BUYING PROPERTY FROM A NON-RESIDENT

Legislation was enacted to provide for the withholding of amounts of consideration payable to non-resident sellers of fixed property and payment of the amounts so withheld to SARS.    The effect is that any person who, on or after 1September 2007, acquires immovable property in South Africa from a non-resident, must withhold a portion of the consideration payable to the seller or any agent on the seller’s behalf if the total amount of the consideration exceed R2 million.  The portion of the consideration required to be withheld is determined by reference to whether the seller is a natural person (5%), a company (7.5%) or a trust(10%).

 Tax Directive

The seller may apply to the Commissioner for a directive that no amount, or a reduced amount, be withheld by the purchaser (s 35A(2)).   The Commissioner must have regard solely to the following four conditions:

• First, to any security furnished for the payment of any tax due on the disposal of the immovable property by the seller.   A directive may be issued if the non-resident disposing of the immovable property provides adequate security.  This form of security can be provided through a variety of means including a bank note.
• Secondly, to the extent of the assets of the seller in the Republic.   A directive may be issued based on the non-resident’s other assets within South Africa.   The existence of these other assets means that enforcement officials will have recourse to other local assets should the ultimate capital gains tax not be paid.
• Thirdly, when the seller is not subject to tax on the disposal of the immovable property.   A directive may be issued when the person will not be subject to tax on the disposal due to some other factor, for example, the reorganization rules or as a result of the application of a tax treaty.
• Fourthly, and finally, whether the actual liability of the seller for tax on the disposal of the immovable property is less than the amount contemplated in s 35A(1).   A directive may be issued if the ultimate capital gains tax due is less than the standard gross withholding amount.   For example, this directive may wholly waive any withholding if the non-resident can demonstrate that the disposition will result in a capital loss, or the directive may partially waive withholding if the non-resident can demonstrate that the ultimate capital gains tax liability stemming from the gain is less than the withholding amount.

Section 35A(3) provides that the amount withheld from a payment to the seller is an advance towards his normal tax liability for the year of assessment during which the property is disposed of by him.   The withheld amount can potentially be applied to reduce the total normal tax due for the year (or even to claim a refund in terms of s 102).   Any withholding under these provisions, however, does not relieve the non-resident from the general responsibility to submit an income tax return. 

Let’s be practical, the seller sells for R2,1 million on 2 March 2008 and has bought for R1,5 million.    The capital gain is therefore R600,000!    The attorney or estate agent needs to pay SARS 5% (R105,000) according to section 35A((1).  If the seller has earned no other income from any other South African source, then his tax liability (due to capital gains tax) will be only R20,322.!    It is substantially less than what was paid to SARS.!  The other problem is that he is going to wait about 15-18 months to get the balance!   If he was selling on 2 March 2008 at the beginning of the 2009 tax year , then he is only going to receive his 2009 tax return in April/May 2009.   He then needs to complete it and inform SARS about his capital gain.    He is only going to receive his R84,678 after assessment at the earliest August 2009.     It is therefore important for estate agents and attorneys to inform their clients about the need to speak to a tax consultant about a tax directive application.

It is important that taxpayers contemplating property transactions obtain proper tax advice to ensure that their obligations are met and their overall tax burden is minimized.  You are welcome to contact Fanus Jonck (tax@jonck.net) regarding your tax queries on + 27 21 913 4164.   Fanus Jonck (B.Compt Hons, B.Proc, H Dip Tax) is a tax consultant in Cape Town.

Foreign owners debate needs caution

A government report proposing limitations on foreign ownership of land in South Africa met with unexpected opposition from ANC MPs last week, prompting the South African Property Owners Association (SAPOA) to call for circumspection and far more consultation on the matter before any proposals are finalised.“This week’s opposition by ANC MPs to the foreign land ownership report highlights the urgent need for government and the private sector to come together and think very carefully about the implications of these proposals,” says Neil Gopal, CEO of SAPOA.

As the voice of the commercial and industrial property industry in South Africa, SAPOA has for some time been advocating that foreign land ownership limitations would in all likelihood be detrimental to the economy.

“Foreign ownership of land in South Africa is in fact negligible. But this whole debate fosters uncertainty and caution on the part of international investors,” Gopal said.

He adds that restricting foreign land ownership could potentially backfire, causing a negative impact on investor confidence that would far outweigh any potential benefits to South Africa.

Furthermore, SAPOA believes that singling out any specific types of investors - or types of properties, for that matter - would pose a serious threat to investment in South Africa.

“Appropriate land policy should apply equally to South Africa and foreign investors alike,” says Prof Francois Viruly, SAPOA director and Wits University professor.

“Such a land policy would strike a balance between an enabling property investment environment and the achievement of South Africa’s socio-economic objectives.”

SAPOA intends to continue to play an active and vocal role in taking the foreign land ownership debate forward to ensure that the interests of the property industry are protected.

“These proposals affect all sectors of the property market – direct investment, listed property, as well as both residential and commercial property,” says Gopal. 

Mortgage and residency in South Africa

Non-residents 

The Reserve Bank ruling, and not the Commercial Bank ruling, for mortgage lending for non-residents is that they can buy and mortgage property in South Africa, but the 50% risk rule will apply.

Non-residents will have to fund 50% of the value of the property and pay for all costs that will be incurred i.e. bank costs, transfer costs and attorney costs (normally about 8% of the property value); the other 50% will be funded via a mortgage bond from the bank of their choice and normal lending criteria will apply i.e. affordability, credibility and the property offers good security. 

South Africans working and living out of South Africa 

There has been an increased demand for South Africans living overseas to purchase property back home. The Banks will lend to these individuals, but they will not lend more than 80% of the value of the property. The reasoning behind this is that there is a concern that when they return they will not necessarily be earning the same income and be able to afford the home loan repayment.

Once again the normal lending criteria will still apply. The Banks will have to be very certain of the following: 

a.. Stable employment 

b.. Employers contact details to confirm employment 

c.. Proof of income 

d.. 6 months bank statements of where salary is credited 

e.. Property being bonded offers good security The Banks are flexible, but the client’s profile and earnings will determine their decision. For example, a higher risk loan will be considered in the case of a high income earner, who with all expenses taken off, still has a low ratio of gross income to net income. 

This varies from bank to bank, but the 80% rule is the norm.  

Article by Fanus Jonck 

‘Racial classification’ in ownership slammed

By Deon de LangeThe government’s controversial report on foreign land ownership came under fire on Wednesday when members of the National Assembly’s agriculture and land affairs committee questioned its accuracy and called for the proposed racial classification of land ownership to be dropped.

In a plea not to return to the “dark ages from which we have only recently emerged”, ANC MP Salam Abram broke with most of his colleagues and warned that the inclusion of racial classification in land ownership laws would cause “havoc and heartache, while leaving our children with lasting complexes”.

“Please, in God’s name, I would not like to see racial terms in any of our legislation. A South African is a South African, finish and klaar,” he said after an emotional account of his personal experiences under apartheid-era race classification laws.Abram was responding to proposals by the government’s panel of experts to enact a form of “compulsory disclosure” by property owners - similar to that required by the Financial Intelligence Centre Act in the banking sector - in order to track land ownership patterns in the country by race and by gender.Another MP suggested it would be untenable to have a situation where, if presidential contender Tokyo Sexwale and his wife - who is white - wanted to invest in property jointly, they would have to declare their mixed marriage status.

Appointed in 2004 under the leadership of land reform academic Sipho Sibanda, the panel was mandated by the cabinet to investigate foreign land ownership and make policy and legislative recommendations in line with international best practice.

While the report suggests that foreign individuals own between 1% (for residential houses) and 3% (for sectional title properties) of local residential properties, it concedes that corporate land ownership and commercial agriculture makes it difficult to determine more accurately “who owns what”.

The report claims that corporate entities own 4.6% of all houses in South Africa, but that these properties account for 63.6% of the total value of residential property in the country - a figure disputed by several MPs.

Although the period for public comments on the report only closes on November 14, the panel has recommended that “compulsory disclosure” provisions be enacted immediately.

“The issue of disclosure is very important. It must go ahead. We cannot wait on this,” Sibanda urged.

Sibanda defended the disclosure proposal by saying race would be only one of a number of categories of demographic information required and that these statistics were needed to track land ownership.

He did not say how this would assist in tracking foreign land ownership.

DA MP and land affairs spokesperson Kraai van Niekerk labelled the panel’s work an “ideologically-driven process with little basis in fact”.

He pointed out that no official document - including a driver’s licence or identity document - currently indicated the bearer’s race.

He also suggested that not all foreign land ownership was bad, citing examples of local farms on the brink of bankruptcy that have since been turned into “productive enterprises thanks largely to foreign capital investment”.

ANC MP David Dlali lamented the fact that - despite cabinet instructions for the practice to be halted - many municipalities still sold land to private developers.

Abram then suggested the government itself had sold “the most valuable piece of real estate on the African continent - the V A Waterfront - at a bargain price to foreign investors”.

Committee chairperson Manyaba Mohlaloge (ANC) dismissed a request by DA MP Maans Nel for the “compulsory disclosure” issue to be debated in parliament before further steps were taken in this regard.

Nel manoeuvred around this by introducing a motion without notice on Wednesday afternoon in the National Assembly for this issue to be placed on the parliamentary agenda for debate. 

Article from Cape Times