When non-residents for tax purposes disposed of immovable property in South Africa, it was often difficult for the South African Revenue Services ("SARS") to collect the taxes due on the gains derived from the disposal of the immovable property. Section 35A of the Income Tax Act 58 of 1962 (the “Act”) was introduced in the Act with the intention that purchasers would be obliged to withhold a portion of the sale proceeds, and pay over same to SARS, to aide in the revenue collection process.
Purpose of S35A
Section 35A was initially inserted into the Act in terms of section 30 (1) of Act No. 32 of 2004 and became effective in South African law from 1 September 2007.[1] In the Explanatory Memorandum to Act 32 of 2004, it was explained that in countries which provide for capital gains gained by non-residents usually have a special withholding scheme in place, as an administrative means to collect the taxes due on the gains. The Memorandum further explained that a withholding scheme is essential as it often happens that once a non-resident disposes of immovable property in a source country, the non-resident often no longer has any nexus to the source country, which makes it difficult to enforce the local taxing laws, and to bring the non-resident into the taxing net of the source country.
It was stated in the Memorandum that it would be easier to place the burden on the purchaser to withhold the withholding tax from the sale proceeds payable to the seller, as after the sale of the property the purchaser would still hold the property (and the non-resident seller would possibly no longer have any ties to the source country, and potentially evade the tax otherwise).
Section 35A- the key points
When a non-resident seller sells immovable property, the purchaser is required to withhold a percentage of the proceeds (currently 7,5% in the case of a natural person, 10% in the case of a company and 15% in the case of a trust), and pay over same to SARS within 14 days of the seller receiving payment where the purchaser is a resident, and 28 days where the purchaser is a non-resident. The seller is entitled to instead apply for a tax directive, to reduce the withholding tax amount payable. The withholding tax is not a final tax- it is an advance payment towards the seller’s tax liability for the tax year in question. The seller should still submit a final income tax return, but if the seller does not, the amount withheld and paid to SARS will be a basis for an additional assessment to be issued in terms of section 95 of the Tax Administration Act.
Source of sale of immovable property
Non-residents for tax purposes only pay income tax on income that is, or is deemed to be, from a South African source[3]. Income that is received by or accrued to a non-resident from the disposal of immovable property, is addressed by section 9(2)(j) of the Act as follows:
“S9(2): An amount is received by or accrues to a person from a source within the Republic if that amount—
j) constitutes an amount received or accrued in respect of the disposal of an asset that constitutes immovable property held by that person or any interest or right of whatever nature of that person to or in immovable property contemplated in paragraph 2 of the Eighth Schedule and that property is situated in the Republic”.
Section 35A also defines “immovable property” as, “contemplated in paragraph 2 (1) (b) (i) and (2) of the Eighth Schedule.”
Paragraph 2 of the Eighth Schedule provides as follows:
2. Application.—(1) Subject to paragraph 97, this Schedule applies to the disposal on or after valuation date of—
(a) any asset of a resident; and
(b) the following assets of a person who is not a resident, namely—
(i) immovable property situated in the Republic held by that person or any interest or right of whatever nature of that person to or in immovable property situated in the Republic including rights to variable or fixed payments as consideration for the working of, or the right to work mineral deposits, sources and other natural resources; or
(ii) any asset effectively connected with a permanent establishment of that person in the Republic.
(2) For purposes of subparagraph (1) (b) (i), an interest in immovable property situated in the Republic includes any equity shares held by a person in a company or ownership or the right to ownership of a person in any other entity or a vested interest of a person in any assets of any trust, if—
(a) 80 per cent or more of the market value of those equity shares, ownership or right to ownership or vested interest, as the case may be, at the time of disposal thereof is attributable directly or indirectly to immovable property held otherwise than as trading stock; and
(b) in the case of a company or other entity, that person (whether alone or together with any connected person in relation to that person), directly or indirectly, holds at least 20 per cent of the equity shares in that company or ownership or right to ownership of that other entity.
Section 9 thus confirms that an amount received by or accrued to in connection with the disposal of immovable property is regarded to be from a source within South Africa. Immovable property also includes shares, ownership or right to ownership or vested interest in a company, where 80% or more of the market value is attributable directly or indirectly to immovable property, and further subject to paragraph 2(2)(b). In establishing the market value, liabilities, the deferred tax assets and intra-group loans are to be ignored. It should be noted that the provisions are quite wide, as it applies directly and indirectly, so taxpayers and non-residents should always seek professional advice to enquire as to whether the provisions of section 35A may apply.
Non residents and Double-Taxation agreements
When dealing with non-residents and source of income legislation, it is also necessary to sometimes consider the double taxation agreement between South Africa and the country of which the non-resident is a tax resident of, to ensure that South Africa does indeed have taxing rights when immovable property is disposed of, as in terms of the Tradehold case, a principle was established that a double taxation agreement entered into between South Africa and another country will override South African domestic legislation when establishing taxing rights. As each double taxation agreement with other countries varies from the other, and although South Africa is not a signatory member to it, the Organisation for Economic Co-operation and Development’s (“OECD”) Model Tax Convention (the “MTC”) is briefly mentioned below, to establish which country may have taxing rights in the event of the disposal of immovable property, as a "tie breaker" rule.
OECD MTC
Article 6(1), of the MTC, summarized, provides that the income derived from immovable property shall be taxable in the state in which the immovable property is situated.
Article 6(2) of the MTC, provides as follows:
“The term “immovable property” shall have the meaning which it has under the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships and aircraft shall not be regarded as immovable property.”
Article 13(4) of the MTC provides as follows:
“Gains derived by a resident of a Contracting State from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other Contracting State if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property, as defined in Article 6, situated in that other State.”
The MTC thus confirms that the country in which the immovable property is situated has taxing rights over the income derived from the disposal of the immovable property. Article 13(4) The MTC does however differ to South Africa’s paragraph 2(2)(a), in that it lowers the percentage required from 80% to 50% (and hence, domestically, less non-residents possibly fall within the South African tax net).
Consequences of failure to comply with S35A
If a purchaser knew of the obligation (or should have known) that such purchaser was obliged to withhold, but didn’t, the purchaser can be held personally liable for the amount that should have been withheld together with late payment penalty interest at 10%, but where a conveyancer or estate agent assisted with the sale of the immovable property, and the said conveyancer or estate agent didn’t notify the purchaser as to the purchaser’s obligations, the conveyancer and/or estate agent are liable to pay SARS, which is limited to the amount of remuneration they received in connection with the sale. The conveyancer and/estate agent are deemed to be withholding agents in terms of section 35(12) of the Act, and for the purposes of the Tax Administration Act, and are obliged to notify a purchaser in writing when a seller is a non-resident for tax purposes and accordingly the said purchaser is obliged to withhold a portion of the payment.
Conclusion
Always seek professional advice, as doing so can avoid costly penalties and/or interest.
This article is for information purposes only, which may contain errors and/or omissions, and should not be regarded as legal advice.
[1] Act No. 8 of 2007.