Owning property: A look at some of the country’s real estate laws

The real estate regime is heavily legislated and creates a definite framework within which persons may own property. South Africa has a first-class definitive registration system, with property rights protected by the 1996 Constitution of the Republic of South Africa.

PROPERTY RIGHTS: Within the constitution is the Bill of Rights, which restricts the deprivation of property, except in the case of expropriation in terms of a law of general application. In such an event expropriation must be subject to compensation that must be agreed by the affected persons or approved by a court. Compensation must be just and equitable. The land restitution process, to restore land to persons dispossessed by land through racially discriminatory laws, is in process and is governed by the Restitution of Land Rights Act 22 of 1994. Notwithstanding that land is to be restored to communities, the persons from whom the state acquires land are required to be compensated on a fair and equitable basis by government.

There exists certain legislation to protect tenants, and these include the Labour Reform (Labour Tenant’s) Act 3 of 1996, the Interim Protection of Informal Land Rights Act 31 of 1996 and the Prevention of Illegal Eviction from Unlawful Occupation Act 19 of 1998. This legislation, while protecting tenants, does not prevent land owners from approaching a court of law for the eviction of tenants on a fair and equitable basis.

The National Environmental Management Act 107 of 1998 is one of the many pieces of legislation to provide for the constitutional requirement of the state’s responsibility to respect, protect, promote and fulfil the social and economic rights and to set out a general framework within which environmental management and implementation plans must be formulated.

Municipalities, which have governmental authority over property, are governed by legislation. Rates and taxes are levied on property by local government under the Municipal Property Rates Act 6 of 2004.

FOREIGN INVESTORS: There is no restriction on foreign investors acquiring property in South Africa. For foreign companies to acquire properties in the country, they must register as an external company in terms of the Companies Act 2000. A withholding amount is payable to the South African Revenue Services pending determination of the tax liability by a non-resident seller. The current rate is 5% for individuals, 7.5% for companies and 10% for trusts. Treaty relief may be available to taxpayers in terms of international treaties.

Investors generally acquire immovable property in South Africa using a domestic company. The company confers limited liability on the shareholder and income net of expenses is taxed at a rate of 28%. When a company disposes of immovable property, a capital gains tax is payable at a rate of 14%. If a property owner holds commercial property from which it derives rental income in excess of R1m ($122,400) a year, the company must register as a vendor for value-added tax purposes at the rate of 14% on all rents collected.

STRUCTURING: Foreign investors investing into a domestic company in South Africa need to structure their investment into that company correctly so as not to run afoul of the thin capitalisation rules in place. It is important that the company has sufficient equity and is not too highly geared, failing which the interest on the loan payable to a non-resident shareholder will not be fully deductible for tax purposes. Once a domestic company has paid tax and chooses to distribute dividends to shareholders, a 10% dividend tax is payable.

All acquisition of property in South Africa is subject to the Transfer Duty Act 40 of 1949. As a general rule, transfer duty is payable, the current rate of which is 8% based on a sliding scale. If the seller of a property is a registered vendor for value-added tax purposes, then value-added tax at 14% is payable and not transfer duty. Leases of property in South Africa are respected and given the sanctity of contracts according to South African law. Unless the contract is against public morals or legislative restrictions, the sanctity of these contracts will be enforced by the country’s courts of law. Leases may be registered against title deeds of properties.