Resident And Non-Residents
Property Letting And Disposals
Companies
Trusts

Resident And Non-Residents

Resident individuals and companies are taxed on their worldwide income and their worldwide capital gains.
Non-residents are taxed on income derived from a South African source including rental income derived from the letting of immovable property in South Africa. While non-residents generally are not liable for capital gains tax (CGT) they do pay CGT on immovable property or any interest or right in immovable property situated in South Africa. In determining whether a non-resident has an interest in immovable property, ownership via a company or other entity is taken into account. Where a non-resident holds (alone or together with a ‘connected person’) at least 20% of the equity or interest in a company or other entity, and 80% of the market value of the net assets of that company or other entity is attributable directly or indirectly to immovable property (which is not trading stock) in South Africa, then an interest is held in that property by the non-resident. Note that the interest can be held ‘indirectly’, typically through the medium of another company, including a foreign incorporated company.  ...Top

Property Letting And Disposals

Rental income derived from the property is taxable and is included in the taxpayer’s ‘gross income’. A tax deduction can be claimed in general for operating expenses including any interest costs, rates and agents commission for administering the property. Note that in practice the SARS limit any interest deduction to the rental income derived. Note further that where interest is paid to acquire shares in a company, which owns a property, the interest will in general not be tax deductible. Certain non-operating expenditure such as repairs to the property may in general be claimed as a tax deduction.

No income tax deduction can be claimed for the cost of acquisition of the property which, however, forms part of the ‘base cost’ of the asset for CGT purposes. Improvements to the property and transfer costs (including conveyancing fees) are similarly not income tax deducible but are added to the ‘base cost’ of the asset for the purposes of CGT. Borrowing costs, including interest and raising fees as well as expenditure on repairs, maintenance or insurance is generally not added to the ‘base cost’ of the asset, irrespective as to whether the expenditure is income tax deductible. On sale of the property, CGT is levied on the difference between the ‘base cost’ of the asset and the ‘proceeds’ on disposal of the asset.

Different tax rates may apply depending on whether the property is owned directly by an individual non-resident or by a company (resident or non-resident) or trust (resident or non-resident).

Individuals

Both resident and non-resident individuals are taxed at their marginal tax rate. Only25% of any capital gains is included in the individual’s taxable income. The tax rates for the 2004 tax year are as follows:

Thus the maximum effective capital gains tax rate for an individual is 10% (25% x 40%).

Individuals who are younger than 65 deduct a rebate of R5 400 from the tax determined, whereas individuals 65 years or older deduct a rebate of R8 500 from the tax determined. The threshold for an individual younger than 65 before tax is payable is R30 000, whereas the threshold for an individual 65 years or older before tax is payable is R47 222. Note that the rebate is generally not apportioned.

On death a person is deemed to have disposed of all property at market value hence triggering a CGT liability. For non-residents this deemed disposal applies to immovable property situated in South Africa. In addition on death a person is liable for estate duty at 20% (after deducting a R1.5million abatement from net assets and after deducting any CGT payable by virtue of the deemed disposal of the property). In the case of a non-resident estate duty would be levied on immovable property situated in South Africa (subject however to the terms of any applicable Double Death Duties Act entered into by South Africa with any other State).

Example

Assume a non-resident individual younger than 65 years old acquires a property in South Africa in their own name on 1 March 2003 for R1million and lets the property out for a number of years at R9000 per month. In such case the gross commission payable to GameFarms.org Properties for administering the property would be R14 774 (VAT inclusive) per year. Assume further that the property is sold for R1.8million on 28 February 2007 and agent’s commission of R153 900 (incl VAT) become payable (7.5% of sale proceeds). Assuming that the current tax rates remain unchanged and ignoring the impact, if any, of any double tax agreement entered into between South Africa and the State that the individual is a resident, then the liability of the non-resident would be as follows:

Note that the tax year for individuals is from 1 March to 28 February.  ...Top

Companies

A South African resident company is a company which is either incorporated or has its place of effective management in South Africa. The place of effective management of a company is essentially the place from where the managing director of the company ‘calls the shots’ in relation to the activities of the company. While in most cases it will be clear where the place of effective management of a company is, this can be a complex issue and in cases of doubt advice should be sought. Note that any foreign company carrying on business in South Africa is required to register as an ‘external company’ in terms of the Companies Acts. Whereas a passive investment in a property is unlikely in itself to trigger an external company registration, the circumstances in which a company may be said to ‘carry in business’ is a complex issue and specific advice should be sought. Note that the registration of a foreign company is not an ‘incorporation’ and thus does not in itself result in a foreign company being regarded as a South African resident.

· South African resident companies pay tax at 30%. In addition dividends declared by a   company are subject to STC (secondary tax on companies) at 12.5%. Where a   company declares all its reserves as a dividend in a tax year (being the financial year   of the company), the effective tax rate of the company is 37.8%. South African resident   companies pay CGT at an effective rate of 15%.

· Non-resident companies which operate through a branch or agency in South Africa pay   tax at 35%. Such companies are however not liable for STC. The effective CGT rate for such companies is 17.5%.

· Non-resident companies which do not operate through a branch or agency in South   Africa pay tax on South African source or deemed source income at the 30% rate and   are not liable for STC. The effective CGT rate for such companies is 15%. A company   renting a single residential property on a causal basis would likely qualify for this   reduced rate. The degree of activities which would result in there being a branch or agency, would ultimately depend on the particular facts, and specific advice on this   issue should be sought.

· Note that where a non-resident disposes of shares in a company (be it a resident or   non-resident company) which owns property in South Africa then the non-resident will   likely be subject to CGT on disposal of the shares (discussed above).  ...Top

Trusts

A South African resident trust is a trust which, is either established or has its place of effective management in South Africa. Both South African resident and non-resident trusts pay income tax at a flat rate of 40%, and CGT at an effective rate of 20%. The income / capital gain may be taxed at a reduced rate in the hands of a South African resident beneficiary should the trustees distribute the income / capital gain to such a beneficiary in the same year of assessment (28/2 – 1/3) in which the income / capital gain arose. These rules are complex and specific advice should be sought.  ...Top

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