only withhold an amount equal to the amount set out in the directive.

Foreign sellers need to be fully aware of their rights in respect of the WHT. Otherwise they could be in for a nasty shock when they receive a somewhat lower cash figure than they had expected upon the sale of their immovable property in South Africa.

Deborah Tickle is a tax partner at KPMG.