You have decided to take the big step of buying a property, but before putting in an offer, you read the Agreement of Sale. One of the clauses is headed, “Withholding Tax”, or something similar and you wonder what it would mean to you?
Briefly, Section 35A of the Income Tax Act, is a control mechanism expressly intended to ensure that the liability to tax by a non-resident is honoured by ensuring that the funds are available. In terms of Section 35A, an obligation is imposed on the Purchaser, who pays in excess of R2 million for a property in South Africa, where the Seller is a non-resident, to withhold part of the purchase price from the Seller, an amount calculated as follows:
- 5% where the Seller is a natural person;
- 5% where the Seller is a company; and
- 10% where the Seller is a Trust.
The amount that is withheld by the Purchaser is treated as an advance in respect of the Seller’s liability for normal tax for the year of assessment during which the immovable property is sold by the non-resident Seller. The withheld amount is then paid within 14 days of registration of transfer, if the Purchaser is a resident, and 28 days when the Purchaser is a non-resident.
If the Purchaser does not pay the required amount within the time periods above, the Purchaser will be liable for the interest thereon at the prescribed rate on any amount outstanding and must pay a penalty equal to 10% of the underpaid amount, in addition to any other penalty or charge for which he may be liable under the Act.
Should the Purchaser have known, or reasonably ought to have known, that the Seller is a non-resident, and he nevertheless fails to withhold the amount required, the Purchaser will become personally liable to pay the amount to SARS on the due date.
The obligation of the Purchaser is lessened or removed where the Seller obtains a directive from SARS that no amount, or a reduced amount, may be withheld and provides this directive to the Purchaser before the expiry of the period allowed for payment.
The estate agent and the conveyancer have an obligation to notify the Purchaser, if they knew or ought to have known, that the Seller is a non-resident. Should the estate agent and the conveyancer fail to do so, they are jointly and severally liable for the tax payable, to the extent of their remuneration.
In order to protect all the parties involved, it is therefore advisable to have such a clause in all Sale Agreements where the Seller must specify if they are resident or not. Should the Seller be a non-resident, the Agreement should further irrevocably authorise the conveyancer to withhold the required percentage of tax from the proceeds of the sale to pay SARS.