Buyers Beware

Purchasers of immovable property from non-resident sellers have a new withholding obligation under a recently promulgated section of the Income Tax Act. And failure to withhold could create personal liability for the buyer, the estate agent and the conveyancer.

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 Johan Troskie, director at Deneys Reitz Attorneys.

As a result, foreign sellers have often walked away without having paid the tax on the capital gain.

The recently promulgated section 35A of the Income Tax Act now provides for a withholding obligation on the buyer of the property. Troskie says the new withholding rules apply to resident or non-resident buyers of property situated in South Africa and bought from a non-resident seller.

The withholding rates are as follows:
(i) 5 per cent if the non-resident seller is an individual (i.e. a natural person);
(ii) 7,5 per cent if the non-resident seller is a company; or
(iii) 10 per cent if the non-resident seller is a trust.

Troskie explains that the buyer must generally pay the amount withheld to SARS within 14 days after the date the amount was withhold together with the necessary form still to be issued by SARS.

"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," he says. "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.

Troskie 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 R2 million. "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 R2 million, the withholding requirements apply in full without regard to the R2 million exemption."

Troskie says that there is a huge danger that a non-withholding purchaser will be personally liable for the withholding tax due if he/she knows or should reasonably have known that the seller is a non-resident, for example where the seller does not have a South African identification.

In addition, Troskie explains, estate agents and conveyancers responsible for the transfer of the property are each 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 party disposing of the property is a non-resident," Troskie says. "Failure to provide this notification could render the estate agent or conveyancer liable for the withholding tax."

"However", says Troskie, "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."

"The non-resident seller may apply to SARS for a relief in the form of a directive", says Troskie.

"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.

Johan Troskie, Director, Deneys Reitz Tax