The Investment Process in South Africa for residents and non residents
There are no restrictions on property ownership by non-residents, except for a prohibition on illegal immigrants owning immovable property within South Africa.
In South Africa private sales are relatively rare and the property market is dominated by a few estate agencies. The agent is paid by the seller and will look after the formalities such as signing the contract or Offer to purchase and request legal proceedings on your behalf.
All Contracts or Agreement of Sale to acquire land must be in writing and must be signed by both the buyer and seller to be valid and legally binding. Once an Agreement of Sale has been signed by both parties it is binding and neither party can withdraw without legal consequences, save for certain instances where:
1. the agreement is subject to certain conditions which are either fulfilled/not fulfilled;
2. the purchase price is less than R250 000 and certain additional criteria in terms of the Alienation of Land Amendment Act are present entitling the Purchaser to "cool off".
Property is commonly advertised at between 10% and 15% above the price the seller expects to achieve. Once a purchase price has been agreed with the seller a deposit of 10% is typically required. The transfer of the property is handled by an Attorney (Conveyancer) and registration at the Deeds Office takes six to eight weeks.
South Africa is reputed to have one of the best deeds registration systems worldwide, with an exceptional degree of accuracy and of tenure being guaranteed. South Africa offers an unusual degree of certainty with regard to property ownership and 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.
Property of any kind in South Africa is normally purchased through a broker or real estate agent who should be registered as a member of the Estate Agents Board.
The South African Reserve Bank refers to foreigners as NON-RESIDENTS whether they be natural persons or legal entities, whose normal place of residence, domicile or registration is outside the common monetary area of South Africa. Should the non-resident be paying cash for the property, the transaction can be processed without intervention from the South African Reserve Bank.
Non-residents purchasing a property in South Africa may borrow up to a maximum of 50% of the purchase price in South Africa; the other 50% of the funds must be brought into the country by the purchaser and transferred from a recognised foreign bank to a bank in South Africa. The total amount that may be borrowed is at the discretion of the commercial bank offering the loan.
A non-resident must open a "non-resident" account at a South African commercial bank, to facilitate loan repayments. This account would normally be funded from abroad or from rentals received on the property purchased, subject to the bank holding the account being provided with a copy of any rental agreement.
Non-residents who are in possession of a valid South African work permit are considered to be residents for the duration of their work permit and are therefore not subject to borrowing restrictions placed on non-residents without work permits.
However, the Exchange Control Authority allows a non-resident desirous of obtaining permanent residence status in South Africa, to be dealt with as a South African ‘resident’ for exchange control purposes. This takes place upon completion of a so-called Immigrant’s Declaration & Undertaking issued by South African banks.
Once such Declaration has been completed, such applicant will be eligible to borrow 100% of the purchase price of the property. However, it will then be incumbent upon such person to actually apply for and obtain permanent residence within a reasonable period.
Exchange Control is currently going through a process of deregulation in South Africa, to make it progressively easier for foreigners to invest in this country, and for South Africans to do business abroad. However, it remains a complex subject and non-residents investing in South Africa are strongly advised to consult a reputable lawyer or accountant for advice. The Reserve Bank retains considerable control, and while notes and guidelines have been set, allowances will be made for exceptional circumstances.
South African Mortgages
In most cases non-residents in South Afrrica may borrow a maximum of 50% of the purchase price, in some cases borrowing a maximum of 70% of the purchase price can be considered.
Loans can be arranged in South African Rand or Pound Sterling or US Dollars for a minimum of £150,000.
The interest rate is based on the Prime Overdraft Rate. Mortgages can be arranged to a maximum term of 20 years but the most common term is 10 years. Life assurance is assessed on a case by case basis although it is strongly recommended that you take out life cover for the loan even if this is not a mandatory requirement of the lender.
Taxes & Costs in addition to the Purchase Price
There are various costs involved in the transfer of property in South Africa. The following are costs borne by the purchaser:
1. Transfer Duty
Transfer duty is a tax levied by the government on transfer of ownership of fixed property.
Where the purchaser is a natural person, the duty is calculated on the following scale:
1.1. No duty up to R500 000 of the purchase price
1.2. R 500 001 - R 1 000 000: 5% above R 500 000
1.3. R 1 000 001 and above: 8% of selling price
1.4. Where the purchaser is a legal entity, transfer duty is levied at a flatrate of 8% of the purchase price.
2. Transfer Costs: Conveyancing and Attorney's Fees
These costs relate to the transferring attorney. They are calculated on a sliding scale regulated by a tariff and amount to between 1-2% of the purchase price.
3. Mortgage Costs
Mortgage costs are the costs incurred for raising mortgage finance. These fees include inspection fees of 0.2% of the bank valuation. Mortgage registration fees according to a prescribed tariff are payable to the registering attorney.
Therefore: a home costing R500 000 with a 50% mortgage bond registered in your own name would attract additional costs of R2 996.
4. Estate Agents Commission
This fee, normally paid by the seller, is 7.5% plus VAT (VAT is currently 14%).
5. Stamp Duty
This amounts to approximately 0.2% of the mortgage amount.
6. Capital Gains Tax
A relatively complicated formula resulting in the tax due on any gain made. If resident in South Africa there is a threshold of the first million ZAR profit made if this is your primary residence. Non-residents do not qualify for this if their primary residence is outside South Africa.
What is...
Voetstoets?
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 within the sellers' knowledge must be brought to the attention of the purchaser. It is not standard in South Africa to conduct property surveys but these can be arranged with the assistance of the estate agent or an attorney and should be included as a condition of the purchase.
Occupation, Possession, Transfer and Occupational Rental?
Occupation is the physical occupation of the property whereas possession is generally deemed to be the date upon which the purchaser assumes responsibility for the property and it is customary for the risk of ownership to pass on the date of possession. Transfer refers to the actual date of registration of ownership in the Deeds Registry in favour of the purchaser. Occupational consideration is the rental payable by the party occupying the property belonging to another where the date of occupation and date of transfer differs, which is better expressed in Rand terms or as a percentage of the outstanding balance of the purchase price.
Electrical and Beetle-free 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 safety requirements. The beetle-free certificate certifies that all accessible parts of the property are free of infestation by certain defined beetle and this certificate, whilst a standard inclusion in the Agreement of Sale, is neither a legal requirement nor included in sales of sectional title units. The cost of attending to the necessary repairs in order for the aforesaid certificates to be provided, is generally accepted as being for the account of the seller, although, the parties can contractually agree otherwise.
Fixtures and Fittings
A property is sold together with all fixtures and fittings of a permanent nature situated thereat. Generally fixtures and fittings include anything which 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.
The format of agreements concluded for the acquisition of shares/members interest and loan accounts in property-owning companies/close corporations contains many of the aspects discussed above, although it is substantially different and includes numerous warranties and indemnities granted by the seller to the purchaser who acquires the property-owning entity together with its financial history.
Purchase Price?
A deposit is not mandatory but serves as a gesture of good faith on the part of the purchaser and an indication of financial ability. This amount will be invested by the estate agent/conveyancer in an interest-bearing trust account for the benefit of the purchaser.
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 which 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.
Frequently Asked Questions
1. Can property be owned by a non-resident?
Non-residents can own property partially or wholly, in their own names or through ownership of an interest in one or other forms of legal entity, as discussed below.
2. What forms of ownership are available?
Freehold is the most common form of property ownership. Other forms of ownership include Leasehold, Sectional Title and Share Block.
3. Which is the best form of ownership?
The most common form of ownership is that of individual title. However, property may also be held through share ownership in companies, through holding membership in Close Corporations or as a beneficiary in a Trust. This choice will be dependent on decisions in relation to tax or transfer duty issues, or relating to the protection of assets.
Companies and Trusts in South Africa are based on English Law and are very similar in nature to those in England. A Close Corporation is a type of company, which is flexible and cheaper to form and administer than a normal incorporated company. A Close Corporation or a Trust can usually be formed in less than a month. A Proprietary Limited Company may take a few weeks longer. Golf 2 Africa will refer you to specialists who provide advice in each case as to the method of holding property best suited to particular needs.
4. Is my investment secure?
The banking system in South Africa is dependable, established and highly advanced. Transfer of funds through any registered South African Bank is secure and guaranteed. Once the money transfer has taken place, it is usually held in trust by an attorney or real estate company, either on behalf of the purchaser or the seller until registration of transfer. The holding of the funds in trust by an attorney is a cornerstone of the attorneys' practice and is regulated by the relevant Law Societies and secured by the Attorney's Fidelity Insurance.
5. Will I be able to get my money out of South Africa?
The Exchange Control Rulings stipulate that funds brought into the country by a non-resident may be repatriated at any time, as well as any capital gain thereon after deduction of any Capital Gains Tax payable.
A new immigrant (that is, someone who has completed the Immigrant’s Declaration & Undertaking) may only repatriate funds introduced from abroad, and capital gains accruing thereon, within the first five years of the date of signature of such Declaration. Thereafter, such person will be bound by Exchange Control restrictions imposed on residents with respect to the repatriation of funds.
6. Can property be leased to others?
Non-resident owners of South African property have all the normal rights of ownership including the right to recover rental income from lessees. Rental income is normally taxable in South Africa.
7. What is the procedure for transfer of ownership?
The registration of a property transaction is handled by a specially qualified legal practitioner known as a conveyancer. It is customary for the seller to appoint the conveyancer to attend to the registration of transfer of a property sold, whilst the costs attendant on it are for the account of the purchaser, unless contractually agreed to otherwise.
The conveyancer prepares the requisite transfer documentation that, after signature by the purchaser and the seller, is lodged in a regionally located Deeds Registry, together with the cancellation of any existing mortgage bonds and new mortgage bonds to be registered. The deeds are subject to an intense examination process whereafter they are made available for registration.
On date of registration of transfer all existing mortgage bonds registered over the property are cancelled simultaneously with the registration of any new mortgage bonds by the purchaser in favour of the bank granting financial assistance. The purchaser is recorded as the new owner of the property and the purchase price is paid to the seller.
The above procedure does not apply in an instance where the shares/members interest and loans are acquired in a property-owning company/Close Corporation where no change in ownership is recorded.
It is important to note that upon transfer to the new owner, any liabilities in respect of the property incurred by the previous owner, remain with the previous owner and do not necessarily pass to the new owner, unless otherwise agreed to.
8. To what taxation am I liable?
For income tax purposes, South Africa is no longer a source-based taxation system. In February 2000 proposed changes to the South African tax legislation were announced and, although the actual legislation has not been promulgated, the government has indicated its intention to change from a source-based to a residence-based taxation system.
In addition, a Capital Gains Tax was introduced in October 2001 and clients are advised that it is prudent in all cases to seek professional legal and tax advice.
9. Does a property purchase affect applications for permanent residence? For any foreign person seeking to reside permanently in South Africa, applying for a permanent residence permit, or at least a temporary residence permit, is obligatory. Permanent residence applications are assessed completely independently of the issue of property in South Africa. However, the current immigration law and regulations do allow for immovable property owned in South Africa to be taken into account when assessing the applicant's net worth.
The contents furnished above are presented for information purposes only and they are not to be depended on in any particular transaction. Professional legal and accounting advice should be sought on individual transactions. The contents contained herein are subject to change.
