Buying Property in South Africa as a non-resident

South Africa follows a system of land registration where every piece of land is reflected on a diagram and ownership recorded in one of the regionally located Deeds Registries. These documents are available for public viewing. South Africa is reputed to have one of the best deeds registration systems worldwide with an exceptional degree of accuracy and guaranteed security of tenure. Property can be owned individually, jointly in undivided shares, or by an entity such as a company, close corporation, or trust, or a similar entity registered outside South Africa.

NON-RESIDENTS

There are no restrictions in respect of legal property ownership by non-residents. Procedures and requirements must be followed for specific situations, like local registration for foreign entities buying property in South Africa. Non-resident property purchasers intending to stay long-term need to apply for a residence permit. Ownership of property does not guarantee a residence permit.

CONTRACTS & BUYING PROPERTY

Contracts are generally referred to as an Offer to Purchase (‘OTP’) and, if accepted by all parties, becomes an Agreement of Sale (‘the Agreement’). These are the requirements for an Agreement to purchase property in South Africa:

• The contract must be in writing;
• It must state the prescribed information (the parties, property, and price);
• It must be signed by both the purchaser and seller to be valid and legally binding;
• Ownership of property can also be obtained by means of acquiring the shares/members’ interest and loan claims in a company/close corporation that owns a property. These contracts, strictly speaking, need not be in writing and can be concluded verbally. It is recommended to record the Agreement in writing to ensure that the material terms agreed to are accurately recorded.

Once an Agreement has been signed by both parties, it is a valid and binding contract. A party cannot withdraw without incurring legal consequences, except where:

• The Agreement is subject to certain conditions which are not fulfilled (such as financing); or
• The purchase price is below R250 000.00 and the purchaser is entitled to a ‘cool-off’ period and may cancel the sale.

TRANSFER PROCEDURE

1. The Agreement is concluded and sent to the conveyancer.
2. The conveyancer acknowledges receipt, contacts parties and attends to FICA compliance.
3. If applicable, payment of the deposit is requested and, bond approval pursued.
4. If applicable, bond cancellation figures are requested from the seller’s bank.
5. Secure purchase price: collect cash and/or bank guarantee.
6. Parties sign the transfer documents; the purchaser signs bond documents, if applicable.
7. The purchaser pays transfer duty and transaction costs.
8. The conveyancer requests:
   • Rates clearance figures from the municipality.
   • Levy clearance figures from the managing agent of the body corporate / HOA, if applicable.
   • Compliance certificates.
   • Original title deed from the seller, if applicable.
     
     
9. Receive rates clearance, levy clearance, and compliance certificate/s.
10. Receive transfer duty receipt/exemption receipt after payment is made to SARS.
11. Documents are lodged in the Deeds Office.
12. Congratulations! Transfer of ownership in the property is registered!

TRANSFER PROCEDURE APPLICABLE TO SHARES

When a purchaser acquires shares/members’ interest in a property-owning entity, the ownership rights are not changed in the Deeds Registry as the entity remains the registered owner. When selling shares or members’ interest, the entity remains responsible for its liabilities. Purchasers should conduct thorough due diligence with a commercial attorney to include necessary provisions in the Agreement.

COSTS

SELLER’S COSTS

1. Brokerage (commission) is payable where an estate agent is responsible for the successful facilitation of a sale of immovable property.
2. Brokerage is generally payable by the seller who mandates the estate agent to procure a purchaser for the property. However, should the parties agree that the purchaser settles the selling agent’s commission, the parties will need to obtain advice as there are certain tax implications.
3. The seller is also responsible for the cost of procuring certain prescribed compliance certificates.
4. If the seller’s property is bonded, the seller is liable for the costs relating to the cancellation of the existing bond over the property.
5. The seller also pays 60 days’ advance rates and services, and any arrears to the local authority.

PURCHASER’S COSTS

The purchaser is responsible for the following costs:

1. Transfer fees payable to the conveyancing attorney to transfer the property and are determined by the Law Society of South Africa.
2. The costs of registering any new mortgage bonds over the property purchased, if applicable.
3. Sundry charges (Deeds Office fees and expenses for obtaining rates/levy clearance certificates).
4. Transfer duty (property tax) payable to the South African Revenue Services (‘SARS’), calculated according to a formula, based on the purchase price.

Transfer duty is payable on the acquisition of property whether by an individual or entity. Note the exception: No transfer duty is payable if VAT is payable. If the seller is a VAT vendor, VAT will be payable either at the standard rate (15%) or at the rate of zero percent (0%) depending on the nature of the transfer.

SIGNATURE OF DOCUMENTS

All conveyancing documents must be signed in black ink. When signing documents outside of South Africa, there are specific formalities for authentication that must be complied with to ensure the validity of the document. This authentication can be time-consuming and costly, and we encourage that specific advice be obtained from the conveyancer.

It is possible, and often advisable, to leave a General Power of Attorney (‘GPA’) in favour of a trusted person in South Africa to assist in this regard. No person may sign an affidavit on someone else’s behalf, even if a GPA has been granted.

If the seller is married according to the laws of another country, their spouse will be required to assist them by signing all the transfer-related documents.

THE OFFER TO PURCHASE/AGREEMENT OF SALE

The following are some of the most important provisions in the Agreement.

DEPOSIT

The deposit is not a mandatory requirement for a valid Agreement, but serves as a gesture of good faith on the part of the purchaser and an indication of financial ability.

It will be invested by the conveyancer in an interest-bearing trust account, interest generally accruing for the benefit of the purchaser provided that the purchaser has specifically mandated the attorney to do so. Attorneys are covered by the Fidelity Fund which guards against the risk of loss and oversees the operation of these trust accounts.

GUARANTEE

Provision will be made in the Agreement for a guarantee to be called for in respect of the balance of the purchase price. In general, a guarantee will only be acceptable if issued by a local financial institution which means that the funds will have to be remitted to South Africa in order for a local bank to issue such a guarantee or, alternatively, arrangements must be made between a foreign and local bank for a back-to-back guarantee to be issued. Specific advice on this subject must be sought from the conveyancer attending to the transaction.

OCCUPATION

Occupation refers to the physical occupancy of the property whereas possession is generally deemed to be the date upon which the purchaser assumes responsibility for the risk in the property. It is customary for possession to pass on the date of registration of transfer. Transfer refers to the date upon which ownership of the property is registered with the Registrar of Deeds, in favour of the purchaser.

Occupational interest is the rental payable by the party occupying the property belonging to another where the date of occupation and date of transfer differs and is normally expressed in Rand terms or as a percentage of the outstanding balance of the purchase price.

VOETSTOOTS

This is a standard inclusion in all sale agreements and implies that the property is bought ‘as is’, which means ‘in the exact condition in which the property is found’.

COMPLIANCE CERTIFICATES

The existing owner is required by law to be in possession of a valid electrical compliance certificate certifying that the electrical installation at the property meets certain statutory safety requirements.

The beetle-free certificate certifies that all accessible parts of the property are free of infestation by certain defined beetle. However, whilst it is a standard inclusion in the agreement, it is neither a legal requirement nor is it included in sales of sectional title units.

If there is a gas appliance installed in the property, a Gas Certificate of Compliance must be obtained confirming that the installation complies with statutory safety requirements. A compliance certificate must also be obtained where there is an electric fence installation on the property.

A Certificate of Compliance of Water Installation must be provided by the seller to the Municipality before transfer where the property is situated in the jurisdiction of the City of Cape Town.

The cost of attending to the necessary repairs in order for the various certificates to be provided is generally accepted as being for the account of the seller, although the parties can contractually agree otherwise.

FIXTURES AND FITTINGS

A property is sold together with all fixtures and fittings of a permanent nature. Generally, fixtures and fittings include anything which is attached to the property or which, by virtue of its considerable mass, accedes to the property. To avoid uncertainty, the purchaser is cautioned to ensure that all items intended to be included in the purchase price are specified in writing in the Agreement.

Including the cost of the sale of movable items in the purchase price of the land may influence the capital gains tax calculation. Specific advice should be sought from a conveyancer prior to signature of the Agreement.

Agreement whereby the shares/members’ interest in a property-holding entity are acquired differs substantially from that of a property being acquired. Specific advice must be sought not only in terms of the agreement but also in respect of the purchaser’s current and future tax obligations.

NON-RESIDENTS AND TAX

INCOME TAX

Non-residents are only liable to pay income tax in South Africa on income accruing from a South African source. This includes a profit realised from letting fixed or other property, as well as the capital profit realised from the disposal of a capital asset (capital profit). Foreign pensions are specifically exempt from tax in South Africa.

A distinction must, however, be made between normal income and income of a capital nature.

Income generated through a scheme of profitmaking is classified as ‘normal income’ and would, for example, include salary or rental income which is taxable. The sale of a capital asset can either result in a capital gain or loss. If it is a capital gain, it will be taxed in accordance with SARS’ withholding tax scale.

CAPITAL GAINS TAX

The phrase ‘capital gains tax’ is a misnomer as this is not a separate tax. In reality, only a portion of a capital gain is included as normal income and the tax on this gain is referred to as capital gains tax. The inclusion rate depends on the type of owner.

The effective rate of tax applicable to a capital gain made by an entity is 21.6% and 36% in respect of a trust. The position for individuals is more complex due to a progressive sliding tax scale applied to the income of natural persons.

The effective tax rate in respect of a capital gain in the hands of a natural person is directly related to the total taxable income for the year of assessment. 40% of the capital gain must be added to the taxpayer’s total income for the year. The sliding scale ranges from 0% to 45%. The highest effective tax rate applicable to a capital gain realised by an individual is 18% (40% x 45%). The disposal of the following will be treated as a capital disposal:

• Immovable property situated in South Africa, including any right or interest in immovable property. (This also includes interest of at least 20% in a company where 80% or more of the value of the net assets of the company is attributable, directly or indirectly, to immovable property in South Africa);
• Assets of a permanent establishment belonging to a non-resident through which trade is carried on in South Africa.

A non-resident realising a profit from the sale of fixed property or any other income from a South African source is obliged to register as a non-resident taxpayer in South Africa and to submit a tax return for the relevant tax period declaring the income to SARS and to make payment in accordance with the assessment raised by SARS.

WITHHOLDING TAX

In 2007, legislative amendments placed an obligation on the conveyancers to withhold a percentage of the proceeds in transactions where the seller is a non-resident disposing of fixed property for consideration in excess of R2 million.

Practically, the withholding tax is collected from the purchase price received from the purchaser.

Where the value of the property exceeds R2 million, the withholding amount applies to the full purchase price without regard to the R2 million limit.

The withholding tax obligation is made on the gross selling price and the applicable rate depends on the nature of the non-resident as follows:

• 7.5% for a non-resident individual;
• 10% for a foreign entity; and
• 15% for a foreign trust.

In instances where this obligation is applicable, the conveyancer shall withhold a percentage of the net sales price and make payment directly to SARS on behalf of the non-resident seller, which payment is then captured as a provisional payment of the seller’s future tax liability.

This provisional tax does not take into account the actual profit realised on a transaction, and more often than not, results in an excessive payment of tax to SARS.

Non-residents can claim a refund of the excessive tax payment by submitting a tax return during the appropriate tax filing season indicating the actual liability as less than the provisional tax payment made. It should be noted that the filing season may in certain instances only open 18 months after the payment of the provisional tax and that no interest accrues to the non-resident on this provisional payment of tax.

BUYING PROPERTY WITH FOREIGN FUNDS

Foreign funds can be paid into any nominated bank account in South Africa. This account will usually be the trust account of the transferring attorneys into which the deposit for the property and the balance of the purchase price is paid.

These funds will be invested for the non-resident’s benefit provided that the attorney is mandated to do so and the non-resident can rest assured that the funds are secure and guaranteed.

When a non-resident transfers funds from a foreign source into a South African bank account, a record known as a ‘deal receipt’ is kept of the foreign funds received by the South African bank. This is an important document which must be retained for purposes of repatriation of funds.

BORROWING MONEY IN SOUTH AFRICA

Subject to the internal lending requirements of local financial institutions, non-residents are allowed to borrow up to 50% of the outstanding purchase price of the property locally on the proviso that the initial 50% of the purchase price, as well as the transfer fees and transfer duties, have been introduced into South Africa from a foreign source.

CAN A NON-RESIDENT OPEN A BANK ACCOUNT WITH A SOUTH AFRICAN BANKING INSTITUTION?

Subject to the internal requirements of the various financial institutions, non-residents can operate a South African bank account. These accounts are strictly regulated and local currency payments may in limited circumstances be deposited into such accounts. For example, local rental income having been approved by the bank in terms of their specific requirements.

WHO CHOOSES THE TRANSFERRING ATTORNEYS?

It is customary in South Africa for the seller to nominate the attorneys who will attend to the transfer of the property. A purchaser may nominate the conveyancer in the OTP to be accepted by the seller. The nominated legal practitioners act on behalf of both parties throughout the conveyancing process.

REMITTANCE ABROAD OF SALE PROCEEDS

Whilst the South African Reserve Bank (‘SARB’) strictly enforces the exchange control regulations which limit the transfer of funds abroad, non-residents are allowed to remit their available proceeds overseas provided that the applicable regulations are adhered to.

ESTATE DUTY IN THE EVENT OF DEATH

Estate duty is presently calculated at 20% of the dutiable amount of an estate, which is valued between R3.5 million and R30 million and 25% on the value exceeding R30 million. However, any inheritance bequeathed to a surviving spouse is not subject to estate duty.

ARE THERE ANY RESTRICTIONS ON NON-RESIDENTS BUYING PROPERTY IN SOUTH AFRICA?

The answer to this is a resounding NO, save for a prohibition on illegal aliens owning immovable property in South Africa. Non-residents will of course be subject to the same laws and regulations as South Africans and it is compliance with these stringent requirements that ensures the efficiency of the South African land registration system and security of tenure.

Should the non-resident not wish to purchase the property in his or her own name but rather in the name of an entity, such entity must be locally registered and meet the requirements inherent in registration of the chosen entity, such as the requirements of the Companies Act.

For example, a non-resident may decide to own the property through share ownership in a company or as a beneficiary in a trust. In the event of a non-resident acquiring property in the name of an entity, funds brought into the country will represent a loan to the local entity and will require Exchange Control approval.

For the most part however, property is registered in the name of the purchaser as an individual. There may be specific reasons for taking transfer in the name of an entity. For further advice, contact us at info@stbb.co.za.

Note that purchasers will have to finalise their choice of entity in which to purchase the property prior to signing any Offer to Purchase or Agreement of Sale, as no changes can be made at a later date without the possibility of penalties being imposed and resultant delays in the transaction. It is possible to sign an agreement as nominee for another, but the nomination of the alternative purchaser must then be made before midnight on the date of signature of the agreement.

Finally, a non-resident can purchase South African property over the internet without entering the country! However, should the prospective purchaser intend residing in the property for any length of time, he or she will need to comply with the requirements of the Immigration Act and either have a valid permit to temporarily remain in the country or be in possession of a permanent residency permit.

HOW CAN FOREIGN FUNDS BE BROUGHT INTO SA FOR A PROPERTY ACQUISITION?

Foreign funds can be paid into any nominated bank account in South Africa. This account will usually be the trust account of the estate agent or transferring attorneys into which the deposit for the property and the balance of the purchase price is paid. These funds will be invested for the non-resident’s benefit and the non-resident can rest assured that such a deposit is secure and guaranteed, as the operation of these trust accounts is regulated by the professional boards overseeing the operations of both attorneys and estate agents. If the money is deposited into an attorney’s trust account, the client will be required to sign a specific instruction form, directing the attorney to invest the money and requesting interest to accrue to the client. Failing such an instruction, interest earned will accrue to the Law Society.

When a non-resident transfers funds from a foreign source into a South African bank account, a record known as a “deal receipt” is kept of the foreign funds received by the South African bank. This is an important document which must be retained for purposes of repatriation of the funds.

CAN MONEY BE BORROWED IN SA TO PURCHASE PROPERTY?

The South African Reserve Bank considers all foreigners not having their domicile in South Africa as non-residents. This however does not include foreigners with South African work permits who will be considered to be residents for the duration of their work permit.

Non-residents are restricted in their borrowing ratio to an amount equal to the amount brought in from a foreign bank. As such, if a purchaser brings sufficient money into South Africa to cover the costs and transfer duty of the transaction together with 50% of the purchase price, he will be able to borrow an amount that is more than 50% of the purchase price. In order to qualify for a South African mortgage bond, the non-resident will need to provide proof of earnings and comply with the Financial Intelligence Centre Act. This Act, in simple terms, requires identification of the non-resident for money laundering purposes, and involves the production of certain documents such as a passport and proof of residential address.

CAN A NON-RESIDENT OPEN A BANK ACCOUNT AT A SOUTH AFRICAN BANKING INSTITUTION?

In order for a non-resident to service repayments on a mortgage bond, he or she will need to open a non-resident banking account which can only be done from within the country. Again, certain documentation relating to the applicant’s identity will be required, ie. application form detailing name, passport number and address, certified copies of the relevant pages of the passport, and proof of source of income, such as a salary slip or pension statement. All copies will have to be certified as true copies of the originals. Once the bank account has been opened, foreign funds will have to be deposited immediately.

In certain circumstances, local currency can be deposited into the account, for example, rental income acquired from property belonging to the non-resident. This is dependent on the bank being in possession of a certified copy of the rental agreement. This type of deposit, together with any other South African deposit into the non-resident account, will require the Reserve Bank’s approval, as non-residents are not entitled to generate income in South Africa, other than interest/rental generated from the foreign funded capital asset. Obviously the Rand value received on the sale of immovable property in South Africa can also be receipted into the non-resident account, provided the necessary documentation is lodged prior to the deposit being made.

WHO CHOOSES WHICH ATTORNEYS WILL ATTEND TO THE TRANSFER AND WHOSE INTERESTS ARE THE ATTORNEYS PROTECTING?

It is customary in South Africa for the seller of immovable property to nominate the attorneys who will attend to the transfer. Such attorneys then act for the seller and on his or her instructions. Consequently, in the event of a dispute between the seller and purchaser, the purchaser would have to seek independent legal advice. Note that whilst the seller selects the attorneys, the purchaser pays the transfer costs.

CAN TRANSFER AND BOND DOCUMENTS BE SIGNED OVERSEAS AND IF SO, WHAT IS THE PROCEDURE?

Yes, but there are certain formalities that must be complied with. Documents can either be signed before a Notary Public in certain countries or alternatively at the South African Embassy in that country. This can unfortunately turn out to be costly and time consuming.

If a seller or purchaser is in South Africa at the time of the transaction but returning overseas shortly thereafter, it is advisable to sign a special or general power of attorney in favour of a local friend or family member who will then be able to act on his or her behalf. It is important to remember that affidavits cannot be signed by an authorised representative on your behalf.

ON SALE OF THE PROPERTY, CAN THE MONEY BE TAKEN OUT OF THE COUNTRY?

Understandably, this is without doubt the number one concern of non-residents considering investing in South Africa. The answer to this question is simply, yes. Money from a foreign source together with any profit, proportionate to that non-resident’s shareholding in the property, may be repatriated in due course in terms of SA Exchange Control Regulations. If the non-resident owns property together with a SA resident, only his portion may be repatriated, and is limited to the amount which can be proven to have emanated from a foreign source plus the profit on that portion.

On transfer of the property to the non-resident purchaser, all deal receipts, a copy of the agreement of sale together with the conveyancer’s final statement of all costs, must be retained by the non-resident purchaser for the duration of his ownership and will have to be presented to the Reserve Bank on sale, when the proceeds are to be repatriated back abroad. This facilitates the repatriation of the funds and profit on sale of the property, provided the bankers are satisfied that such profit is reasonable and market related.

Obviously if the purchase was partially financed by funds borrowed in South Africa, that portion of the purchase price cannot be repatriated unless the bond has been settled in full. It is important to note that during the course of the bond repayment history, the monthly/other installments towards the bond must again have emanated from a foreign source or from rental/interest income generated from a capital asset purchased partly/wholly with foreign funds.

Furthermore, if a foreigner takes up permanent residency in South Africa and signs a Declaration and Undertaking at a South African bank (namely declaring whether he/ she is in possession of foreign funds and undertaking not to place such funds at the disposal of anyone resident in the Republic), they will be considered a resident for Exchange Control purposes and will accordingly only be able to repatriate funds within five years of immigration. Thereafter he/she will be considered to be a South African citizen and subject to the same regulations and limitations.

Finally, the repatriation of funds will be subject to capital gains tax.

IS A NON-RESIDENT LIABLE FOR PAYMENT OF ANY SOUTH AFRICAN INCOME TAX?

While South Africans are taxed on their worldwide income, non-residents are liable for income tax only on income accruing from a South African source. For example, if the property is rented, the rental income will be subject to South African income tax. In addition, a non-resident is liable for payment of capital gains tax on the disposal of a South African property.

Finally, it is important to note that a non-resident who has not permanently immigrated to South Africa will be considered a resident for income tax purposes if he or she spends more than a certain length of time within the country. This is known as the “physical presence test” and is calculated in terms of days spent in the country over a three year period.

No tax is levied on foreign pensions.

WHAT ABOUT THE ESTATE DUTY IN THE EVENT OF DEATH?

Estate duty is presently calculated at 20% of the dutiable amount of an estate. However, any inheritance bequeathed to a surviving spouse is not subject to estate duty. Nonresidents, like South Africans, are entitled to a rebate of R3.5 million on their dutiable assets; however, unlike South Africans, this rebate is limited to assets situated in South Africa.

Finally, it is important to note that a non-resident who has not permanently immigrated to South Africa will be considered a resident for income tax purposes if he or she spends more than a certain length of time within the country. This is known as the “physical presence test” and is calculated in terms of days spent in the country over a three year period. 

No tax is levied on foreign pensions.