It could cost you dearly if you don't establish whether the seller of the property you are about to buy is a resident of South Africa.
Two years ago, a piece of tax legislation was written with a view to ensuring that non-residents pay tax in South Africa when they sell property they own in this country. However, those regulations have not been promulgated into law, until now.
The regulations became effective on September 1 this year. (If there is a suspensive condition to a sale agreement that is not fulfilled before September 1, the regulations could apply to an agreement signed before that date. If there is no suspensive condition, they will apply only to agreements signed after September 1.) As a result of the legislation, if you buy immovable property (land or buildings), you need to know whether the seller is a resident or a non-resident for tax purposes. In addition, you need to ensure that, if the seller is a non-resident, you pay a portion of the purchase price, on the seller's behalf, to the South African Revenue Service (SARS) and not directly to the seller.
If you don't, you may find yourself in the unfortunate position of having to pay the tax for the seller, out of your own pocket, even though you have paid the full purchase price to the seller. In addition, you may have to pay a penalty and interest on the tax.
It is critical to establish whether a seller is a non-resident in order to determine whether you are obliged to pay SARS a portion of the selling price.
But firstly, what are your obligations if you establish that a seller is a non-resident?
If you buy a property from a non-resident for more than R2 million (which might sound a lot, but given what has happened to property prices in the past few years, is not unrealistic), you must withhold five percent of the purchase price if the seller is a natural person, 7.5 percent if the seller is a company and 10 percent if the seller is a trust, and pay the relevant amount to SARS. The amount is known as a withholding tax (WHT).
The tax is not payable on properties of R2 million or less. And it is not payable on properties of more than R2 million if the seller provides you with a directive from SARS stating that payment is not necessary. The seller of the property can apply for a directive on a directive form. The WHT must be paid over to SARS within 14 days of it being withheld if you (the purchaser) are a resident, and 28 days if you are a non-resident.
Although the tax must be withheld from payments made to the seller, the mere payment of a deposit to the seller does not trigger the WHT.
Payment of the tax must be accompanied by the relevant SARS form.
If an estate agent and/or a conveyancer is involved in the transaction and he or she receives a fee for the work performed, he or she must inform you, in writing, if a seller is not a resident.
If the estate agent or conveyancer does not do this, and he or she should reasonably have known that the seller was a non-resident, the estate agent or conveyancer will be personally liable for the payment of the WHT and you will not be liable.
However, the estate agent or conveyancer's liability will be limited to his or her fees in respect of the transaction. This means the agent or conveyancer can lose all his or her fees but no more. If there is a shortfall in the amount, the buyer does not have to make up the shortfall.
All three of you can, of course, always go back to the seller and ask him or her for the money that you have paid out, on his or her behalf. But since the seller is a non-resident, you take the risk that you will never recover the amount, and even if you do, the costs of recovery could be high.
It is clear from this that you, your estate agent or your attorney need to know whether a seller is a non-resident for tax purposes.
Residency can be complicated
Even though the forms that accompany a transfer duty payment have a space that requires the seller's passport number to be entered if he or she is a non-resident, the forms do not specify that the seller must declare his or her tax residency. Thus, establishing a seller's residency status might not be as easy as it sounds. Furthermore, the seller may not know whether he or she is resident for tax purposes.
If the seller lives overseas full time, it would be clear that he or she is a non-resident. But what if, for example, the seller currently lives in South Africa and has done so for the past four years? Unfortunately, you can't simply assume that the seller is a resident.
The residency status of an individual for tax purposes may be determined using one of two tests:
- The ordinarily resident test; or
- The time-based physical presence test.
Both of these tests may be overridden if a person is deemed to be a non-resident by virtue of a double-tax treaty the South African government has concluded with the government of another country.
Sounds complicated? It is.
Firstly, a person is "ordinarily resident" based on his or her intention. Thus, if the seller considers South Africa to be his or her real and permanent home (the place to which the seller would ordinarily return after his or her wanderings), that person would tend to be regarded as a resident for tax purposes, and you would not be required to retain the WHT if you bought property from him or her.
As a matter of interest, there are people who have lived overseas for a number of years, who have not emigrated and who intend to return to South Africa at some stage in the future, and who are therefore still tax-resident here. It would be incorrect to withhold the WHT from the amount you paid them if you bought their property.
On the other hand, there are people who have lived here for a number of years, who are, for example, on a secondment with their employer and do not consider South Africa to be their permanent home, and who are therefore not resident for tax purposes, and from whom you should withhold the WHT if you buy their property.
Such people may become resident by virtue of the time-based physical presence test, but, as you will see, this applies only if extensive time has been spent in South Africa.
The test requires that the person is present in South Africa for at least 91 days in each of the current and previous five years, and his or her presence during the previous five years must total at least 915 days. So, although you or your estate agent might know for certain that a person has been here for the past five years, he or she may still be a non-resident for tax purposes. Even if the seller satisfies this "days-present" test, a double-tax treaty could still treat him or her as a non-resident.
Avoid costly assumptions
So, what do you do? Basically, you can't assume that any person from whom you buy a property for more than R2 million is a South African resident for tax purposes.
You need to check with your attorney what has been completed on the transfer duty forms. You could even ask the individual to sign an affidavit setting out his or her tax-residence status.
If you believe the seller is a non-resident, you must make sure that a portion of the purchase price is withheld and paid appropriately to SARS. Don't simply assume that your attorney will do this for you.
If your attorney has notified you that the seller is a non-resident but the WHT is not properly paid over to SARS, you run the risk of being liable for an additional cost of at least R100 000 (five percent of R2 million) plus penalties or interest.
Buying a property is costly enough without having to fork out for someone else's tax, so it would really be best if you, your estate agent and your attorney got it right!
- Deborah Tickle is a tax partner at KPMG.
This article was first published in Personal Finance magazine, 4th Quarter 2007. See what's in our latest issue