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Sep 17, 2007:
Anyone buying property from a non-South African resident should be aware that they must withhold tax from the proceeds of that sale as of 1 September this year.
According to Godfrey Timber, director and conveyancer for Smith Tabata Buchanan Boyes Attorneys, this important change in legislation came into effect on 1 September 2007.
"Section 35A of the Income Tax Act declares that where the seller of immovable property is a non-resident, the purchaser has an obligation to withhold part of the purchase price from the seller, and pay such withheld portion to the South African Revenue Services (SARS)," says Timber.
Madeleine Schubert of Shepstone & Wylie's tax department explains that where the purchaser is a South African resident, the taxes withheld must be paid to SARS within 14 days. "However, if the purchaser is a non–resident, the taxes must be paid to SARS within 21 days," she adds.
"If the purchaser fails to pay the taxes and should reasonably have known that the seller is a non-resident, he or she will be personally liable to SARS, together with interest and a 10% penalty," warns Schubert.
It is also critical that estate agents and conveyancers, who are entitled to a fee, must notify the purchaser about the seller's residential status. Failure to do so will result in the estate agent or conveyancer being jointly and severally liable for the amount of taxes payable to SARS.
"However, their liability is capped at the amount of remuneration or other payment received in respect of the disposal of the seller's property," says Schubert
The amount of tax to be withheld is determined as follows: • 5% of the total amount where the seller is a natural person; • 7,5% of the total amount where the seller is a company; and • 10% of the total amount where the seller is a trust.
"The amount of tax paid to SARS is an advance payment of the seller's normal tax liability. It is possible for the seller to request a directive from SARS if the ultimate tax liability will be less than the amount to be withheld."
She adds that the withholding tax legislation is not applicable where the purchase price of the fixed property is less than R2m. However, the deed's office will not permit the transfer of such a property where the seller cannot provide it with a valid income tax reference number.
Johan Troskie, a director in the tax division of Deneys Reitz Attorneys, explains that there is a very useful exemption from the withholding obligation, namely if the total amount payable (the purchase price) for the immovable property does not exceed R2m.
"This exemption will assist low and middle-income buyers who are unlikely to be aware of the immovable property withholding requirements," he says.
"If the total amount payable exceeds R2m, the withholding requirements apply in full without regard to the R2m exemption.
"The non-resident seller may apply to SARS for a relief in the form of a directive. The relief may come in the form of reduced withholding or no withholding altogether."
In order to obtain this relief, one of four conditions must exist: (a) Adequate security: SARS may issue a directive if the non-resident seller provides adequate security through a variety of means, including a bank note. (b) Other assets within South Africa: SARS may issue a directive based on the non-residents' other assets within South Africa. (c) Person not subject to tax: SARS may issue a directive where the person will not be subject to tax on the disposal due to some other factor, such as the so-called reorganisation rules or as a result of the application of a Double Tax Agreement between South Africa and the country of residence of the non-resident seller. (d) Actual liability on disposition: SARS may lastly issue a directive if the ultimate capital gains tax due is nil as a result of a capital loss.
How does this affect estate agents? Conveyancers and estate agents could incur a personal tax liability if they fail to notify purchasers of an obligation to withhold tax on the sale of immovable property by non-resident sellers under a recently promulgated section of the Income Tax Act.
Although non-residents are currently taxed on the sale of fixed property in South Africa as part of the Capital Gains Tax provisions, there has been no efficient system of withholding the tax on such transactions, says Troskie.
Troskie explains that in terms of the recently promulgated section 35A of the Income Tax Act, estate agents and conveyancers, who are responsible for the transfer of the property, are also required to notify the purchaser in writing of the obligation to withhold. "The notification obligation applies only if the estate agent or conveyancer knows or should reasonably have known that the seller of the property is a non-resident," he says.
"Failure to provide this notification could render the estate agent or conveyancer liable for the withholding tax. However, any person (purchaser, estate agent and conveyancer) subject to any personal liability as a result of a failure to withhold has a right of recovery of any amounts paid to SARS against the non-resident seller of the property. This right of recovery exists only for the required withholding, not for any interest or penalties," Troskie says.
"Special adjustments are required in two cases. First, if the person buying the property is a non-resident, that non-resident will have 28 days (rather than the usual 14) to pay over withheld amounts. The additional time makes sense as the non-resident will often be located overseas".
"Second, if the amounts withheld are denominated in foreign currency, payment to SARS must be translated to rands at the spot rate on the date of payment." – Kara Michaels
