1. MORE TAX AND FISCAL LEGISLATION APPLICABLE TO ESTATE AGENTSThe list of applicable legislation is growing longer and longer and it is readily apparent that SARS is transferring obligations and duties onto the shoulders of Estate Agents.
2. TRANSFER DUTY
2.1 Transfer Duty Receipts.One of the most common complaints I hear from Estate Agents is that SARS is holding up a transfer because one of the parties (including sometimes an Estate Agent) Tax Returns or affairs are not in order. In terms of Section 99 of the Income Tax Act SARS is entitled to appoint any person to be the Agent of any other person for the purposes of obtaining payment of "any tax interest or penalty due from any monies including salaries, pensions, wages or any other remuneration which may be held by him or due by him to the person whose Agent has been declared to be".
The same type of provision is set out in Section 13B of the Transfer Duty Act. SARS approach is often to refuse to issue a Transfer Duty Receipt until such time as payment is actually effected or until a Return has been submitted by one of the parties. There is no entitlement whatsoever to delay or prevent the issue of a Transfer Duty Receipt under these provisions. SARS should be firmly seen off when any such attempt is made. I recommend to Agents that their Sale Documentation however, be amended to provide for warranties by the parties involved that their Tax affairs are up to date and will not delay transfer!2.2 Double Transfer DutyUnder Section 16 of the Transfer Duty Act, if a person is acting as an Agent for any other person and fails to disclose such an appointment “on the day of conclusion of the Agreement of Sale” that Agent may also be liable for Transfer Duty apart from the Principal. Many Articles have been written on this particular Section with all sorts of conclusions. Basically SARS wishes to prevent the purchase of property by one party and before transfer is effected, the sale at a considerable profit, by that party to a third party with only Transfer Duty payable by the third party purchaser. In my view the only sensible way of dealing with the situation is where, for whatever reason the purchaser wishes to arrange for another entity to purchase a property, for a Tripartite Deed of Cancellation and Resale to be entered into on exactly the same terms as in the previous document of sale. No additional consideration is payable and therefore Transfer Duty is not payable by the first purchaser. Often individuals purchase property and change their minds and want a Family Trust to own the property in question. I have never experienced a problem with a Seller refusing to sign such a Deed of Cancellation or with SARS accepting that only one payment of Transfer Duty will payable. In my view in agreeing to such a cancellation and resale there is no disadvantage to the Seller and invariably Sellers so agree. 2.3 Sale of Shares in a Residential Property CompanySections 14 and 17 of the Transfer Duty have been amended with effect from 24th January 2005 to make it a criminal offence for Estate Agents not to submit within six months of the date of acquisition of shares in a Residential Property Company, details of that transaction to SARS. The penalty is up to one year in prison!
'Residential property' means any dwelling-house, holiday home,apartment or similar abode, improved or unimproved land zoned for residential use in the Republic … and 'a residential property company' means any company that holds property that constitutes residential property (these are edited extracts).
It is of interest to note that this definition could mean that a company holding Commercial, Industrial or Agricultural zoned property would presumably not be included under the definition of Residential property. Thus if the shareholders in a commercial land owning company disposed of their shares, no Transfer Duty would be payable because it would not be properties "zoned for residential use …." However I query what would happen for instance if a company owning a farming operation was sold with a dwelling house for the farmer and twenty houses for labourers. Does it then become a “Residential Property Company” because it includes "a dwelling house". As I interpret the section it is only when a dwelling house constitutes the main identity of a property that a Residential Property Company can be constituted.
3. CAPITAL GAINS TAX3.1 Upfront Payments
Section 35A of the Income Tax Act has been amended to provide that Purchasers are required to withhold specified amounts from the purchase price payable to the Seller as a provisional payment to the Receiver of Revenue where the Seller is a non-resident. However the date of its coming into effect has not yet been promulgated will probably only be implemented towards the end of the year. The amounts to be retained are 5 per cent where the Seller is a natural person; 7.5% where the Seller is a company and 10% where the Seller is a Trust. The Section does not apply when the amounts payable by the purchaser in aggregate do not exceed R2 million.
In essence an Estate Agent or Conveyancer who fails to notify the purchaser in writing of the fact that the Seller is a non-resident will be liable for payment of Capital Gains Tax up to the amount of the remuneration he or she would have obtained from such transaction. Quite a hefty penalty!
It should also be noted that Immovable property is defined under the Eighth Schedule as including “a direct or indirect interest of at least 20 per cent held by a person (alone or together with any connected person in relation to that person) in the equity share capital of a company or in any other entity, where 80 per cent or more of the value of the net assets of that company or other entity, determined on the market value basis, is, at the time of disposal of shares in that company or interest in that other entity, attributable directly or indirectly to immovable property situated in the Republic.
3.2 Suitable ProtectionI think a sensible way of Estate Agents dealing with the issue would be, for a start, to ensure that sale documents contain a sentence to the following effect:
"The Seller warrants that he/she is a resident of the Republic as defined in terms of the provisions of the Income Tax Act No 58 of 1962", or;
"The Seller records that he/she is a non-resident of the Republic of South Africa for the purposes of the Income Tax Act No 58 of 1962 and is aware of the provisions of Section 35A relating to the withholding of specified amounts from the purchase price by the Purchaser in respect of Capital Gains Tax as a provisional payment to the Receiver of Revenue". 3.3 Primary Residence Deductions
I have had lengthy correspondence with the Receiver of Revenue as to whether a non-resident owning a residence in South Africa is entitiled to a primary residence deduction of R1.5m. SARS’s view is that to qualify as a “primary residence” a non-resident has to “ordinarily reside” therein, which on SARS’ interpretation means that the non-resident cannot by definition ever reside in a primary residence in the Republic because he would then be a resident. On the other side of the coin that if he has a primary residence outside South Africa he cannot have one inside South Africa because you cannot have two primary residences at the same time. How you can be a non-resident without having a primary residence outside South Africa I do not know!
Not withstanding the view of the Commissioner I believe that a non-resident can fulfil the requirements of having a primary residence in South Africa provided he/she uses the residence for domestic purposes and while in South Africa “ordinarily resides” there. The critical point being that if as a non-resident one spends even one day in a home in South Africa and it is that person’s only home, there can be no basis to hold that it is not then that person’s primary residence for South African purposes.
3.4 Who Then Is The Resident?
There are two tests to determine whether a person is a resident, namely firstly whether they have chosen South Africa as their place of normal residence and if they have not so chosen, i.e. they are temporarily seconded to South Africa; then one looks to the Physical Presence test. This provides that persons become residents if they are physically present in South Africa for more than 91 days during the sixth year of residence in South Africa and likewise for each of the five preceding years but that altogether during the five preceding years, they have resided for not less than 915 days. If this requirement is met then that person becomes a resident as from the 1st day of the sixth year of assessment. Until 1st March 2005 the test was three years and 549 days, but this has now been extended as from 1st March 2006 on the basis that if one had not become a resident on or before the 1st March 2005 in accordance with the previous test then the new test would apply and as well as for a person who had only just become a resident in consequence of the then three year residence definition as at 28th February, 2005. For a company or Trust it is the place where either has been formed or if formed outside South Africa the place of effective management.
4. CONCLUSIONIt seems to me the SARS increasingly wants Estate Agents, amongst others, to do his work but not be paid!
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