Johannesburg - Foreigners investing in South African property must consider the accompanying tax implications, an accountant warned on Wednesday.
David Warneke of Cameron and Prentice Chartered Accountants said if in individual was investing in residential property, he would generally suggest that the property be held in that person's own name.
"The reason for this choice, besides simplicity and administrative cost savings, is a saving on income tax and the soon-to-be-enacted dividends tax," he said in a statement.
An individual's maximum rate of tax on capital gains was 10%, compared with combined taxes of 22.6% payable by a company.
Warneke said that holding the property in a local trust could also be considered.
"This is a more costly option and is only considered necessary if the circumstances of the investor are such that the specific advantages of a trust are considered important."
He said the use of a trust provided flexibility, asset protection, ease of administration on death and savings on estate duty.
However, if revenue and capital gains were to be retained in a trust there was a significantly increased current tax cost when compared with holding of the property in the individual's name.
Extensive double tax treaty network
Warneke said that whichever legal person was used to house the property, tax would be payable in South Africa if the property was let, or a capital gain was realised on its disposal.
"South Africa has a very extensive network of double tax treaties, with the result that tax will most probably not be payable on the property both in the investor's country of residence and South Africa."
He said it was usual under the circumstances that the investor would receive a credit in the country of residence for the tax paid in South Africa.
Warneke said transfer duty was payable by the purchaser on acquisition of the property and the rate of transfer duty depended on the juristic nature of the purchaser of the property.
If the purchaser was an individual, the duty was levied on a sliding scale up to 8% of the purchase price of the property.
If the purchaser was a trust, the rate was a flat 8%.
"If the property is let, current tax is payable on the net rental income derived," Warneke said.
"The legal person owning the property would need to register for income tax and submit returns reflecting the rental income, less any attributable deductions in the production of the income."
Rate of tax
These deductions typically included rates, levies, service charges, interest on bond and repairs and maintenance.
Warneke said capital expenditure such as transfer duty paid and improvement costs were not deductible for current tax purposes, but qualified as part of the base cost of the property when it was sold and capital gains tax was calculated.
According to Warneke, when the investor sold the property, a withholdings tax had to be held by the transferring attorney and paid to the local revenue authorities.
"The rate of the tax depends on the juristic nature of the seller and this is not a final tax, but is in effect an advance payment against the capital gains tax payable by the seller with any excess paid being refundable."
He said South Africa also had a system of exchange control which had been relaxed to a great degree, but still needed to be considered.
"In general, where funds are introduced from abroad for the acquisition of fixed property, then there is no problem in repatriating funds from the sale of real estate."
This was on the assumption that the structure of the investment was set up correctly and that exchange control approval was obtained in advance where necessary, he said.