New law may undercut foreign buyers' capital gains dodge

THE proposed Revenue Laws Amendment Bill could improve the official and industrial property rental market as foreign companies may choose to sell off their South African property investments and lease instead.

This is the view of Pace Property Group MD David Green, who was commentating on the bill, which will attempt to level the playing field between South African and foreign sellers of property.

Business Day reported last week that national treasury chief director Martin Grote said it was difficult to enforce payment of capital gains tax by sellers who no longer maintained a connection with SA.

Anyone buying property worth more than R1m from a foreign seller would be obliged to withhold part of the payment to cover capital gains tax. This would amount to 5% of the purchase price if paid to nonresident individuals, 7,5% to nonresident companies and 10% to a nonresident trust. The withheld amounts would have to be paid to the South African Revenue Service.

Grote said the size of the avoidance was difficult to estimate, but that there was a general concern that foreigners could get around their tax liability and use that benefit to gain an unfair advantage over South African purchasers.

Green says any form of capital gains tax puts off foreign investors. "It will effect foreign investment in fixed property in SA, especially with regard to foreign speculators."

Green says one positive aspect is it might improve the South African office and industrial property rental market, because many foreign companies may choose to sell off their South African property investments and rather lease properties in SA. They would enter sale-and-leaseback transactions and they would be entitled to claim tax deductions allowable in respect of tenants.

He says the residential property market would be a "small part of the this equation".

Brent Townes, CEO of Sotheby's International Realty, operated by Lew Geffen, says if government implements this strategy there would be an effect on residential property investment on the part of foreigners, but that this would be only "negligible".

Townes says a very small percentage about 1% of the South African residential property market is held by foreigners, and they are holding onto their properties, using them when they visit SA.

Article by: Nick Wilson - Business Day 1st Edition -