The sale of immovable property in South Africa by non-residents has tax implications that need to be considered. If the sale price exceeds R2 million, non-residents are potentially required to pay withholding tax to the South African Revenue Service (SARS) under section 35A of the Income Tax Act.
To determine whether the Sellers are subject to section 35A of the Act, the first step is to establish their residency status in South Africa, as this section only applies to non-resident sellers. The Act provides two tests to determine residency, namely the ordinary residence test and the physical presence test. If a person meets either of these tests during the year of assessment, they are deemed to be a "resident" for tax purposes. To qualify as an "ordinarily resident" in South Africa according to common law, a person must typically return to South Africa from their travels and consider South Africa as their primary or principal residence, or their "real home"
To satisfy the physical presence test, a person must be physically present in South Africa for the following periods:
“be present in the country for more than 91 days in each of the five years preceding the year of assessment, and be present in the country for more than 915 days in total during the five years preceding the year of assessment. However, if a person is outside of South Africa for a continuous period of at least 330 full days but meets the physical presence test otherwise, they will not be considered a resident from the date they leave the country”.
If a person does not meet the requirements to be deemed a resident according to the Act, they will be treated as a non-resident and liable for taxes under section 35A of the Act.
Withholding tax is determined by a percentage of the gross selling price. The percentage depends on the status of the seller, as follows:
7.5% for natural persons
10% for companies
15% for trusts
To comply with the law, the conveyancer must withhold the appropriate amount and hold it in the firm's trust account. The balance of the net sale proceeds is then paid to the seller, and the withheld amount is paid to SARS within 21 business days of the transfer. It should be noted that the Real Estate Practitioner is also mentioned as being required to withhold the money and remit to SARS after registration should the conveyancer not be able to do so.
Sellers have the option to request a Directive from SARS to exempt or reduce the rate of withholding tax. The seller can submit the form with supporting documents to SARS directly or grant a Power of Attorney to their tax advisor or the conveyancer. The reasons for a lower rate of tax will depend on the case. For instance, the seller may be fully exempt from income tax or have a low taxable income or may have sold the property at a loss. The conveyancer must retain the withholding tax funds in trust until receipt of the SARS Directive. Therefore, it is advisable to make an application at the start of the transaction to allow enough time for the issuance of the Directive before registration of the transfer.
Non-resident sellers need to be informed of the possibility that a portion of their net sale proceeds may be withheld once their transfer registers and their expected net proceeds may be less than anticipated. Therefore, the conveyancer and or the real estate practitioner should communicate the provisions of section 35A to non-resident sellers as soon as possible, allowing them to apply for a Directive promptly. Likewise, sellers must inform their conveyancer if they have immigrated so that the necessary "residents" test can be done, and provisions made for withholding tax if necessary.
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12 May 2023