Do you own a property overseas? You may have owned it before you immigrated to South Africa, or you may have bought it with funds that you have been permitted, by the exchange control authorities, to take out of the country, as part of your R500 000 investment allowance, for example.
If you don't but would like to, there are a number of foreign investment companies that specialise in finding suitable properties and assisting in obtaining offshore finance to enable South Africans to buy geared properties offshore.
Generally, if you live here, the property will be leased to a third party and rental income will be generated.
But what are the tax implications relating to such rental income in your hands? Rental income is considered to be investment income in terms of the deeming legislation which relates to local residents earning offshore income.
Consequently, in the absence of a double tax agreement to the contrary, the rental income will be taxable in South Africa. Even if there is a double tax agreement, the wording may be such that the income may be taxed in the country in which the property is located. And this does not preclude it also being taxed in the country in which you are resident, that is, South Africa. But the tax paid in the country in which the property is located, will be set off against the South African tax payable on the same rental income.
Thus, you will only pay a total amount of tax on the rental income that would be payable in the country which has the highest tax.
Thus, if, for example, there is no tax payable on the rental in the country in which the property is located, the tax will all be paid in South Africa.
If the tax payable on the rental income in the other country is R5 000, and the tax calculated as being payable here, before taking the offshore tax into account, is R7 000, only R2 000 will be payable here, being the balance.
But what exactly is the South African tax payable on?
In order to hold the property, you may be required to incur certain expenses, for example, the interest on funds borrowed to acquire the property, repairs and maintenance costs, rates and so on. Before determining the South African tax, such expenses as would normally be deductible if the property were in South Africa, may be deducted. Such things as personal allowances that would normally be taken into account to determine a person's taxable income in the other country (Britain, for example) would not be taken into account only expenses normally deductible under the South African tax legislation.
In addition, the South African tax would not be payable if either of the exclusions relating to a person holding offshore investments apply ( I am dealing here with the situation where you hold the property in your own name and not when it is held in an offshore entity, such as a company or trust).
These exclusions apply:
* If the property is held as part of a substantive business enterprise you are conducting in the other country through a permanent establishment (a branch, say). This exclusion envisages substantial business activities taking place in the other country; or
* If you owned the offshore property, or you bought it out of funds that you held before you became ordinarily resident in South Africa for the first time. This exclusion, however, only applies to rental income you receive in the tax years up to February 28 2000. Thus, even if this exclusion applies, the rental income you receive or accrue, less deductible expenses, from your offshore property, on or after March 1 2000, will be taxable in South Africa (that is, in your 2001 tax return and thereafter).
In a nutshell, understand your South African tax obligations relating to a property you own offshore.