Buyers beware withholding tax when buying from non-residents

Although only involving a small minority of actual sales non-resident sellers still do not realise that in terms of section 35A of the Income Tax Act, a withholding tax applies to any sale with a value of R2 million or more.

Drawing attention to this legislation, Lanice Steward, MD of Anne Porter Knight Frank, believes, it had been introduced to prevent non-residents avoiding paying Capital Gains Tax.

She estimates that some 2,5% of all Cape property transactions still involve foreign buyers, but adds this figure could increase towards 2010.

“From the buyers’ viewpoint,” said Steward, “it is important to realise that the responsibility for seeing that this tax is paid falls squarely on their shoulders – and those of the estate agent and conveyancer. If the seller ducks and runs without paying the withholding tax, the buyer and his team will be held liable for the money owing. It is their duty to see that the seller is not paid out in full – they must withhold a certain percentage of the price paid.”

This, said Steward, is calculated at 5% of the purchase price for a non-resident individual, 7,5% for a non-resident company or closed corporation and 10% for a non-resident trust (a fairly large number of SA properties are, in fact, owned by non SA trusts.

How does a buyer determine whether a seller is a non-resident?

Steward said that law stipulates that anyone who lives continually in SA for more than 180 days is deemed in terms of the so-called Physical Presence Ruling to be a resident and has to accept residence status – and tax levies. Also to be borne in mind, she said, is the fact that any property owning legal entity will be classified as locally resident if that entity was formed or established in SA or, more importantly, is managed from SA.
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