PRE-PAYMENT OF CGT BY NON-RESIDENTS
1. The commencement date for the recent amendment (Section 35A) of the Income Tax Act for has not yet been promulgated and the legislation is not therefore as yet operative. This relates to the Purchaser/conveyancer holding back a portion of the purchase price from the non-resident Seller of immovable property as a CGT pre-payment. A buyer/conveyancer in withholding the applicable proceeds is not entitled to exclude the sum of R1million on the basis that this constitutes the primary residence deduction allowed in terms of paragraph 45(1) of the Eighth Schedule because the withholding portion must be calculated on the gross amount. However the SARS Draft GCT Guide makes it clear that a non-resident can only have a “primary residence” in South Africa provided he/she does not have a primary residence anywhere outside South Africa”. How one can be a non-resident without a primary residence outside SA is difficult to envisage!
2. Going back to basics, a Primary Residence is defined as being a residence “in which a natural person …….. ordinary resides in as his or her main residence and uses (it) for domestic purposes…..” The words “ordinary resident” or “resides in” are not defined in the Act but a long list of cases has defined what is meant by this term albeit more for the purposes of determining the source country of income rather than whether a person actually resides in a residence or not. Clearly what is intended for the purposes of the Eighth Schedule is to know not whether the person in question has chosen South Africa as his/her place of residence but whether the house is the one which she/he uses as his/her main or principal place of residence. Perhaps the definition given in the case of Thompson vs Minister of National Revenue TDC812(SCC) gives the best definition where it was stated that it is the place “where in the settled routine of his life he regularly, normally and customarily lives …… or at which he in mind and in fact settles into or maintains or centralises his ordinary mode of living with its accessories in such relations, interest and conveniences”
3. As a non-resident may well only reside in the residence in question for a few days in the year but at the same time as it is the only place she/he resides in when he/she comes to South Africa, I cannot see on what basis it does not fulfil the definition of where she/he “ordinary resides”. The Receiver of Revenue’s attitude is set out in the draft Comprehensive CGT Guide which states as follows, namely
"No primary residence offshore
Where a non-resident does not own a primary residence elsewhere and buys one for the purpose of residing therein during an extended visit to South Africa, the South African residence may comprise a primary residence. This is so notwithstanding that the person is not ordinarily resident in this country. The residence in South Africa would be the one where the person ‘ordinarily resides’ while in South Africa and would comprise his or her ‘main residence’ whilst in this country."
"More than one primary residence
Where the non-resident owns a primary residence in his or her home country, the South African home would not comprise a primary residence, as it would not be one where the person ‘ordinarily resides’ as his or her ‘main’ residence. A person is in any event only allowed one primary residence (para 45(3)).
However, where the person has let out his or her overseas home while in South Africa, it will not comprise a primary residence for that period, since it would not be used mainly for domestic purposes (para (b)(ii) of the definition of ‘primary residence’). It would therefore be possible for the person to qualify for the R1 million exclusion on the South African home."
I do not agree with these propositions. Whether or not a non-resident owns a residence elsewhere is completely irrelevant for the purposes of the Act because the Act does not apply outside South Africa insofar as non-residents are concerned. Thus, provided he/she has no other “primary residence in the Republic” the test in my view is satisfied.
4. However, this is a procedural refinement that the original legislation did not contemplate and it will be interesting to see how the process is dealt with in practice. I have no doubt that from an equitable point of view a non-resident is as equally entitled to such a deduction, both being subject to CGT. Why should the one obtain a better result than the other? There is no logical reason for it. Of course if a non-resident also rents out or otherwise uses his/her local residence for the purposes of carrying on a trade it will introduce complications to the extent that I think the deduction will probably be lost.
5. The moral of the story is therefore if you are a non-resident and want to claim a deduction of R1 million on selling your local property, don’t let it out and according to the Receiver of Revenue and don’t live in a “primary residence” outside SA!