Section 35A to the Income Tax Act No. 58 of 1962 was introduced by The Revenue Laws Amendment Act No. 32 of 2004 and with effect from 1 September 2007, a purchaser of immovable property (which has been disposed of for R2 million or more) is obliged to withhold the amounts set out below from the purchase price payable, if the seller of the property is not resident in South Africa.
The practical difficulty for SARS has been the collection of the CGT payable by non-residents selling immovable property in South Africa.
This withholding amount is to provide for the payment of Capital Gains Tax to SARS. It is therefore necessary to have a quick look at the basics of CGT to understand the withholding amounts better.
- Capital Gains Tax
Capital Gains Tax (CGT) legislation is contained in the Eighth Schedule to the Income Tax Act, 1962. It was introduced by the Taxation Laws Amendment Act, 2001 that was promulgated on 20 June 2001. Since then, it has been substantially amended.
Capital Gains Tax is triggered by the disposal of an asset. As a rule, an asset is acquired or disposed of whenever there is a change in ownership of an asset.
A person’s taxable capital gain is included in taxable income for the year of assessment under section 26A of the Income Tax Act No.58 of 1962 (Income Tax Act).
2. Who is liable to pay CGT?
The types of persons that are potentially liable for CGT include individuals, companies, close corporations, trusts and the various taxable funds of an insurer. Both residents and non-residents are subject to CGT.
A resident as defined in the Income Tax Act is:
Any natural person who is ordinarily resident in South Africa; or
Any natural person who complies with the physical presence test; and
Any person (other than a natural person) which is incorporated, established or formed in South Africa or which has its place of effective management in South Africa, but:
Excludes any person who is deemed to be exclusively a resident of another country for purposes of the application of any agreement entered into between the government of South Africa and that other country for the avoidance of double taxation.
A resident is liable for CGT on assets located both in and outside South Africa.
A non-resident is any person not normally residing in South Africa and falls outside the definition of a resident. A non-resident is liable for CGT on the following categories of assets:
a. Immovable property or any interest or
right of whatever nature of the non- resident person to or in immovable
property situated in South Africa.
An interest in immovable property includes equity shares in a company, ownership or right to ownership in any other entity and a vested interest in the assets of a trust in which
- 80% or more of the market value of those equity shares, ownership or right to ownership or vested interest, as the case may be, at the time of disposal thereof is attributable directly or indirectly to immovable property in South Africa held otherwise than as trading stock; and
- in the case of a company or other entity, that person (whether alone or together with any connected person in relation to that person), directly or indirectly, holds at least 20% of the equity shares in that company or ownership or right to ownership of that other entity.
b. The assets of any permanent establishment of a non-resident in South Africa. A permanent establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on, for example, a branch, office, factory, workshop or mine.
3. Will the sale of a primary home be subject to CGT?
The first R1.5 million of gain or loss on disposal of a primary residence is exempted from CGT. This concession, known as the primary residence exclusion, means that most individuals will not be subject to CGT on the sale of their homes. If the primary residence is sold for a capital gain of R2 million, the first R1.5 million is excluded and the remaining R500 000 is subject to CGT. You are also entitled to disregard any capital gain if the proceeds (selling price of the house) do not exceed R2 million.
There are two basic requirements which must be met before a home may be considered a primary residence
- it must be owned by a
natural person (not a trust, company or close corporation); and
- the owner or spouse of the owner must ordinarily reside in the home as his or her main residence and must use the home mainly for domestic purposes.
4. Rate of Withholding Tax
Where a purchaser acquires immovable property from any person that is not a resident of South Africa, the Purchaser must withhold from the amount due as and when paid to the non-resident seller:
- 7.5% where the seller is a natural person;
- 10% where the seller is a company; and
- 15% where the seller is a trust.
Section 35A does not apply:
- Where the total amount payable by the purchaser to the seller does not exceed R2 million, or
- In respect of any deposit paid to secure the disposal before the agreement is entered into. Any amount which would have been required to be withheld from the deposit must be recovered from the first following payments made by the purchaser.
Where the value of the property exceeds R2 million, the withholding amount applies to the full purchase price without regard to the R2 million limit. In the event that the purchaser acquires immovable property from a non-resident natural person for amount or R3 million, he/she would be obliged to withhold and pay over to SARS an amount of R150 000. The rate of the withholding tax does not take account of the seller’s cost of the immovable property. The withholding tax is an advance of the tax ultimately payable by the non-resident seller when they submit their tax return to SARS.
- Directive to reduce tax
The seller may apply to the Commissioner in the prescribed form for a nil or a reduced amount to be withheld. The Commissioner will consider the directive if one of four conditions exists:
- Security furnished e.g. a bank guarantee;
- Other assets in SA;
- Whether the seller is subject to tax on the disposal, for example the disposal may qualify for roll-over relief in terms of Sections 41 to 47, be exempt in terms of a DTA or, in the case of a foreign embassy, exempt in terms of Section 10(1)(a); or
- Where the actual liability is less than the prescribed withholding amount, for example where the seller can show that the property has been sold at a capital loss or where the tax liability stemming from the gain is less than the withholding amount.
6. Date of payment of withholding tax
The purchaser must pay the amount withheld to the Commissioner within:
- 14 calendar days (if the purchaser is a resident); and
- 28 calendar days (if the purchaser is a non-resident).
If the purchase price is in foreign currency, the amount withheld must be translated into Rands at the spot rate on the date paid over to SARS.
The purchaser must submit a declaration in the prescribed form when paying the amount withheld to SARS. The procedure to be followed when a withholding tax is to be paid to SARS can be found on the SARS website under the heading: External guide: Withholding amounts from payments to Non-Resident Sellers of Immovable Property in South Africa.
If the withholding tax is not paid within the prescribed periods, the purchaser will be liable for interest at the prescribed rate, currently 10.5% per annum. In addition the purchaser will be liable to pay a penalty equal to 10% of the amount of the withholding tax that should have been paid to SARS
7. Liability of Purchaser
If the purchaser knows or should reasonably have known that the seller is a non-resident and fails to withhold the amount payable, that purchaser will be personally liable for the amount not withheld and must pay the amount to SARS within the time it should have been paid.
A purchaser who is assisted by an estate agent / conveyancer will not be held personally liable if not notified of the seller’s non-resident status by that estate agent / conveyancer.
8. Obligations of the Estate Agent and Conveyancer
The estate agent / conveyancer must notify the purchaser in writing that the seller is a non-resident and that Section 35A may apply. 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. This requirement only applies to an estate agent / conveyancer who is entitled to any remuneration in connection with the disposal.
An estate agent and/or conveyancer will be held jointly and severally liable for the tax not withheld, limited to the amount of his / her remuneration where he / she knows or should reasonably have known that the seller is a non-resident and fails to notify the purchaser.
The purchase, estate agent or conveyancer may however recover any amount paid by them under the provisions of section 35A from the Seller (excluding interest and penalties).