WITHHOLDING TAX ON PROPERTY SOLD BY NON-RESIDENTS

Withholding tax on property soldA remarkable number of non-residents own property in South Africa. While non-residents are not subject to South African capital gains tax generally, an exception is to be found where non-residents dispose of South African immovable property, or shares in “South African property rich” companies.

A obvious practical difficulty arises though for SARS to collect taxes from non-residents once they have sold their properties and have no further connection with South Africa. There is very little SARS can do to collect a tax debt from such non-residents, let alone compel them to file the necessary tax returns.

Section 35A of the Income Tax Act[1] was introduced for this reason. It levies an interim withholding tax on non-residents selling South African immovable property, required to be withheld from the selling price payable by the non-resident, on the following basis:

  • 5% of the selling price where the seller is a non-resident natural person;
  • 5% of the selling price where the seller is a non-resident company; and
  • 10% of the selling price where the seller is a non-resident trust.

In clause 10(1) of the draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, which was released concurrently with the Annual National Budget earlier this year, it is proposed that the rates above be increased to 7.5%, 10% and 15% respectively and effective to disposals of immovable property from 22 February 2017.

While ultimately the withholding obligation lies with the purchaser paying the purchase amount, a conveyancer or estate agent may also be liable where the withholding tax is not withheld from payments made to the non-resident seller.[2]

As referred to above, the withholding tax is not a final tax and its purpose is merely to secure the ultimate capital gains tax liability that may ultimately be due (and which would in most circumstances be substantially less the amount withheld). To the extent that a lesser amount is due in the form of a capital gains tax exposure for the non-resident, the balance overpaid is refunded to the seller upon submission of an annual income tax return.

It is also possible for a non-resident to apply for a tax directive that no withholding tax needs to be withheld from the selling price of the property sold. The directive may be based on either:[3]

(a) the extent to which the seller is willing to provide for security for the payment of taxes due to SARS on the disposal of the property;

(b) the extent of the other assets that the seller has in the Republic;

(c) whether the seller is potentially not subject to tax in respect of the disposal of the property; and

(d) whether the actual liability of that seller for tax in respect of the disposal of the property is less than the amount required to be withheld.

[1] 58 of 1962

[2] Section 35A(12)

[3] Section 35A(2)

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

ASSET-FOR-SHARE TRANSACTIONS: TAX FREE RESTRUCTURE

A1_bThe Income Tax Act, 58 of 1962, contains several so-called ‘group relief’ provisions in terms whereof corporate restructures can take place on a tax neutral basis.  One of these is if a transaction comprises an ‘asset-for-share transaction’, or put simply:  where a company purchases an asset in exchange for which that company agrees to issue shares to the seller.

The term ‘group relief’ is somewhat of a misnomer in that not all of the group relief provisions necessarily involve groups of companies.  The ‘asset-for-share transaction’ is one such an example where company groups are not necessarily involved.  In fact, the concession (in section 42 of the Income Tax Act) is quite often used by individuals who are seeking to incorporate their businesses whereby they would transfer said business into a company in exchange for the latter issuing them with ordinary shares in that company.  Such a transaction would not give rise to any immediate income tax costs, nor to any ancillary taxes such as VAT, Securities Transfer Tax, Transfer Duty, etc. (on condition that the relevant required formalities are observed).

The effect of an ‘asset-for-share transaction’ is effectively that the cost of the assets transferred are ‘inherited’ by the company.  For example, assume Mr A has an asset with a base cost of R10 which is worth R100 today.  He is able to transfer that asset to the company in exchange for shares without incurring any tax liability, but the company will be deemed to have acquired that asset at R10, and likewise Mr A his shares at the same price.  The effect therefore is that when one day Mr A should sell his shares, or the company the asset, the capital gain on the original R10 cost would still be realised and consequently taxed at that stage.  The tax implications linked to the asset is therefore not avoided altogether, but merely postponed.

A few requirements to qualify for a section 42 transaction includes:

  • The person to whom the shares are issued (i.e. the person selling the asset) must hold a ‘qualifying interest’ in the company subsequent to the transaction being concluded (being most often at least a 10% interest held in the company);
  • The company and the person disposing of the asset must typically hold the asset with the same intent. In other words, if the company will hold the asset as trading stock, then so too must the person disposing thereof have held the asset as such; and
  • The asset must be worth more than its base cost at time of the transaction being concluded.

Admittedly, this may be quite complex.  To make matters worse, the provisions of section 42 apply automatically if its prerequisites are met and taxpayers are required to specifically elect out of its provisions if it does not want it to apply.  All the more reason why any restructure would be incomplete without a review by a tax expert first before implementation thereof.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

SELLING OF ASSETS BY INDIVIDUALS: WHEN WILL IT ATTRACT CGT?

A1_bIndividuals who are residents for the purpose of the CGT Act (Capital Gains Tax), are liable for CGT on the disposal of South African and foreign assets. In addition, non-residents who dispose of immovable property or other assets of a permanent nature in South Africa are liable for CGT as well. As a disposal is the event that can trigger a taxpayer’s liability for CGT, it is important to know what type of transactions SARS will view as a disposal. The following actions are considered to be a disposal for CGT purposes:

  • Selling of an asset
  • Donating an asset
  • Destruction, scrapping or loss of an asset
  • Abandonment of an asset
  • Change in the use of an asset

Please note: The above actions are not a complete list of what constitutes a disposal. Please contact your tax adviser for more detailed information.

The rule of thumb is that if an asset is disposed of it will be subject to CGT, except if the capital gain/loss is specifically excluded. A capital gain/loss on any of the following disposals will not trigger CGT:

a) Disposal of a primary residence

The capital profit/loss on the disposal of a primary residence will not be taxable for CGT purposes if all the following requirements are met:

  • The proceeds are not more than R2 000 000, and
  • It is owned by a natural person (not by a company, close corporation or trust), and
  • The owner or his/her spouse normally lives in the house as their main residence, and
  • More than 50% of the house is used for private purposes.

It is also useful to know in which circumstances, upon disposal of a primary residence, a capital profit/loss, or a portion thereof, will be taxable for purposes of CGT. If any one of the following circumstances are present the capital profit/loss, or a prorata portion thereof, will be taxable for CGT purposes:

  • If the proceeds is more than R2 000 000, the amount of the capital profit/loss exceeding R2 000 000 will be taxable.
  • When a property is bigger than 2 hectares, the portion of the capital gain/loss relating to more than the first 2 hectares, will be taxable.
  • Where a person or his/her spouse did not live in a primary residence for any period after 1 October 2001, the primary residence exclusion will not be allowed for that time period.
  • If any part of a primary residence was used for trade purposes (e.g. if you used your study to run a business from), the portion of the primary residence exclusion relating to the part of the primary residence used for business purposes will be taxable.

b) Disposal of personal use assets

The disposal of personal use assets which are owned by a natural person and not used for trade purposes, will not give rise to a liability for CGT. Some examples of personal use assets which are excluded for the purpose of calculating a potential CGT liability, are the following:

  • Personal belongings used more than 50% for personal purposes, for example a car, a caravan, an art collection or household furniture.
  • The capital gain/loss on the disposal of a boat up to a maximum length of ten metres and which was used for private/personal purposes.
  • Aircraft with an empty weight of 450 kilograms or less.

Please note: The above-mentioned circumstances is not a complete list of exclusions on the disposal of personal use assets. Please contact your tax adviser for more detailed information.

c) Disposal of an interest in a small business

The exemption of the capital gain/loss is limited to R1 800 000 if:

  • The gross asset value of the small business is less than R10 000 000, and
  • The individual is:
  • a sole proprietor or partner or has held 10% or more of the shares in the small business for five years or more, and
  • is at least 55 years old, and
  • suffers from ill-health or infirmity, or is deceased.

d) Disposal of assets in a registered micro business, provided that the
assets were used for business purposes

e) Receiving lump sum payments from certain approved retirement funds

f)  Receiving the proceeds from certain endowment or life insurance
policies

  • Second-hand policies are not excluded unless they are pure risk policies with no investment/surrender value.

g) Compensation received for personal illness or injury

h) Winnings and prizes from certain games and competitions e.g. Lotto winnings

Although the above exclusions are very specific, it is still possible to plan a transaction in such a way that will minimise the taxpayer’s liability for CGT.  If you need more information on this topic, please do not hesitate to contact us for professional assistance and advice.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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