“In all cases, the real estate owner will need to file with SARS an annual tax return for each period of 12 months, ending on the last day of February in each year.”
Meticulous paper work and the right legal is required to meet tax requirements
Many non-resident private individuals (and entities) have acquired real estate in South Africa as holiday homes or investments, or both. There are currently no restrictions on the purchase of real estate by non-residents, but important income tax and exchange control considerations should be borne in mind.
A non-resident private individual or entity will need to register as a taxpayer in South Africa to ensure that net rental income is subjected to South African income tax and that a capital gain realised on disposal will also be declared for tax purposes. A non-resident entity may also need to register as an external company in terms of our company law requirements.
A non-resident individual or entity will only be liable to South African income tax on income and capital gains derived from a South African source. A percentage of capital gains (33.3% in the case of a private individual and 66.6% in the case of entities or trusts) are included as normal taxable income and subject to our standard income tax rates. There is no separate Capital Gains Tax (CGT).
When a non-resident sells South African real estate, there is a withholding tax of 5% of the gross selling price (in the case of a private individual) which must be paid over to the South African Revenue Service (SARS) as payment on account of the tax as finally assessed. The rate is 7.5% in the case of a company seller and 10% in the case of a trust. If the tax on the computed capital gain is likely to be less than such withholding tax, a directive can be applied for from SARS for a reduced amount of tax to be withheld.
In all cases, the real estate owner will need to file with SARS an annual tax return for each period of 12 months, ending on the last day of February in each year. A company may request a different year end. Income tax on an annual basis will be payable on the gross rental income, less the expenses incurred to produce such income (such as municipal rates, repairs, maintenance, electricity, water, rent collection commission and similar expenses which may be borne by the owner). Income tax would also be payable on a capital gain arising on the actual or deemed disposal of the real estate. A deemed disposal arises on the date of death of the non-resident individual holding real estate in South Africa. In certain cases there may be a double tax treaty between South Africa and the home country and the terms thereof may override the local tax rules.
If, subsequent to the purchase of the real estate, the non-resident owner incurred costs on capital improvements to the property, records of such expenditure (and the source of the funds) must be carefully retained. As such costs may be taken into account in the computation of the taxable capital gain, the absence of documentary evidence and proof could result in SARS not allowing any deduction for such costs. Similarly, records need to be retained of all costs relating to both the acquisition of the real estate (for example transfer duty, VAT, transfer costs, bond registration costs and other lawyer fees) as well as those relating to a subsequent sale (such as selling commission, electrical and other certificates, rates clearance certificates or lawyer fees).
Funds introduced by non-residents into South Africa may be repatriated in full together with any after-tax income and gains made during the holding or disposal thereof. Despite this, there are administrative controls in that the movement of funds has to be reported to the relevant department of the South African Reserve Bank (SARB). This is done via the local South African commercial banks.
So as to ensure that there is no obstacle to repatriating funds, it is essential that records of the funds coming into South Africa be retained and the use of such funds be able to be tracked. Accordingly, if funds are remitted from outside South Africa to a local lawyer to pay for real estate, it is essential that proof of the funds transfer be collated and retained by the owner as the lawyer will probably destroy his or her records after five years. It is important therefore to request from the lawyer written confirmation that he/she received such funds from offshore direct into his/her trust bank account and an accounting as to how such funds were disbursed. Copies of the real estate purchase agreement and subsequent sale agreement, as well as related statements from the lawyers, must also be carefully retained.
If the funds were to be used to form or acquire a local company in order for it to acquire the real estate, it is also critical to place on record with SARB, the fact that the local company is borrowing funds from a non-resident lender and the terms of such loan. It would be incorrect (and cause major delays later) if it was stated that the funds came into South Africa to purchase real estate when, in fact, a local company purchased the real estate using funds borrowed from the non-resident.
Non-residents acquiring real estate in South Africa need to consult local professionals to handle their tax and exchange control needs and requirements. The lawyer handling the transaction is normally acting for the seller and may (or may not) be equipped to also handle these aspects for the purchaser.
Author: Kent Karro CA(SA) Senior Partner at Horwath Zeller Karro
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