Revisiting Withholding Tax: pitfalls and penalties

Revisiting Withholding Tax: pitfalls and penalties

When "foreigners" sell property in South Africa, current legislation ensures payment of Capital Gains Tax via a "Withholding Tax" provision, imposed on a non-resident seller, for the sale of immovable property located in South Africa in terms of Section 35A of the Income Tax Act (58 of 1962).

This does however not mean that just because someone does not have a South African Identity document or possesses a foreign passport, that he or she is necessarily a non-resident.

The definition of a non-resident, in terms of the Income Tax Act, means 'a person that does not normally reside in South Africa' and falls 'outside the definition of a resident'.

A resident, in turn, includes:
any natural person ordinarily resident in SA;
any natural person complying with the physical presence test;
a person who is not deemed to be exclusively a resident of another country for purposes of the application of any tax treaty;
any entity incorporated, established or formed in SA and having its main place of effective management in SA.
The definition of immovable property includes any interest or right to such property, incorporating: 
equity shares held in a company; or
ownership or right to ownership in any other entity; or 
vested interest of any person in any assets of any trust, 
if 
80% or more of the market value of such shares, ownership or right thereto or vested interest therein, is attributable (even if indirectly) to immovable property;
that person (the Seller) holds at least 20% of the equity shares in that company or ownership or right to ownership in such other entity.

Section 35A of the Income Tax Act provides two approaches to ensure payment of Withholding Tax:

The South African Revenue Service (SARS) has realised that it is probably losing out on capital gains tax (CGT) in respect of properties that are bought and/or sold by non-residents of South Africa.

The intention of Withholding Tax is that this "withheld" amount represents an "advance payment" in respect of the "non-resident"-seller's normal tax liability for that year of assessment (in this instance, for Capital Gains Tax in respect of the disposal of the property in that specific tax year (Sect 35A(3)(a)).

If eventually determined that the amount initially withheld was too much, the Seller may reclaim the surplus from SARS as per normal tax return procedures for that specific tax year.  

If the Seller fails to submit a tax return in respect of that specific year, the amount withheld and so paid over, shall be deemed sufficient for an assessment in terms of Sect 95 of the Tax Administration Act.

Option 1 - Withholding a portion of the purchase price

The onus is placed on the Purchaser to withhold an amount of money as "Withholding Tax", where the purchase price exceeds R2 million (current threshold). The amount of Withholding Tax will however still be determined on the full purchase price, without regard to this R2 million limit.

The amount of the monies to be so withheld, is currently established at the following rates:  
7,5% where the Seller is a natural person;
10% if the Seller is a Company;
15% if the Seller is a Trust.

Option 2 - Obtaining a "Withholding Tax Directive"- The Seller may apply to the Commissioner of Revenue for a reduced rate-, or even for a nil rate, of Withholding Tax, if this is viable. The Commissioner will consider issuing a directive for such lesser amount only if one of the following conditions prevail:
security is furnished for due payment of the Withholding Tax by the Seller;
the Seller has ample other assets remaining in South Africa;
consideration will be given to whether the Seller is subject to tax on the disposal;
if it is determined that the actual liability in terms of Capital Gains Tax on this specific disposal, would be less than the prescribed withholding amount. 

Responsibilities of the Purchaser, the Conveyancer and the Estate Agent:

Careful reading of the Act will reveal that the responsibility is placed on the Purchaser to ensure timeous compliance with all the administrative tasks in finalising the payment to SARS of the aforesaid Withholding Tax, which includes the following:

The Purchaser must submit a Declaration, in the prescribed form, to inform SARS of the purchase of the property which has Section 35A applying to it;
The Purchaser must furthermore make payment within a limited time period as from the date which the Purchaser is liable to withhold such funds from the Seller:
14 days if the Purchaser is a resident;
28 days if the Purchaser is a non-resident.

The "pitfall and penalty" section: what happens if monies were not withheld or paid over to SARS as contemplated in Section 35A?

In the event of late payment, a penalty of 10% of the amount due, plus interest (at the prescribed rate) on a daily basis, from date of payment due until date of final payment, will apply. (The Commissioner may in due course and after having regard to circumstances explained in respect of the late payment, waive the whole or a portion of the penalty of 10%, but not the interest portion of the penalty.)

If the Purchaser knows or reasonably should have known that the Seller was a non-resident and failed to withhold the said amount, that Purchaser will be personally held responsible for the amount not withheld and must pay the amount over to SARS within the time period allowed therefor (Sect. 35A(7)).
The Purchaser obviously has a right of recourse to recover these funds from the Seller at its own expense.

There is however also a duty on any Estate Agent and Conveyancer involved with this transaction, to notify the Purchaser in writing that the Seller is a non-resident and that Section 35A may apply. This requirement only applies if the Conveyancer and/or agent is entitled to a remuneration emanating from the transaction.

Where the Estate Agent or Conveyancer failed to notify the Purchaser of the Seller's "non-resident" status, such Conveyancer or Estate Agent may be held personally liable (jointly and severally) limited to the extent of the remuneration / payment, where they should reasonably have known about the Seller's status and failed to notify the Purchaser thereof.

The Estate Agent and/or Conveyancer also has a right of recourse for monies that they were held personally liable for in terms of either Section 35A(7) or (12), against the Seller, but again at its own expense.

Advice to non-resident Sellers:

It is clear that this detrimental onus placed on the Purchaser, (and which by law, should be revealed to the Purchaser at the outset of the transaction), could really be off-putting and intimidating to potential buyers. 

It is therefor imperative for non-resident Sellers to pre-empt this situation by ensuring that both the appointed estate agent and chosen conveyancer, are informed and qualified to deal with this expertly on behalf of the Seller.

At VZK, we have the expertise, practical experience and an efficient team of experts to ensure best practice results, especially when section 35A is found to be applicable.