Expatriate workers face double taxation on buying SA property

SA has set itself goals of increasing the level of foreign direct investment; attracting an influx of hard currency and addressing the skills shortage by encouraging expatriate workers to augment manufacturing capacity.

Why then should the tax system work in the opposite direction to penalise the very people the country needs to help its development?

The introduction of Capital Gains Tax (CGT) has sprung a number of traps which foreign nationals need to avoid at the risk of severe financial penalties.

Firstly, any growth in their capital assets, measured in terms of a depreciating rand, will be taxed over the period in which they are regarded as resident in the Republic, even if the assets are located overseas and they remain unsold.

On becoming tax-resident here, the expatriate is given a tax base for CGT equal to the market value of his assets. This exempts the accrued gain up to that point; but when he ceases to be a resident when his tour of duty is complete, he is treated as having sold his assets at their then market value.

The difference between the two values is taxed as a capital gain, so if an expatriate`s fixed property or investments increase in value whilst he is resident here, South Africa claims the right to tax that increase.

More insidiously however if he brings any hard currency into the country after becoming resident here, he will be taxed on the rand depreciation. The market for rented property in South Africa is notoriously uneven, and many expatriates may prefer to buy their own property.

Measured in hard currency, South African property prices are very attractive, and a typical expatriate has the purchasing power to afford a superior property, and may well decide to keep it as a holiday home or let it when he returns to his home country.

Local banks will normally limit the bond they will advance to a non-resident (for Exchange Control/Immigration purposes) to 50% of the cost of the property, so the expatriate will have to draw on his offshore resources to pay the balance of the purchase price.

Let us suppose that our hypothetical worker became tax-resident in March 2001. Early in 2003 he decides to buy a home for R1 million and remits half of that amount to be converted into rands.

Under draft regulations for the taxation of gains on foreign currency assets, any currency which is not legal tender in the country of which that person is a resident is a CGT asset.

The cost of that currency is its exchange rate value at 1st October 2001, or if later, the date when the person became resident for tax purposes. If, at the time the expatriate converted his Dollars, Pounds or Euros into Rand the exchange rate had weakened then the difference is a capital gain.

Buying a house in South Africa could easily cost an expatriate tens of thousands of Rands in Capital Gains Tax.

If our expatriate should buy a motor car or a boat using his offshore funds the same problem arises and he will have to pay CGT on the currency gain.

Fortunately, the draft foreign currency regulations have yet to be finalised even though they were published a year ago. Under a recent amendment the deadline for their completion has been removed, and when they are eventually issued they will only come into operation on a date announced by the Minister.

There appears to be a lack of agreement at the Policy level, especially on the issue whether, when the regulations come into effect they could be made retrospective to 1st October 2001. That would appear to be an extraordinary abuse of power given that taxpayers have already filed tax returns for 2001/2002 on the basis of the law as it stands. We may reasonably expect therefore that any change to the law would affect only the future.

Unless the regulations are remodelled however, an expatriate should think very carefully before deciding to bring any hard currency into this country. Perhaps South African property is not as cheap as it appears when transaction taxes can amount to 10%-11% of the price?

Written by Peter Harrison, Associate Director, Deloitte & Touche Taxation Services