TABLE OF CONTENTS
Applying for a mortgage Applying for a permanent residence Exchange Control and Repatriation of Funds Security of Investment Different forms of ownership Legal Documentation Transfer of Ownership Additional purchase costs What to expect in an Offer to Purchase Purchase Price Occupation, possession, transfer & occupational rental Voetstoets Electrical and beetle-free certificates Fittings Income Tax Capital Gains Tax
There are very few restrictions at present on the purchase of property by non-residents, but there are procedures and requirements which must be complied with in certain circumstances. For example, entities registered outside of South Africa who intend to purchase property in South Africa must be registered here and must appoint a South African resident public officer for a local company whose shares are owned by a non-resident. In the event that a non-resident plans to purchase property in South Africa with the intention of residing here for longer periods, he or she will have to apply for permanent residency in accordance with the given requirements and procedures of South African law. The South African Reserve Bank refers to foreigners as NON-RESIDENTS (regardless of whether they are natural persons or legal entities) whose normal place residence; domicile or registration is outside the common monetary area of South Africa. If the non-resident intends paying cash for the property, the transaction can be processed without intervention from the South African Reserve Bank.
Property in South Africa is usually purchased through a registered broker or real estate agent, who would be registered as such with Estate Agency Affairs Board (EAAB).
Applying for a Mortgage
Non-residents purchasing a property in South Africa may borrow up to a maximum of 50% of the purchase price in South Africa; the other 50% of the funds must be brought into the country by the purchaser and transferred from a recognised foreign bank to a bank in South Africa. The total amount that may be borrowed is at the discretion of the commercial bank offering the loan. A non-resident must open a ‘non-resident’ account at a South African commercial bank, to facilitate loan repayments. This account would normally be funded from abroad or from rentals received on the property purchased, subject to the bank holding the account being provided with a copy of any rental agreement. However, the Exchange Control Authority allows a non-resident desirous of obtaining permanent residence status in South Africa to be dealt with as a South African ‘resident’ for exchange control purposes. This takes place upon completion of a so-called Immigrant’s Declaration & Undertaking issued by South African banks.
Once such Declaration has been completed, such applicant will be eligible to borrow 100% of the purchase price of the property. However, it will then be incumbent upon such person to actually apply for and obtain permanent residence within a reasonable period.
Non-residents who are in possession of a valid South African work permit are considered t be residents for the duration of their work permit and are therefore not subject to borrowing restrictions placed on non-residents without work permits.
Applying for Permanent Residence
A non-resident seeking permanent residence in South Africa must apply for a permanent residence permit or at the very least a temporary residence permit. All permanent residence applications are assessed independently of the issue of property ownership in South Africa; however the current immigration laws and regulations do allow for immovable property owned in the country to be taken into account when assessing an applicantÂ’s net worth. It is important to note that South AfricaÂ’s immigration laws are complex and have recently changed: it is therefore essential for those non-residents wishing to proceed with the process of applying for permanent or temporary residence, to consult with a reputable immigration lawyer.
Exchange Control and Repatriation of Funds
Is advisable to note that Exchange Control is a complex subject in South Africa and while it is currently going through a process of deregulation to make it easier for foreigners to invest in South Africa and for South Africans to do business abroad, it is highly recommended that non-residents investing in South Africa consult a reputable lawyer or accountant for advice. The Reserve Bank retains considerable control, and while notes and guidelines have been set, allowances will be made for exceptional circumstances. The rules governing exchange control in South Africa stipulates that all funds brought into the country by a non-resident to acquire fixed property within the country (and provided the title deed of the property has been endorsed ‘non-resident’) may be repatriated at any time, as well as any profit (capital gain) made on the resale of the property after the deduction of any Capital Gains Tax payable.
It should be noted however that a new immigrant (i.e., someone who has completed the ImmigrantÂ’s Declaration & Undertaking) may only repatriate funds introduced from abroad, as well as any capital gains accruing thereon (after the deduction of Capital Gains Tax payable), within the first five years of the date of signature of such Declaration. Thereafter, such a person will be bound by the same Exchange Control restrictions imposed on residents with respect to the repatriation of funds.
Security of Investment
South AfricaÂ’s banking system is dependable, well-established and highly advanced, and the transfer of funds any registered South African Bank is secure and guaranteed. Once a money transfer has taken place, it is usually held in trust by an attorney or real estate company, either on behalf of the purchaser or the seller until registration of transfer. The holding of the funds in trust by an attorney is a cornerstone of the attorneyÂ’s practice and is regulated by the relevant Law Societies and secured by the Attorneys Fidelity Insurance.
The different forms of ownership that are available
Non-residents can own property partially or wholly, in their own names or through ownership of an interest in one or other forms of legal entity. Freehold is the most common form of property ownership, while other forms or ownership include leasehold, sectional tile and share block. Property can be owned individually (i.e.: ownership by individual title), jointly in undivided shares, or by an entity such as a company, close corporation or trust or a similar entity registered outside South Africa. The choice is dependent on decisions in relation to tax transfer duty issues, or relating to the protection of assets.
Companies and trusts in South Africa are based on English Law and are very similar in nature to those in England. A close corporation is a type of company which is more flexible and cheaper to form and administer than a normal incorporated company and can usually be formed in less than a month (the same with trusts). A proprietary limited company (PTY) may take a few weeks longer.
Legal Documentation
Contracts dealing with the purchase of property (most commonly known as an Agreement of Sale or Offer to Purchase) must be in writing, contain certain prescribed information and be signed in black ink by both buyer and seller to be valid and legally binding. Once such a contract has been signed by both parties, it represents a valid and legally binding document from which neither party can withdraw without legal consequences. The contract can, however, be subject to certain conditions which are either fulfilled or not fulfilled, or – if the purchase price is less than R250 000 and certain additional criteria in terms of the Alienation of Land Amendment Act are present – the Purchaser may be entitled to a ‘cooling off’ period.
Transfer of Ownership
The registration of a property transaction in South Africa is handled by a specially qualified legal practitioner (an attorney) known as a conveyancer – normally appointed by the seller while the costs of the registration are for the purchaser’s account (unless contractually agreed to otherwise). The conveyancer prepares the required transfer documentation that, after signature by the purchaser and the seller, is lodged in a regionally located Deeds Registry, together with the cancellation of any existing mortgage bonds and new mortgage bonds to be registered. The deeds are subject to an intense examination process before they are made available for registration.
On the date of registration of transfer all existing mortgage bonds registered over the property are cancelled simultaneously with the registration of any new mortgage bonds by the purchaser in favour of the bank granting financial assistance. The purchaser is recorded as the new owner of the property and the purchase price is paid to the seller.
The above procedure does not apply in an instance where the shares/members interest and loans are acquired in a property-owning company/close corporation where no change in ownership is recorded. It is important to note that upon transfer to the new owner, any liabilities in respect of the property incurred by the previous owner, remain with the previous owner and do not necessarily pass to the new owner, unless otherwise agreed to.
Documentation prepared by the conveyancer pertaining to the registration of transfer of the property and any mortgage bond to be registered over the property is required to be signed in black ink and must be authenticated if signed outside South Africa. As this can be extremely inconvenient, it is often advisable to leave a General Power of Attorney in favour of an entrusted person within South Africa to assist with the signing of documentation. Where the purchaser is married under laws governed by another foreign country and a mortgage bond has been applied for, it is important to note that the spouse of the purchaser will be required to assist the purchaser in signing the mortgage bond documentation. However, marriages according to the laws of the England and Scotland are expectations to this rule.
Additional Purchase Costs
Apart from the cost of the property itself, there are various costs involved in the legal transfer of the property in South Africa. These costs are borne by the purchaser and are as follows: Transfer Duty – a tax levied by the government on transfer of the ownership of fixed property. Where the purchaser is a natural person, the duty is calculated on the following scale:
Up to a purchase price of R500 000 –no duty payable; Between R500 001 to R1 000 000 – 5% is payable in duty on the purchase price; R1 000 001 and above – 8% is payable in duty on the purchase price. Where the purchaser is a legal entity, transfer duty is levied at a flat rate of 8% of the purchase price.
Transfer Costs - these refer to the costs relating to the transferring attorney (the conveyancer) who handled the registration and are calculated on a sliding scale which is regulated by a tariff and amount to between 1-2% of the purchase price.
Mortgage Costs – These are the costs incurred for raising mortgage finance and include inspection, initiation and valuation fees. Mortgage registration fees are calculated according to a prescribed tariff ad are payable to the registering attorneys.
Estate Agents Commission – this fee is normally paid by the seller and attracts VAT (VAT is currently 14%)
What to expect in an Offer to Purchase / Deed of Sale
You can expect to find certain of the following provisions in an Offer to Purchase / Deed of Sale in South Africa: Purchase Price A deposit is not mandatory but serves as a gesture of good faith on the part of the purchaser and an indication of financial ability. The deposit will be invested by the estate agent/conveyancer in an interest bearing trust account for the benefit of the purchaser. Provision will be made in the Offer to Purchase/Deed of Sale for the balance of the purchase price to be called upon in the form of a bank guarantee from a local financial institution. Alternatively, arrangements must be made between a foreign and local bank for a back-to-back guarantee to be issued. It is, however, possible in certain circumstances to negotiate the issue of a Standby Letter of Credit from an overseas institution.
Occupation, possession, transfer & occupational rental
Occupation is the physical occupation of the property whereas possession is generally deemed to be the date upon which the purchaser assumes responsibility for the property and it is customary for the risk of ownership to pass on the date of possession. Transfer refers to the actual date registration of ownership in the Deeds Registry in favour of the purchaser. Occupational consideration is the rental payable by the party occupying the property belonging to another where the date of occupation and date of transfer differ, which is better expressed in Rand terms or as a percentage of the outstanding balance of the purchase price.
Voetstoets
This is a standard clause found in all offers to purchase/deeds of sale and means that the property is bought in the exact condition in which the property is found. However, all patent and latent defects present in the property within the sellerÂ’s knowledge must be brought to the attention of the purchaser. While it is not standard in South Africa to conduct property surveys, purchasers are allowed to include these as a condition of the purchase if so desired. These can be arranged either via your estate agent or your conveyancing attorney.
Electrical and beetle-free certificates
The property 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 safely requirements. The beetle-free certificate certifies that all accessible parts of the property are free of infestation by certain defined beetle and this certificate, while a standard inclusion in the Offer to purchase/Deed of Sale, is neither a legal requirement nor include in sales of sectional title units. The cost of attending to the necessary repairs in order for the aforesaid 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 – i.e., this will generally include anything physically attached to the property. In the event of any uncertainty, the purchaser is cautioned to ensure that all items intended to be included in, the purchaser is cautioned to ensure that all items intended to be included in the purchaser price are specified in writing in the Offer to Purchase/Deed of Sale.
Income Tax
South African taxation is based on a revenue income tax system, which means that any income earned from South African source will be subject to ordinary income tax. In the case of property ownership, this accordingly means that any rental earned by non-residents in respect South African properties will be subject to income tax and it is the responsibility of the non-resident to register as a South African taxpayer. Income earned by natural below R40 000 per annum (for persons under the age of 65) and R65 000 (for persons above the age of 65) is exempt from income tax, while all income earned over and above these amounts will be taxed at a marginal rate applicable in accordance with published tax tables. The marginal tax rate is calculated on a sliding scale with a maximum rate of 40%. Companies and close corporation are subject to a flat tax rate of 29% of each rand of taxable income. The equivalent rate for trusts is 40%. If a company declares a dividend it will be subject to an additional tax (STC- secondary tax on companies) of an amount of 12.5% of the dividend declared. Non-resident companies are taxed at a rate of 35% but are exempt in STC in respect of dividends paid.
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 an R2.5milion abatement from net asset 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). There will be exception to this if a person bequeaths his or her estate to his or her spouse as the bequest is exempt form both CGT and estate duty.
Capital Gains Tax
Capital Gains Tax (CGT) became effective on 1 October 2001 and all South African residents are liable for the payment of CGT on the disposal of any asset, subject to certain limited exceptions. Non-residents however are only liable to pay CGT on the disposal of the following: Immovable property situated in South Africa, including any right or interest in immovable property (this also includes an interest of at least 20% in a company where 80% or more of the value of the net assets of the company is attributed, directly or indirectly, to immovable property in South Africa); Assets of a permanent establishment of a non-resident through which trade is carried on in South Africa. CGT is payable in the year in which the asset is disposed of and is calculated by adding 25% of the capital gain, or profit, to the individualÂ’s income for that year and taxing that income at the individualÂ’s marginal rate of income tax. The maximum marginal income tax rate for individuals in South Africa is presently 40% (reached at taxable income above R300 001). The capital gain is calculated and disclosed in the individuals income tax return for the year in which it is sold.
Therefore: If a non-resident disposes of an immovable property in any property in any year of assessment and is not already registered as South African taxpayer, he or she will have to register as such and submit an income tax return reflecting the calculation of the capital gain, and will be liable for the payment of CGT on that gain.
The amount of a capital gain is calculated either by deducting the value the property as at 1 October 2001 (together with the costs of acquiring and improving the property) from the proceeds on disposal of the property or by apportioning the amount of time the property was owned between the period before 1 October 2001 and the period after that date. Note: South African residents do not pay CGT on the first R1.5million of profit made on the disposal of their primary residence. The documentation contained on this website is for information purposes only, is subject to change and cannot be depended on in any particular transaction. As with all transactions such as the purchase of property, it is highly recommended that professional legal and accounting services and advice be sought.
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