Introduction

Non-residents failing to keep these records will be hit with a huge tax liability and could find themselves in a nightmare situation with the South African Revenue Service (SARS).

The road to owning real estate in South Africa by a non-resident seems to be a smooth highway. There are no restrictions on the ownership of property by a non-resident and, with the recent weakening of the Rand, foreigners do not even have to dig very deep in their pockets to purchase sought-after wine farms and beach villas.

South Africa has a highly sophisticated registration system which offers excellent security of tenure. Local and foreign banks are prepared to lend money against the registration of mortgage bonds and owning a property in South Africa is, for many, the first stepping stone to wealth. Disputes about ownership of property are limited to land claims, which claims had to be lodged by 31 December 1998.

This is the good part, but the seemingly smooth highway contains certain potholes into which the unwary foreign investor can fall.

Record-Keeping Requirements

South Africa has exchange control regulations which restrict the inflow and outflow of capital in South Africa. Investments into South Africa must be reported to the South African Reserve Bank, which administers exchange control. Some of these powers are delegated to certain banks which are authorised dealers.

It is of fundamental importance to most non-residents that investment funds and funds generated by the investments, can be repatriated. Funds introduced into South Africa to acquire property may, together with the profits on resale of the property, be repatriated if the title deed of the property was previously endorsed "non-resident" by an authorised dealer.

This practice has been terminated by most of the local banks, who are only prepared to endorse the share certificates of foreign shareholders as "non-resident". Good record keeping is accordingly of utmost importance to any foreigner who purchases property in South Africa. Non-residents have to apply to take money out of South Africa. The application is usually handled by an authorised dealer who requires the following documents:

1. A certified copy of the seller`s passport.

2. A certified copy of the purchase and sale agreement concluded when the seller purchased the property.

3. The seller`s bank statements confirming the transfer of the funds to South Africa when the property was purchased.

4. A letter from the attorney who attended to the transfer of the property confirming receipt of the funds.

5. A copy of the sale agreement to prove that the seller sold the property at fair market value.

That a lack of good record keeping can cause grave problems is illustrated by the following example.

Case Study

Mr Bloom, a UK citizen, purchased a property in Bantry Bay in 1998 for a purchase price of R2M (this was still possible in 1998). He transferred the full purchase price of the property from a UK account into the trust account of the attorneys who attended to the transfer of the property.

During 2000 and 2001 he made extensive renovations to the property, to the value of R5M. In 2008 Mr Bloom sold the property for R20M and wished to repatriate the funds to the UK.

Mr Bloom did not keep records of the flow of the funds to South Africa when he purchased the property and did not keep records of the expenses he incurred when he did the renovations. The attorneys who attended to the original transfer to Mr Bloom did not request an authorised dealer to endorse the title deed of the property "non-resident" and destroyed their file (an attorney is only obliged to keep records for a period of five years after the finalisation of a transaction).

Where does this leave Mr Bloom? He is unable to provide the documents required for repatriation of the funds and might very well be forced to spend his R20M in South Africa.

Mr Bloom`s failure to keep proper records of his expenses, will lead him into the next pothole, namely Capital Gains Tax (CGT). A non-resident is liable to pay CGT on the capital gain made on the sale of a property. In simple terms this is the difference between the price for which the property is sold less all capital expenses, which in our example would be the following:

Mr Bloom will be liable for the payment of CGT on 25% of the gain at the marginal rate of 40%. As Mr Bloom did not keep records of the capital expenses of R5M he will be liable for CGT on the amount of R18M, being R1.8M. If he would have kept proper records, the CGT would be payable on the amount of R13M, and would have been an amount of R1.3M. His failure to keep proper records, in short, will cost Mr Bloom an amount of R500,000.

Withholding Tax for non-Residents

SARS has seen a substantial number of non-residents selling property at large profits but failing to pay CGT and as a result has introduced a withholding tax into the Income Tax Act. A purchaser of immovable property in South Africa must withhold from the purchase price payable to a non-resident seller, an amount in respect of tax on the capital gain at the following rates: 5% where the seller is a natural person; 7.5% where the seller is a company; and 10% where the seller is a trust.

In our example this would mean that the purchaser of Mr Bloom`s property has to withhold an amount of R1M, which is held by SARS as an advance payment in respect of Mr Bloom`s tax liability for the year during which the property was sold.

All of the above makes it abundantly clear that a non-resident who purchases property in South Africa has to keep good records and make use of the services of a professional who understands the requirements of a non-resident.

The above article was produced by Mieke van Rensburg who is a director at Denys Reitz, and is reproduced with the kind permission of TAXtalk, South Africa's leading tax publication (www.taxtalk.co.za).
 

Article Added Friday, 09 May 2008 | 1065 Hits

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