1. CAPITAL GAINS TAX

 

2. WHO THEN IS A RESIDENT?

There are basically two tests to determine whether a person is a resident, namely firstly whether South Africa is their place of normal residence, i.e. the place that they habitually return to and regard as their home. Secondly if they do not have such an intention, i.e. they are temporarily seconded to South Africa then one looks to the physical presence test which requires that persons become residents if they are physically present in South Africa for more than 91 days during the fourth year of residence in South Africa and likewise for each of the three preceding years but altogether during the three preceding years, for not less than 549 days. If this requirement is met then that person becomes a resident as from the 1st day of the fourth year of assessment. 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.

3. IMMOVABLE PROPERTY

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, other than immovable property held by that company or other entity as trading stock”

4. REMAINING PROVISIONS

The remaining relevant Sections are 7, 8, 10, 11, 12 and 13 reading as follows.

(7) If a purchaser knows or should reasonably have known that the seller is not a resident and fails to withhold any amount as required by subsection(1), that purchaser-
(a) is personally liable for the payment of the amount which he or she failed to withhold; and
(b) must pay that amount to the Commissioner not later than the date on which payment should have been made if the amount had in fact been withheld.

(8) Subsection (7) does not apply if an Estate Agent or conveyancer assists in the disposal of the immovable property and that Estate Agent or conveyancer fails to notify the purchaser as contemplated in subsection (11).

(10) The Commissioner may having regard to the circumstances of the case remit the whole or any part of the penalty imposed under subsection
(9)(b).

(11) Any Estate Agent and any conveyancer who is entitled to any remuneration or other payment in respect of services rendered in connection with the disposal of the immovable property by the seller or the registration of transfer, as the case may be, must before any payment is made to the seller each notify the purchaser in writing of the fact that the seller is not a resident and that the provisions of this section may apply.

(12) If an Estate Agent or conveyancer knows or should reasonably have known that the seller is not a resident and fails to comply with subsection (11), that failing Estate Agent or conveyancer is jointly and severally liable for the payment of the amount which the purchaser is required to withhold and pay to the Commissioner in terms of this section, but limited to the amount of remuneration or other payment in respect of the services rendered in connection with the disposal of the immovable property by the seller or the registration of transfer, as the case may be.

(13) The purchaser, Estate Agent or conveyancer, as the case may be, may recover any amount paid in terms of subsection (7) or (12) from the seller.

5. THE CONSEQUENCES FOR ESTATE AGENTS

5.1 It seems to me that from these provisions an Estate Agent is bound in every case where the Seller is a non-resident to advise the Purchaser in writing. Of course under FICA the Estate Agent must take a copy of the Seller’s ID, tax registration and utility bill. If the Seller is not able to do so then the Estate Agent is put on guard that the Seller may be a non-resident and his/her passport should be required.

5.2 Section 12 the Act refers to an Estate Agent knowing or “should reasonably have known” that the Seller is not a resident but because of the provisions of FICA I cannot see how an Estate Agent can ever allege that he/she did not know! In consequence if the applicable amount is not deducted and paid over to the Receiver of Revenue, the Estate Agent is liable to pay to the Commissioner an amount as provisional CGT “limited to the remuneration or other payment in respect of the services”.

6. The Section does not apply when:

(a) if the amounts payable by the purchaser to the seller and to any other person for or on behalf of the seller, in respect of the acquisition by that purchaser of the immovable property, in aggregate do not exceed R2 million; or

(b) in respect of any deposit paid by a purchaser for purposes of securing the disposal of the immovable property by the seller to that purchaser,until the agreement for that disposal has been entered into, in which case any amount which would have been required to be withheld from the amount of that deposit, must be withheld from the first following payments made by that purchaser in respect of that disposal.

7. DEDUCTIONS

I have had lengthy correspondence with the Receiver of Revenue as to whether the amount to be withheld can be calculated after deducting R1 million as a primary residence deduction. SARS’s attitude is that the R1 million deduction cannot be made for the purposes of calculations whether in respect of residents or non-residents as the amount on which it is to be calculated must be the gross amount provided it exceeds R2 million. SARS’s view is that to qualify as a “primary residence” a non-resident has to “ordinarily reside” therein, which means in effect 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! The Receiver has been unable to justify why a non-resident can be treated differently from a resident.

8. WRITTEN NOTICE

Presumably the address to which written notice must be given is the address set out in the sale document. I think a sensible way of Estate Agents dealing with the issue would be, for a start, to ensure that all 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”.
(Delete whichever is not applicable)

9. DIRECTIVES

Notwithstanding the view of the Commissioner I believe that a non-resident can fulfil the requirements of having a primary residence in South Africa in that provided he/she uses the residence for domestic purposes and while in South Africa “ordinarily resides” there. The Commissioner should wherever a non-resident is involved be requested to direct that CGT is not payable because the residence is a primary residence under the Act. At some stage a Court will have to rule on the matter. 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.

10. TRANSFER DUTY

Sections 14 and 17 of the Transfer Duty have been amended to read as follows:

17 Penalties

(1) Any person who-
(a) fails to comply with any requirement or demand under this Act;shall be guilty of an offence and liable on conviction to a fine or to imprisonment for a period not exceeding one year.

Immovable property is defined under Section 1 of the Transfer Duty Act as including:
'residential property' (which) means any dwelling-house, holiday home, apartment or similar abode, improved or unimproved land zoned for residential use in the Republic (including any real right thereto), other than-

(a) an apartment complex, hotel, guesthouse or similar structure consisting of five or more units held by a person which has been used for renting to five or more persons, who are not connected persons, as defined in the Income Tax Act, 1962 (Act 58 of 1962), in relation to that person; or

(b) any 'fixed property' of a 'vendor' forming part of an 'enterprise' all as defined in section 1 of the Value-Added Tax Act, 1991 (Act 89 of 1991);
'residential property company' means any company that holds property that constitutes-

(a) residential property; or

(b) a contingent right contemplated in paragraph (f) of the definition of 'property',

and where the fair value of that property or contingent right comprises more than 50 per cent of the aggregate fair market value of all the assets, as defined in paragraph 1 of the Eighth Schedule to the Income Tax Act, 1962, (other than financial instruments as defined in section 1 of that Act or any coin made mainly from gold or platinum), held by that company on the date of acquisition of an interest in that company;

11. EFFECTIVE AS FROM 24TH JANUARY, 2005

The amendments came into operation as from the 24th of January of this year. It seems to me that the Receiver wants Estate Agents, amongst others, to do his work but not be paid! The same comments apply in regard to SARS constituting Estate Agents in terms of Section 99 of the Income Tax Act as agents to recover monies due to SARS by the Seller or Purchaser!

12. Consideration should be given to amending sale documents to require the Purchaser/Seller to provide certificates from the Receiver that their tax affairs are up to date!