Foreigners buying property must consider tax implications

Foreigners investing in South African property must consider the accompanying tax implications, an accountant warned on Wednesday.

An Accountant said if an individual was investing in residential property, then he would generally suggest that the property be held in that persons 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 individuals maximum rate of tax on capital gains was 10 percent compared with combined taxes of 22.6 percent payable by a company.

He 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 individuals name.

Hesaid 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 investors 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.

He 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 eight percent of the purchase price of the property.

If the purchaser was a trust, the rate was a flat eight percent.

“”If the property is let, current tax is payable on the net rental income derived,”” he 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.””

These deductions typically included rates, levies, service charges, interest on bond and repairs and maintenance.

He 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.

TAXtalk: www.taxtalk.co.za

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