Section 35A of the Income Tax Act, 1962 imposes a withholding of tax in respect of non-residents who dispose of fixed property in South Africa (SA), and came into operation on 1 September 2007. This section applies to any disposal on or after that date.
The application of the section applies to both resident and non-resident purchasers who acquire certain properties in SA from non-resident sellers. Although non-residents are required to account for, and pay capital gains tax (CGT) upon disposal of any fixed property in SA, the South African Revenue Service (SARS) has experienced difficulty in enforcing the collection of CGT from foreigners. In order to ensure more effective tax collection, section 35A imposes an obligation on the purchaser to withhold the tax, under certain circumstances.
On acquiring immovable property priced at more than R2m from a non-resident of SA, the purchaser will be required to withhold a certain percentage of the amount due to the seller. The rate of the amount to be withheld differs according to the nature of the seller:
- If the seller is a natural person, 5% of the purchase price is to be withheld;
- If the seller is a company, 7,5% of the purchase price is to be withheld;
- If the seller is a trust, 10% of the purchase price is to be withheld.
In contrast to the calculation of CGT payable, the withholding tax is based on the amount due to the seller – i.e. the "base cost" of the asset is not brought into account. This obligation does not apply under circumstances where a deposit has been paid by a purchaser and the sales agreement has not been unconditionally finalised.
The amounts are payable to SARS within 14 days of the money being withheld (if the purchaser is a resident of South Africa), or within 28 days of the money being withheld (if the purchaser is a non-resident). SARS will treat such payments as an advance in respect of the seller's liability for tax for that year of assessment.
Under circumstances where the purchaser has failed to withhold the tax due, and was aware that, or should reasonably have known that the seller of the property was a non-resident, the purchaser would be personally liable for the payment of the withholding tax and a 10% penalty on such amount. SARS would also levy interest charges on the outstanding amount of tax due.
However, should an estate agent or conveyancer have assisted in the sale of the property, and should they have failed to advise the purchaser of the seller’s status (both parties have a specific duty to inform the purchaser in writing that the seller is non-resident and that there may be a duty to withhold) these parties would be held jointly and severally liable, and not the purchaser. The liability of these parties would be limited to the amount of remuneration receivable in respect of services rendered in connection with such disposal.
The relevant party required to make payment of the withholding tax may then recover such tax paid from the seller.
The question of residence for tax purposes has been the heated subject of much case law over the years and the question of the residence of a taxpayer is often not answered with a simple "yes" or "no". The imposition, by section 35A, of the obligation on purchasers, conveyancers and estate agents to determine the residency status of sellers thus adds a significant burden, with severe repercussions on these parties, to what used to be a simple purchase agreement.
Patrick McGurk, Director and National Practice Head, Tax; Cliffe Dekker Hofmeyr Tax (Pty) Ltd