Tax implications for foreigners investing in SA property

The 2010 World Cup has created unprecedented interest in South Africa. As locals know, despite its problems, South Africa is an enchanting place with a mixture of open spaces, natural beauty and ethnic diversity that is entirely unique.

It is widely anticipated that many of the soccer spectators that will be visiting our shores will contemplate buying real estate here, but what about the tax implications for foreigners investing in South African property?

According to David Warneke, Tax Partner at Cameron and Prentice Chartered Accountants, if the investor is an individual and their target is residential property, then he would generally suggest that the property be held in that person’s own name.

“The reason for this choice, besides simplicity and administrative cost savings, is a saving on income tax and the soon to be enacted dividends tax. (An individual’s maximum rate of tax on capital gains is 10 % compared with combined taxes of 22.6 % payable by a company.)”

The holding of the property by a local trust can also be considered. This is a more costly option according to Warneke and is only considered necessary if the circumstances of the investor are such that the specific advantages of a trust are considered important.

“The use of a trust provides flexibility, asset protection, ease of administration on death and savings on estate duty. However, if revenue and capital gains are to be retained in a trust there is a significantly increased current tax cost when compared with holding of the property in the individual’s name.”

Warneke explains that whichever legal person is used to house the property, tax will be payable in South Africa where the property is let, or a capital gain is realised on its disposal. “South Africa has a very extensive network of double tax treaties, with the result that tax will most probably not be payable on the property both in the investor’s country of residence and South Africa. It is usual under these circumstances that the investor will receive a credit in the country of residence for the tax paid in South Africa.”

“Transfer duty is payable by the purchaser on acquisition of the property and the rate of transfer duty depends on the juristic nature of the purchaser of the property. If the purchaser is an individual, the duty is levied on a sliding scale up to 8% of the purchase price of the property, if the purchaser is a trust, the rate is a flat 8%.”

“If the property is let, current tax is payable on the net rental income derived,” says Warneke. “The legal person owning the property would need to register for income tax and submit returns reflecting the rental income, less any attributable deductions in the production of the income.”

These deductions typically include rates, levies, service charges, interest on bond and repairs and maintenance. Capital expenditure such as transfer duty paid and improvement costs are not deductible for current tax purposes, but qualify as part of the base cost of the property when it is sold and capital gains tax is calculated.

According to Warneke, when the investor sells the property, a withholdings tax has to be withheld by the transferring attorney and paid to the local Revenue authorities. “The rate of the tax depends on the juristic nature of the seller and this is not a final tax, but is in effect an advance payment against the capital gains tax payable by the seller with any excess paid being refundable.”

“South Africa also has a system of exchange control which has been relaxed to a great degree, but still needs to be considered. In general, where funds are introduced from abroad for the acquisition of fixed property, then there is no problem in repatriating funds from the sale of real estate. This is on the assumption that the structure of the investment was set up correctly and that exchange control approval was obtained in advance, where necessary. The local borrowing restrictions, which used to restrict the amount of finance that could be obtained locally to a ratio of 1:1 or 3:1 of locally borrowed funds to introduced foreign funds, have been abolished.”

“Increased foreign investment in the South African property market due to the World Cup will have a myriad of benefits. Not only will it boost economic growth and stimulate job creation but will also indicate a confidence in the country as a safe investment destination – thereby potentially creating a knock on effect that we will hopefully feel the positive results of for years to come,” concludes Warneke.

Article by: David Warneke -