Many South Africans live and work overseas but buy property in this country. We explain how capital gains tax will be calculated if you are a non-resident and sell a property in South Africa.
A Personal Finance reader who lives in the United Kingdom recently read an article, published in a UK journal, about the tax implications for South Africans who own fixed property in South Africa and who sell that property while living outside South Africa.
The reader expressed surprise that the article indicated that he would have to pay South African capital gains tax (CGT) on the disposal of the property, and wrote to Personal Finance to ask if this is correct.
The simple answer is, yes, it is.
Generally, people who are not resident in South Africa are not subject to CGT from disposals of assets they own in South Africa.
There are two exceptions to this rule, one of which is that South African CGT is payable on gains made from the sale of immovable property or an interest in an immovable property company, regardless of whether the seller is resident or non-resident for tax purposes in South Africa. (An interest in an immovable property company is defined as a holding of more than 20 percent in a company that derives more than 80 percent of its value from immovable property). The other exception is not relevant for the purposes of this article.
The principle that tax on the capital gains made from the disposal of fixed property will be paid in the country where that property is located is applied by jurisdictions worldwide, and double taxation treaties (agreements between governments to determine the taxing rights) generally support this principle.
Generally, double taxation treaties ensure that a taxpayer is only ultimately taxed in total at the rate in the country with the higher tax rate. They do this by ensuring that if the gain is also taxed in the seller's country of residence, that country will either exempt the gain from tax there or give a credit for the tax paid in the country where that property is located against the tax payable in the country of residence. In South African treaties, the latter usually applies.
For example
Just to clarify how this works: let's say you are a UK tax resident, albeit a former South African (the treaties also provide guidelines as to where tax residency is, if this is not clear between the two countries) and you have just sold a property in South Africa for R1 million.
You have held the property for investment purposes and have received rental from it for a number of years. Thus, it can safely be said that the property is considered to be a capital investment and not a trading investment (in which case the income tax rate, and not the CGT rate, would apply).
In addition, it should be noted that since rental is also required to be paid in the country where the fixed property is located, you will have paid tax in South Africa on the net rental income you received each year - that is, rental received less expenses incurred to generate the rental - as required by the tax legislation and treaty. Thus you will be registered in South Africa as a taxpayer.
On sale of the property, you are able to deduct the original cost of the property, the cost of any improvements and the sales commission to the agent against those proceeds, and you make a capital gain for South African tax purposes of, say, R500 000.
You will reduce this gain by the individual annual exclusion of R16 000, and pay tax on 25 percent of the balance - that is, on R121 000 (R500 000 less R16 000, multiplied by 25 percent). Let's assume you have no other South African income during the year, because transfer of the property took place on March 1, 2008 (that is, no rental or other income this year). The tax will thus amount to R13 500 (based on the tax tables, less the primary rebate of R8 280).
If the UK tax on the same gain is, say, R10 000, the UK authorities will recognise that you have paid tax in South Africa, the country where the property is located, and you will offset the South African tax against the UK tax so that you will not also pay UK tax on the gain. If the UK tax is more, you will pay the difference in the UK.
Because you are non-resident at the time of selling the property, unless you obtained a directive from the South African Revenue Service (SARS), the purchaser may have withheld tax from the purchase price he or she paid to you on transfer of the property and paid it over to SARS as an advance payment of the CGT owing. The withholding tax (WHT) would have amounted to five percent of the selling price payable to you (the rates differ for companies and trusts). Thus, you would have already paid R50 000 as tax in the form of the non-resident WHT in advance of submitting your provisional tax returns and income tax return for 2009. On submission and assessment of your tax return for 2009, SARS will give you a refund of R36 500 (which is R50 000 less R13 500). (The tax implications of buying property from non-residents was dealt with in "Buying property from non-residents: what you need to know" in the fourth quarter 2007 edition of Personal Finance.)
Should you not have been registered as a taxpayer in South Africa before - for example, because you held the property as a holiday home and did not receive rental income - you may not have ordinarily submitted a tax return and paid the CGT to SARS. It is for this reason that the authorities introduced the WHT provisions. However, since the WHT is merely an advance tax, it is important to be aware that you are still obliged to register for tax and submit a tax return in respect of the disposal of the property in the year of the disposal.
- Deborah Tickle is a partner at KPMG.
This article was first published in Personal Finance magazine, 3rd Quarter 2008. See what's in our latest issue