While there is no prohibition against non-residents buying and selling property in South Africa, such transactions are treated a little differently, for tax purposes. The sale of immovable property in South Africa as a non-resident usually attracts withholding tax, and capital gains tax in certain circumstances. Let’s unpack these two tax types and how they might affect you if you are selling your South African property from abroad.
Selling property in South Africa as a non-resident
Whether sellers are resident for tax purposes or not is determined by either the ordinary residence test or the physical presence test. If you do not meet the criteria, you will be treated as non-resident for tax purposes. Why is tax residency relevant in the sale of a property? This is because selling immovable property in South Africa as a non-resident can incur withholding tax according to section 35A of the Income Tax Act if the property is sold for more than R2 million. Because this section only applies to non-resident sellers, the first step is to determine residency status in South Africa. The Act uses two tests to determine residency for tax purposes:
In terms of the Act, a person is deemed a tax resident if they meet the requirements for the ordinary residence test during the assessment year or, failing that, the physical presence test. A person is considered “ordinarily resident” if they would ordinarily return to South Africa because they consider it to be their usual or principal residence. To pass the physical presence test, a person must be physically present in South Africa for specific periods over the years preceding the assessment year.
If you do not fulfill the requirements to be a tax resident by either test, you will be treated as a non-resident and charged withholding taxes on the sale of property, as outlined in section 35A of the Act, where the property sells for more than R2 million.
Tax on sale of property in South Africa: capital gains tax and withholding tax
- Capital gains tax (CGT) and withholding tax are two different types of taxes that may be payable on the sale of property in South Africa by a non-resident.
Capital gains tax is a tax on the profit made from the sale of an asset, such as property. Non-residents are only liable for CGT on immovable property situated in South Africa. The maximum effective rate of CGT is as follows: 18% for individuals and special trusts, 21.6% for companies, and 36% for trusts.
- Withholding tax is a tax that is deducted from a payment made to a non-resident. When a non-resident sells property in South Africa, the purchaser of the property is required to withhold 7.5% of the purchase price if the seller is an individual, 10% if the seller is a company, and 15% if the seller is a trust. This withholding tax is then paid to the South African Revenue Service (SARS).
The main difference between CGT and withholding tax is that CGT is a tax on the profit made from the sale of an asset, while withholding tax is a tax that is deducted from the purchase price of an asset. Another difference is that CGT is calculated on the seller’s net capital gain (after taking into account any allowable deductions), while withholding tax is calculated on the gross purchase price of the asset.
Withholding tax on immovable property sold in South Africa
Non-resident sellers should be informed that a portion of their net sale proceeds may be withheld once the transfer registers, potentially resulting in lower profits than anticipated. The conveyancer must hold back the relevant amount before transferring the net sale proceeds to the seller and this money must then be paid to SARS within 21 business days from the date of transfer after sale.
Sellers can request a directive from SARS to exempt or reduce the withholding tax based on their circumstances. The reasons for a lower tax rate depend on the specific case, such as being fully exempt from income tax, having a low taxable income, or incurring a loss from the property’s sale. Even if SARS issues a negative directive, the amount may still be refundable (in case of a capital loss) or applied toward taxes owed by the sellers.
Transferring attorneys have a duty to communicate section 35A provisions to non-resident sellers promptly, allowing them to apply for a directive in a timely manner. Likewise, sellers should inform their transferring attorneys if they have permanently relocated, enabling the necessary “residency” test and provision for withholding tax to be made, if needed.
Capital gains tax on inherited property in South Africa
In South Africa, inheriting a property does not incur immediate tax. However, the value of the property on the day of inheritance becomes the base cost for Capital Gains Tax (CGT) calculations and when the inherited property is eventually sold, CGT applies based on this base cost.
FinGlobal: cross-border financial specialists
For South African expats living abroad, tax matters back home can often be a cause for stress and anxiety. Fortunately, there is an easier way. Let FinGlobal manage all your tax requirements and relieve you of the headaches associated with engaging with SARS from out of the country. Whether it involves tax directives to minimise withholding tax for non-resident property sales, tax refunds, or obtaining tax clearance for foreign investment allowances, we’ll handle the paperwork and give you peace of mind from start to finish.
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