Nobody likes handing over hard-earned money to the tax man, and looking over the number of taxes that apply to South African property transactions can be overwhelming. Add to that, people and businesses that are not registered for tax, or have returns and/or monies outstanding, will find it very difficult to avoid repercussions during a property purchase or sale these days.
According to SARS, property transfers are used as an opportunity to ensure compliance across all types of taxes, by all parties involved. That includes buyers, sellers and, interestingly enough, real estate agents as well, whether operating as natural persons or business entities.
“The South African Revenue Service is definitely cracking down on unregistered taxpayers,” says Calum Wedge, Financial Director at the Rawson Property Group. “There has been legislation in place for several years requiring both buyers and sellers to be registered for income tax and they need to complete a transfer duty declaration as part of the sale process, but many are unaware of the extent to which unresolved tax issues can affect their transaction.”
According to SARS, property transfers are used as an opportunity to ensure compliance across all types of taxes, by all parties involved. That includes buyers, sellers and, interestingly enough, real estate agents as well, whether operating as natural persons or business entities. While the estate agent’s tax status will not affect the finalisation of the sale, buyers and sellers risk having proceedings delayed by SARS if their tax obligations have not been properly met.
“SARS does give buyers and sellers the opportunity to rectify any tax issues before taking action against them,” says Wedge, “but this can delay the transfer process, which is pretty serious in large property transactions, because the seller stands to lose considerable interest on the purchase price.”
If matters are not voluntarily resolved to SARS’ satisfaction, however, things get more complicated, as the Transfer Duty receipt can be withheld until such time as SARS has instituted the necessary recovery steps – further delaying the finalisation of the sale.
“One of the ways SARS deals with this kind of situation is to appoint the conveyancer handling the sale of the property as an agent,” says Wedge. “The conveyancer will then be required to recover any outstanding taxes from the proceeds of the sale, on SARS’ behalf. This also applies to the estate agent, whose commission can be confiscated by the Receiver of Revenue to cover any outstanding tax that they owe.”
While this method of tax recovery only works on those receiving money as part of the sale (sellers and estate agents), Wedge cautions buyers that they are far from exempt from SARS’ scrutiny. “You have to include an income tax and VAT number (if you’re a VAT vendor) as part of your transfer duty declaration,” he explains, “which means that you have to be registered for tax before you can buy fixed property. That’s all well and good, except that registering for the first time in the midst of a large financial transaction – like a property purchase – will undoubtedly trigger an investigation into any previously undeclared sources of the income that has made that purchase possible. That kind of investigation can take time, and will inevitably impact the progress of the sale. There could also be serious financial implications for those who’ve been avoiding paying tax for many years.”
Ensuring that your own tax affairs are in order is easy enough to do, in most cases, but how can buyers and sellers protect themselves against delays caused by the other party’s non-compliance? “At the Rawson Property Group, we’ve included a tax warrantee clause in our standard Agreement of Sale to do exactly that,” says Wedge. “It requires both the seller and purchaser to warrant that their tax obligations have been discharged and are fully up to date. If this is proven to be untrue further down the line, the offending party will face legal consequences.”
Handled correctly, tax should be an uneventful aspect of buying or selling a property, but costly delays and legal issues are a real risk for the uninformed and unprepared. If you’re not sure of your tax status, contact SARS directly, or discuss your obligations with your real estate agent, accountant or attorney.
7th Jan 2016