Advance payments by non-residents disposing of immovable property
Introduction
The 2015 Taxation Laws Amendment Bill proposes an amendment to Section 35A of the Income Tax Act (58/1962), dealing with withholding percentages from payments due to non-resident sellers of immovable property situated in South Africa.
The proposed amendment raises interesting questions regarding compliance with tax laws through the submission of returns for assessment versus a final withholding tax.
Withholding obligation
As a general principle, Section 35A of the Income Tax Act obliges a purchaser of immovable property in South Africa that is owned by a non-resident seller to withhold a percentage of the purchase price and pay it to the South African Revenue Service (SARS). The percentage differs according to the nature of the seller, as follows:
- A natural person must withhold 5% of the amount payable;
- A company must withhold 7.5% of the amount payable; and
- A trust must withhold 10% of the amount payable.
There is a general misconception – most likely based on poor advice being given to sellers – that Section 35A of the act imposes a final ‘capital gains’ withholding tax. This is clearly incorrect, as the relevant provision states that the amount withheld “is an advance in respect of that seller’s liability for normal tax”.
The withholding obligation is comparable to the employees’ tax regime, where the monthly amount withheld by the employer is not a final tax, but an advance payment towards the normal tax liability of the employee, which is assessed annually. Section 35A of the act looks to apply the same principle – the purchaser withholds the amount and pays it to SARS on behalf of the seller as a provisional payment. This provisional payment is then offset against the seller’s normal tax liability once assessed by SARS, which implies the submission of a tax return. On assessment, tax overpayments or underpayments can arise, as with any other submission to SARS.
Proposed amendment
Although the process behind Section 35A is simple in theory, a number of practical issues can arise, one of which motivated the proposed amendment under the Taxation Laws Amendment Bill. According to the National Treasury, the proposed amendment to Section 35A(3) is designed to resolve an impasse that occurs where the non-resident seller does not submit a tax return, but an amount has been paid to SARS in respect of the disposal of the immovable property situated in South Africa. Under the proposal, SARS would be permitted to regard the advance payment, which would lie in the seller’s provisional tax account, as a final payment of the assessed tax due.
The National Treasury further states that the provision deeming the advance payment to be a final tax will occur by operation of law one year after the due date of the relevant tax return has passed. This extended period is intended to afford the non-resident seller an opportunity to submit a tax return.
The proposal is geared towards overcoming a real administrative issue in complying with Section 35A. It will work well for non-residents who have made an accurate calculation of their capital gains tax liabilities on the basis that the advance payment will cover exactly the amount that would in any event have been assessed by SARS on submission of a tax return.
However, in most cases the withholding percentages under Section 35A are much more than the ultimate tax liability of the seller on assessment, which is generally reduced to a more accurate amount by way of a directive application. In the absence of a directive application, the advance payment may be more than what the assessed liability would have been, thereby triggering refund provisions. However, in the absence of a return being submitted, the non-resident will be unable to claim any refund.
The finality of the advance payment, where no return is submitted, brings with it a few problems. It is still an offence under Section 234(d) of the Tax Administration Act (28/2011) not to submit a return wilfully or without just cause. It is uncertain whether the proposed amendment to Section 35A of the Income Tax Act will qualify as ‘just cause’ for the purposes of Section 234(d) of the Tax Administration Act; this notwithstanding, no amendments have been made to decriminalise the non-submission of a return by a non-resident seller.
Further, if the amount were deemed final after the prescribed period for submitting a return, could the non-resident still submit a return and claim a potential refund? The proposal does not seem to prevent the non-resident from doing so, bearing in mind the general prescription timeframes. In a normal withholding tax context (eg, dividends tax, royalties and interest), the legislation provides specific refund mechanisms; this is absent from the proposed amendments. On this basis, one could potentially still utilise the Tax Administration Act provisions to seek a refund, despite the deemed finality of the advance payment.
Comment
Non-resident sellers should tread cautiously if they choose not to submit a return to SARS for administrative ease. It would still be advisable to utilise the directive provisions in Section 35A of the Income Tax Act to obtain clarity on ultimate tax liability before doing so and not merely accept the prescribed withholding percentages, which could potentially result in substantial overpayments to SARS.
