WITHOLDING TAX - NON-RESIDENTS

Use where seller is a non-resident and purchase price is  R2million or more.

Withholding Tax in terms of S35A of the Income Tax Act. 58 of 1962 where purchase price is R2 million or more and the seller is a non-resident.

1. This explanatory note sumarises the requirements of Section 35A of the Income Tax Act.

2. Capital Gains Tax (CGT)is payable by non-residents on immovable property located in South Africa.  However collection of CGT is sometimes difficult when the seller is a non-resident.

3. Section 35A of the Income Tax Act which comes into effect on the 1st September 2007 is designed to lessen this problem by withholding tax in certain circumstances.  Note, however that withholding tax can be appropriated towards any tax obligation of the non-resident seller.

4. Section 35A deals with many different scenarios, but the agreement which you are about to enter into provides that payment of the purchase price to the Seller will be made by the conveyancers on registration of transfer of the immovable property to the purchaser.  Section 35A places the onus on the Purchaser to pay the withholding Tax to the Commissioner, South African Revenue Services (SARS) but the conveyancer will be in control of the funds and it is only practical that the conveyancers be authorised and instructed to pay the withholding tax to SARS.

5. If withholding tax is payable to SARS and is not, the Purchaser, can be obliged to pay.  In certain circumstances the estate agent and conveyancer can be obliged to pay to the extent of their remuneration.

6. Section 35A only applies where the purchase price is R2 000 000.00 (Two Million Rand) or more.

7. The amount to be withheld is as follows:
1. 5 per cent of the PURCHASE PRICE where the non-resident seller is a natural person.
2. 7,5 per cent of the PURCHASE PRICE where the non-resident seller is a company.
3. 10 per cent of the PURCHASE PRICE where the non-resident seller is a trust.

8. The non-resident seller may apply to SARS for a directive that no amount or a reduced amount be withheld, solely having regard to:
1. Any security furnished.
2. The extent of any assets held by the non-resident seller.
3. Whether the non-resident seller is subject to tax in respect of the disposal of the immovable property by that seller.
4. Whether the actual liability of that seller for tax in respect of the disposal of the immovable property is less than the tax that will be withheld.

9. Non-residents should, if they are not already registered, register as South African tax payers as soon as possible.  An accountant or qualified tax adviser should be consulted.  Capital Gains Tax is payable on the disposal of assets and in the case of non-residents applies to immovable property in South Africa.  25% of the Capital Gain is included in the next income tax return and is included in the taxable income and taxed at the normal income tax rates applicable.  The maximum effective rate is 10% of the Capital Gain but can be less where the non-resident’s taxable income is low, for example where the taxable income consists only of rental income.  (ie rent payable less the aggregate of other expenses such as interest on mortgage bond, rates, levies and other expenses directly relating to the rent).  It is therefore suggested that non-residents obtain a tax directive from the South African Revenue Services as soon as possible.  

10. This is not a detailed explanation of Capital Gains Tax.

11. It goes without saying that where the purchase price is R2 million or more, it is essential that it is essential that the Seller discloses whether he/she is a resident or non-resident of the Republic of South Africa or not.  Further enquiries may be made to confirm whether the Seller is a South African Resident or not.

We confirm that we have read and understood this explanatory note and have received a copy of it.

______________________________

Seller                           

Date: _________________________

______________________________

Purchaser                    

Date: _________________________

I, the undersigned

___________________________________________________________ (the Seller)

_____________________________________ (Identity number or Passport number)

the seller of the following immovable property:

____________________________________________________________________

Hereby declare:

1. *

                                                               i.      *I am a resident of the Republic of South Africa as defined in the Income Tax Act.

                                                             ii.      *I am not a resident of South Africa as defined in the Income Tax Act.

(*Delete which is not applicable)

(if  i.. is deleted, then the rest of this note is also deleted.)

2. As a non-resident, I acknowledge that I am aware that:
   (a) In terms of section 35A of the Income Tax Act, where the Purchase Price of immovable property is R2 000 000.00 (Two Million Rand) or more the PURCHASER is obligated to withhold part of the PURCHASE PRICE from the SELLER if the SELLER IS NOT a resident.
   (b) The amount to be withheld is as follows:
   5 per cent of the PURCHASE PRICE where the seller is a natural person
   7,5 per cent of the PURCHASE PRICE where the seller is a company
   10 per cent of the PURCHASE PRICE where the seller is a trust
   (c) The amount to be withheld must be paid to the Commissioner, South African Revenue Services) (SARS).
   (d) To facilitate the above, the Seller and the Purchaser irrevocably authorise and instruct the Conveyancers to deduct, on transfer of the property to the purchaser, the required amount and pay it immediately to SARS in terms of the said Section 35A.

____________________________

Seller                     

Date: __________________________

NOTE:

In general terms, the Income Tax Act defines a resident as a natural person who is:-
i)                     ordinarily resident in the Republic of South Africa; or
ii)                    not at any time during the relevant year of assessment ordinarily resident in the Republic, if that person was physically present in the Republic-
aa)      for a period or periods exceeding 91 days in aggregate during the relevant year of assessment, as well as for a period or periods exceeding 91 days in aggregate during each of the five years of assessment preceding such year of assessment; and
bb)      for a period or periods exceeding 915 days in aggregate during those five preceding years of assessment,
in which case that person will be a resident with effect from the first day of that relevant year of assessment.

Capital Gains Tax

with special reference to Immovable Property.

Updated at 1st March 2007

A.                 Capital Gains Tax came into effect on the 1st October 2001.
B.                 Take Disposal Consideration (e.g. Net sale price after deducting agent’s commission, borer and electrical inspection and remedial costs, but ignore amount required to discharge bond).
C.                 LESS Base Cost
Properties acquired (e.g. bought) before 1/10/2001 are valued at 1/10/2001
Properties acquired after 1/10/2001 are valued at date of acquisition or on date Suspensive Conditions are fulfilled, whichever is the later.  If property acquired before 1/10/2001, time apportioned valuation or actual valuation will have to be applied.
In both cases add cost of acquisition and improvements.
D.                 B less C is the Capital Gain or loss.
E.                  LESS Primary Exclusion of R16 000.00 for Natural Persons, per year.
F.                  D less E is multiplied by the inclusion rate, which is 25% for Natural Persons and 50% for Companies, CCs and Trusts.
G.                 F must be included in taxpayer’s income for income tax purposes.
H.                 Maximum Income Tax marginal rate for Natural Persons is 40%.
Therefore Natural Persons will in effect pay no more than 40 x 25% = 10% of the amount referred to in E.  (less if the taxpayer’s marginal rate is less).
Companies and Close Corporations pay 14% of Capital Gain.  Trusts pay 20% of Capital Gain.
I.                    The first R1.5 million Capital Gain of a Natural Person’s Primary Residence is exempt from Capital Gains Tax.  Companies, CCs and Trusts do not qualify for this benefit.  There used to be a window of opportunity to transfer the Primary Residence to a Natural Person/s without incurring CGT, Transfer Duty or Stamp Duty.  This has now fallen away.  The disposal of a Primary Residence for a purchase price of R2 million or less is exempt from CGT.
The above is a summary only.