Foreign / Non-Resident Investors' Buying Property in South Africa

South Africa follows a system of land registration where every piece of land is reflected on a diagram and ownership recorded in one of the regionally located Deeds Registries where documents are available for public viewing. South Africa is reputed to have one of the best deeds registration systems worldwide with an exceptional degree of accuracy and of tenure being granted. Property can be owned individually, jointly in undivided shares or by an entity such as a company, close corporation or trust or a similar entity registered outside South Africa.

Foreigners are referred to as non-residents, whether they are natural persons or legal entities whose normal place of residence, domicile or registration is outside the common monetary area of South Africa. A South African Resident who has lived abroad for more than 5 years, regardless of whether or not he/she has emigrated will also be regarded as a non-resident for the purposes of obtaining finance in South Africa. There are certain restrictions on property ownership by non-residents, and it is prohibited for illegal aliens to own immovable property within South Africa.

FINANCIAL ASSISTANCE FOR NON-RESIDENTS

A non-resident may borrow up to a maximum of 100% of his/her borrowing base. The 'Borrowing base of a non-resident individual is the sum introduced into South Africa to fund the purchase of a property, i.e. 50% of the purchase price, e.g. "A non-resident wishes to purchase a property in South Africa for R600,000.00. Provided R300 000.00 is introduced into South Africa to effect the purchase he/ she would be able to apply to the South African Reserve bank for permission to avail himself of a bond of R300 000.00. In other words, banks will lend up to 50% of the purchase price, subject to their normal terms and conditions, which would include a valuation of the property.

Technically, if a non-resident has consistently brought funds into the country over a number of years, he/she may borrow up to a maximum of 100% of the total funds invested in South Africa - theoretically, this could also be more than 50% of the purchase price of the property.

Such non-resident loans are however subject to foreign exchange approval from the South African Reserve bank. Financial assistance is granted in the form of a loan secured by a mortgage bond to be registered in favor of the bank granting the loan. The obtaining of financial assistance from a financial institution should be included in the agreement of Sale as a suspensive condition where the sale is subject to the receiving of financial assistance.

A Non-resident does not have to open a banking account in SA with a commercial bank, although some banks insist, as he/she can transfer funds directly from his overseas account into his Mortgage Account. If an account is to be opened, especially if an access facility is required for the capital paid off, then the non-resident is required to obtain an original letter of credibility from his bankers. This local account will often be funded from abroad or from rental income from the property purchased, subject to the bank holding the account being in possession of a copy of the rental agreement.

As Exchange control is a complex subject, Non Residents are advised to consult with our property finance consultants on this issue.

BUYING A PROPERTY

Property of any kind in South Africa is usually purchased through a broker or Real Estate agent who should be a registered member of the Estate Agents Affairs Board.

All contracts to purchase property must be in writing and must contain certain set information and be signed by both the buyer and seller of the property, for the contract to be legally binding. These contracts usually take the form of an Offer to Purchase or Agreement of Sale, and once this has been signed by both parties it is a valid binding document from which neither party can withdraw without incurring legal consequences. Accordingly the decision to enter into and sign an offer to Purchase / Agreement of sale is not something to be taken lightly and it is recommended that an inexperienced purchaser obtain independent legal advice if uncertain in any respect.

The offer to purchase will contain certain of the following standard provisions:

Purchase price: 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. Provision will be made in the Agreement for a guarantee to be called for in respect of the balance of the purchase price. In general, a guarantee will only be acceptable if issued by a local financial institution. It means that the funds will actually have to be remitted to South Africa in order for a local bank to issue such a guarantee, or alternatively, arrangements must be made between a foreign and local bank for a back-to-back guarantee to be issued. It is however possible to negotiate the issue of a Standby Letter of Credit from an overseas institution in certain circumstances.
‘Voetstoots’ - this is a standard inclusion in all deeds of sale and implies that the property is bought 'as is'. As is means in the exact condition in which the property is found. However all patent and latent defects present in the property must be brought to the attention of the purchaser.
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 at the property meets certain statutory requirements. The beetle free certificate certifies that all accessible parts of the property are free of infestation by certain defined beetle.
Fixtures and fittings - A property is sold with all fixtures and fittings of a permanent nature situated thereat. Generally fixtures and fittings include anything with is attached to the property or which by virtue of its considerable mass accedes to the property. In the event of any uncertainty, the purchaser is cautioned to ensure that all items intended to be included in the purchase price are specified in writing in the agreement of sale.

COSTS INVOLVED IN BUYING A PROPERTY

Commission
If the property is sold by an estate agent the seller will pay commission to the agent. The amount payable is negotiable but the 'normal' tariff, recommended by the Institute of Estate Agents is 7.5% - this commission will attract VAT as the agent is providing a service to the seller. VAT is currently at 14%.

Transfer Fees
The purchaser is responsible for the payment of transfer costs and the costs of registering any new mortgage bonds over the property purchased. He / she will also have to pay an inspection fee and initiation fee. Transfer costs include transfer duty and Conveyancer fees. Transfer duty is calculated as a percentage of the purchase price and varies depending on the purchaser's legal status. For a legal person it is 10% of the purchase price. For a natural person the calculation is as follows:

For a price of R0 - R140 000.00, the duty is 0%
For a price of R140 001.00 - R320 000.00, the duty is 5% on the value above R140 000.00
For a price of R320 001.00 and above, the duty is R9 000.00 + 8% on the value above R320 000.00

Conveyancer fees, charged by the attorneys for attending to the transfer and registration of mortgage bonds are calculated according to a tariff.

Bond Costs
Bond costs are the costs incurred for raising mortgage finance. These fees include stamp duty (approx. 0.2% of the mortgage amount) and inspection fees of 0.2% of the bank valuation. Mortgage registration fees according to a prescribed tariff are payable to the registering attorney.

For example a home costing R500, 000 with a 50% mortgage bond registered in your own name would attract additional costs of R3, 496.

Exchange Control / re-patriation of funds

All funds introduced from outside South Africa to acquire fixed property within South Africa may be repatriated together with any profit on resale of the property, after deduction of any capital Gains Tax payable, provided the title deed of the property has been endorsed 'non-resident'. Similarly, funds introduced to acquire shares in a company / members interest in a close corporation may be repatriated together with any profit on resale, provided the relevant securities have been endorsed 'non-resident'. Funds introduced into South Africa in the form of foreign loan to find acquisitions of corporate entities which own property in South Africa, may be repatriated in terms of the original loan approval by the Reserve Bank. The profit on resale may also be repatriated, provided the relevant securities have been endorsed 'non-resident'.

Income Tax
South Africa follows a revenue based income tax system meaning that income earned from a South African source will be subject to ordinary income tax. Accordingly, any rental earned by non-resident in respect of South African properties will be subject to income tax and it is the responsibility of the non-resident to register as a South African taxpayer.

Income earned by natural persons below R27 000 per annum (for persons under the age of 65) and R42 640 (for persons above the age of 65) is exempt from income tax, whilst all income earned over and above the aforesaid amounts, will be taxed at a marginal rate applicable to that non-resident.

Corporate entities are subject to a tax rate of 30% of each Rand of taxable income whilst the equivalent rate for a trust is 40%. Non-resident companies are taxed at a rate of 35% but are exempt from Secondary tax on companies (STC) in respect of dividends paid.

Capital Gains Tax (CGT)
Non-residents are only liable to pay CGT on the disposal of the following:

Immovable property situated in South Africa, including any right or interest in immovable property.
Assets of a permanent establishment of a non-resident through which trade is carried on in South Africa.

CGT is payable in the year in which the asset is disposed of and is calculated by adding 25% of the capital gain, or profit, to the individual's income for that year and taxing the income to the individual's marginal rate of income tax. The maximum marginal income tax rate for individuals in South Africa is presently 40%. The capital gain is calculated and disclosed in the individual's income tax return for the year in which it is sold. Thus, if a non-resident disposes of an immovable property in any year of assessment and is not already registered as a South African taxpayer, her or she will have to register as such and submit an income tax return reflecting the calculation of the capital gain and will be liable for the payment of CGT on that gain.