Guide for foreign purchasers
South Africa is reputed to have one of the most accurate and most secure deeds registration systems worldwide, giving certainty in respect of property ownership and tenure.
Similarly, the banking system is dependable, well established and highly advanced, guaranteeing reliable transfer of funds. Money paid over i.r.o. property transactions is held in trust (escrow) by the legal firm or real estate company until registration of transfer, secured by Attorney’s Fidelity Insurance and regulated by Law Societies.
Non-residents are natural persons or legal entities whose normal place of residence, domicile or registration is outside the common monetary area of South Africa.
There are certain procedures and requirements to be complied with, such as the local registration of entities registered outside of South Africa where it purchases immovable property in South Africa.
The purchase of immovable property and property interests in South Africa is usually negotiated through a broker or Estate Agent, registered with the Estate Agents Board, but may be sold privately as well. (See Purchasing Procedure)
Contracts must be in writing, signed by both buyer and seller (and respective spouses where applicable) of the property in black ink, must include a full description of the property, the purchase price, as well as the terms of the agreement for the contract to be legally binding. These contracts usually take the form of an Offer to Purchase or Agreement of Sale and constitute a valid, binding document from which neither party can normally withdraw without incurring legal consequences, conditional clauses excepted.
Documentation relating to registration of transfer and mortgage bond registration must be authenticated if signed outside South Africa. To speed up the process, a General Power of Attorney in favour of an entrusted person within South Africa will assist in this regard. According to applicable laws, the purchaser’s spouse may be required to assist in signing mortgage bond documentation.
Purchasers should obtain independent legal and/or professional advice if uncertain in any respect.
A deposit is not obligatory but serves as a gesture of good faith on the part of the purchaser and an indication of financial capacity. The sales agreement generally makes provision for guarantees i.r.o. the purchase price or the balance thereof.
Guarantees are normally only acceptable if issued by a local financial institution, requiring that funds i.r.o. the purchase price will have to be remitted to a South African bank in order for guarantees to be issued. Arrangements must otherwise be made between a foreign and local bank for a back-to-back guarantee to be issued. It may also be possible to negotiate a standby Letter of Credit from an overseas financial institution in certain circumstances.
Electrical and Beetle certificate - the property owner is required by law to be in possession of a valid electrical compliance certificate, certifying that the electrical installation of the property meets statutory requirements.
The beetle free certificate certifies that all accessible parts of the property are free of infestation by certain defined beetle. Whether beetle certificates are required or not is usually a stipulation of the Sales Agreement. Beetle / Woodborer problems are more common in coastal areas and buyers may insist on a certificate.
Fixtures and fittings - A property is sold together with all fixtures and fittings of a permanent nature and generally includes anything that is attached to the property and its improvements. It is advisable to specify and describe clearly in writing, as part of the sales agreement, which items are included in the transaction if they are not clearly permanent improvements or fixtures, or where any doubt exists.
At present there are no exchange control regulations preventing non-residents from transferring capital into South Africa for the purpose of purchasing immovable property. There are no restrictions on non-residents purchasing immovable property in South Africa but valid residence permits must be in place for non-residents wishing to reside in South Africa.
A Non-resident account is opened with a South African bank in the client’s name and funds are transferred from recognised foreign banks or deposited locally into the South African bank. The bank should be informed of the purpose for which the funds are being transferred as this will assist in the remittance of funds overseas should a property or property interests be sold. Funds may also be transferred from an overseas account directly into the mortgage account.
The property deed of transfer or share certificate must be endorsed as "non-resident" and will allow transfer of the full proceeds should the property be sold.
A copy of the rental agreement should be supplied to the local bank if rental income is used to fund the purchase price.
All funds introduced from outside South Africa to acquire fixed property, an interest in fixed property or shares in companies within South Africa, may be repatriated at any time, together with any profit on resale of such property or interests, provided that the title deed of the property or relevant securities are endorsed "non-resident".
New immigrants may only repatriate funds introduced from abroad and capital gains accrued thereon within the first five years whereafter they will be bound by restrictions imposed on South African residents in respect of the repatriation of funds.
Various categories of temporary and permanent residence options exists in South Africa, including Temporary Residence Permits, Work Permits, Retired Person’s Permits and Business Permits. More information as well as the various acts may be found at the links below:
Immigration Law Attorneys
Immigration Amendment Act 19 of 2004
Immigration Regulations 1 July 2005
Immigration Act 2002
FORMS OF OWNERSHIP
Immovable property in South Africa may be owned individually, jointly in undivided shares or by companies, closed corporations, trusts and partnerships or similar entities registered outside of South Africa. Non-resident owners have all the normal rights of ownership including the right to rental income.
∙ A Close Corporation is a type of company that is more flexible as well as quicker and cheaper to form and administer than a normal incorporated company. Close Corporations can usually be formed in less than a month while Proprietary Limited Companies takes longer.
∙ Individual or Freehold Title is the most common form of ownership with other options being Sectional Title and Share Block.
∙ Sectional Title makes it possible for different persons to own a portion of a building eg. apartment blocks where each apartment in the building may be owned by a different person. Owners will be sole owners of their unit and joint owners of common property such as entrances, parks and swimming pools. Monthly maintenance levies are paid to a Body Corporate responsible for the administration and management of the development.
Property investments may also be made by acquiring shares in a company or member’s interest in a close corporation where such companies are the registered owners of immovable property. Only natural persons may acquire the member’s interest in a close corporation. Accordingly, if it is intended for a non-resident company or trust to be the ultimate purchaser, provision can be made for the close corporation to be converted to a private company at nominal expense.
Non-residents may borrow up to 50% of the purchase price from local banks. Non-residents seeking permanent residence in South Africa should complete an Immigrant’s Declaration & Undertaking issued by South African banks where-after they will be eligible to borrow up to 100% of the purchase price of immovable property.
Non-residents with South African work permits are considered residents for the duration of the permit and are not subject to the same borrowing restrictions. Dependent on the merit of the application, loans of up to 100% of the purchase price may be granted.
When a foreign national who owns real estate leaves South Africa, the criteria for non-resident purchasers will apply and the bond may have to be reduced in line with the S. A. Reserve Banks’ requirements.
South African residents working abroad may obtain mortgage bonds of up to 80% depending on the individual merit of each application. Applicants should be living abroad temporarily and must intend returning to South Africa; application to emigrate must not have been made nor should South African residency have been surrendered.
South African residents who have lived abroad for more than 5 years, regardless of whether or not they’ve emigrated, will be regarded as non-residents i.r.o. obtaining finance in South Africa.
South African contract workers working abroad are regarded as South African residents for the purposes of obtaining finance in South Africa and loans of up to 100% may be granted, subject to normal income qualifying criteria.
CAPITAL GAINS TAX
Non-residents are liable for CGT on the disposal of immovable property within South Africa, including any right or interest in immovable property. This would also apply to an interest of 20% or more in a company where 80% or more of the nett assets of the company is directly or indirectly attributable to immovable property.
CGT also applies to the assets of permanent business concerns owned by non-residents.
CGT is payable in the year in which the property is disposed of and 25% of the capital gain must be included in the taxable income for the year i.r.o. individuals. Properties owned by companies, close corporations or ordinary trusts must include 50% of the capital gain in taxable income. CGT is levied on the difference between the base cost of the asset and the nett proceeds on disposal of the asset.
Capital losses may be set off against capital gains made in the same tax year. If no capital gains were made the loss may be carried forward to subsequent years of assessment.
Acquisition costs, improvements, transfer costs and conveyancing fees are added to the base cost for CGT purposes. Expenses which have been allowed as income tax deductions are not added to the base cost.
The first R12 500 of an individual’s capital gain (or loss) is exempt and thus disregarded for tax.
Where applicable, non-residents have to register as South African taxpayers and submit income tax returns reflecting capital gains (or losses) and will be liable for payment of CGT on capital gains.
A primary residence exclusion of R1.5m applies to South African residents for properties owned by individuals. This does not apply to properties registered in companies, close corporations or trusts.
Death triggers a CGT event and all property, situated in South Africa, is deemed disposed of at market value, attracting CGT liability, except where assets are bequeathed to a spouse in which case the bequest is exempt from CGT and estate duty.
South African Revenue Services http://www.sars.gov.za
Non-residents are taxed on income derived from South African sources, including rental income, which is included in a taxpayer’s gross income and taxed accordingly. Operating expenses such as interest costs, rates, administration and management fees may be claimed as a deduction. Interest deductions are limited to the amount of income derived.
It is the responsibility of non-residents to register as South African taxpayers where applicable.
Income earned by natural persons 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. Income earned over and above these amounts is taxed at a marginal rate 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 corporations are subject to a flat tax rate of 29% while trusts are taxed at 40%. Non-resident companies are taxed at 35%.
South African Revenue Services http://www.sars.gov.za