South Africa is known
for having one of the best and most secure systems of
land registration worldwide. Buying property in any
foreign country can be fraught with pitfalls and legal
implications. Here is a basic guide for a foreigner
wishing to purchase property in South Africa:
1. FORM
OF OWNERSHIP
There are several types of land ownership in South
Africa, the two most common being:
-
Freehold title A purchaser buys
a freestanding property and obtains ownership of
the land and the buildings attached to it. The registered
owner receives a separate title deed to the property
and is solely responsible for all maintenance and
services supplied to the property;
-
Sectional title – A purchaser
buys a unit (section) in a complex or apartment
block. He gets a title deed for his section whereby
he owns the section as well as an undivided proportionate
share of the communal property. He contributes to
shared expenses on a pro rata basis and is governed
by a set of management and house rules.
2. FOREIGNERS AND LAND
OWNERSHIP
There is no restriction in principle against non-residents
owning property in South Africa.
Property may be purchased by a person
in his/her individual capacity or in the name of a South
African legal entity like a company or trust. Another
option is to use an entity unique to South Africa: a
close corporation or CC. This vehicle is ideal for small
businesses and can also be used as a property-owning
entity. The CC owns the property and the CC’s
member/s own the member’s interest in the CC.
It is also possible for foreign entities to own property
in South Africa, although there are certain formal legal
requirements which must be complied first.
3. TAX IMPLICATIONS OF
OWNING PROPERTY IN SOUTH AFRICA
The tax consequences of buying, owning
and disposing of fixed property in South Africa are
determined not by a person’s nationality but his
or her tax status. There are various ways of determining
one’s tax status in order to establish whether
you are a resident or non-resident for tax purposes.
Both private individuals and legal entities are classified
in South Africa as either residents or non-residents.
South Africa uses a source based system
of taxation to tax non-residents. This means that any
income earned by a non-resident person, which is South
African in origin, is taxed in South Africa, unless
that person hails from a country with whom South Africa
has concluded a double taxation agreement. Therefore,
even if you are not a resident of South Africa for tax
purposes, you may be required to register for tax and
annually submit an income tax return.
The South African Revenue Services
(SARS) uses the purchase of property as a checkpoint
to ensure that all parties to property transactions
are registered for tax purposes and, if already registered,
that their tax affairs are up to date. Therefore, should
you not have been registered as a taxpayer in South
Africa before, when you purchase immovable property,
SARS will insist that you register at that point before
it will allow the transaction to proceed.
There are several property taxes in
South Africa. Among them are:
- Transfer Duty – This is a tax levied by government
on the transfer of ownership of fixed property, and
is payable before transfer of a property can take
place. It is calculated on the purchase price of the
property.
If a purchaser is an individual, the following
rates apply:
| 0-R500 000 |
Nothing payable |
| R500 001 – R1 000 000 |
5% (ie R25 000) |
| R1 000 001 upwards |
8% of the value above R1 000 000 |
If the purchaser is a legal entity, the rate is
a flat rate of 8%.
- Value Added Tax (VAT) – This is a tax
levied on supplies of certain goods and services by
persons or entities who are VAT-registered. It is charged
at a rate of 14% and is included in the purchase price
where the Seller (developer) is VAT-registered. Most
developers are VAT-registered and when VAT is applicable,
no transfer duty is levied.
- Capital Gains Tax (CGT) – This tax is
levied on the profit or gain made by the owner when
property is sold. Non-residents are also liable to pay
CGT and for this reason, SARS insists that all purchasers
of property register as tax payers. When a non-resident
person sells his property, a CGT withholding tax is
applicable. This is collected by the attorney or estate
agent dealing with the sale and paid directly to SARS.
The non-resident seller is obliged to complete a tax
return and account to SARS for the balance of the CGT
within the same tax year.
4. EXCHANGE CONTROL: BORROWING
FUNDS LOCALLY TO FINANCE PROPERTY
If a non-resident purchaser intends
paying cash for a property, there is no limit to the
amount of money he can bring into South Africa for this
purpose and he needn’t involve the South African
Reserve Bank (SARB) in the transaction. When that property
is sold, all the profits can be returned to the country
from which they were sent.
However, should a non-resident person
wish to borrow money from a local South African bank,
he is restricted in his borrowings to an amount equal
to the amount introduced into South Africa in cash.
For example, should the property cost R2 million, the
purchaser can borrow R1 million locally but must introduce
R1 million from offshore. When the property is sold,
that person can repatriate the entire sale proceeds
(including profit) to his country of origin subject
to the CGT provisions as more fully explained herein
below. In order to facilitate this process, when the
property is purchased, the title deed is endorsed “non-resident”.
The same rules apply when a foreign-owned
or –controlled entity purchases property in South
Africa, but the borrowing is limited a certain percentage
of that entity’s net worth. In this instance,
the share certificate (in the case of a company) or
member’s interest (in the case of a CC) will be
endorsed “non-resident”.
5. THE LEGAL PROCESS OF
ACQUIRING PROPERTY
After a sale is concluded, this process
is managed by a specialised attorney referred to as
a conveyancer, who is usually appointed by the Seller.
The conveyancing attorney will draft the relevant transfer
documents (and mortgage bond documents, if applicable)
and present them to the purchaser for signature.
Should it be necessary for the purchaser
to sign legal documentation overseas, specific rules
apply regarding the authentication of such documents
before a Notary Public, Embassy, Consulate or certain
other higher authorities. It is advisable, if possible,
to appoint someone in South Africa by way of a Power
of Attorney to sign as many of the documents as possible
on behalf of the foreigner. However, certain documents
cannot be signed by anyone other than the purchaser
himself. Should the purchaser be married according to
the laws of a foreign country, and he wishes to obtain
bond finance, that person’s spouse will be required
to co-sign the bond documentation.
The purchaser will also be required
to comply with the country’s Financial Intelligence
Centre Act (FICA). This legislation, aimed at combating
money laundering, requires that the attorney and the
bank (if the purchaser takes mortgage finance), obtains
and keeps on record certain documentary proof of identification,
home address and the like. If the purchaser is a legal
entity, the requirements are even more complex and detailed.
The legal fees payable to the conveyancer
are usually paid over and above the purchase price of
the property and are then payable by the purchaser prior
to transfer. The transfer and bond costs are based on
the purchase price and bond amount respectively and
are typically 1-2% of those values.
When all the transfer and bond documents
have been signed and the necessary clearances are in
place, the conveyancer will lodge the transfer and bond
documents at the local Deeds Office, where they will
be examined. When the documents have passed examination,
they will be registered and all monies will be paid
by and to the relevant parties. On that date the purchaser
becomes the registered owner of the property. Approximately
3 months later, the original title deed will be delivered
to the conveyancer by the Deeds Office. This will be
sent to the registered owner if the property was purchased
cash, or the mortgaging bank, should bond finance have
been used.
This process is not applicable where
a person buys the shares or member’s interest
in a company or CC which holds the property. The transfer
of these securities is a paper-based process which can
be handled by an attorney. |
