Widening the scope of Capital Gains Tax liability

One of the amendments proposed in the Taxation Laws Amendment Bill (TLAB), relates to the revision of the definition of “immovable property.” This definition is significant when considering the potential tax liability of non-resident persons, especially when it comes to capital gains tax (CGT).

Paragraph 2 of the Eighth Schedule makes a distinction between residents and non-residents in determining CGT liability. As with income tax, residents are subject to tax on all capital gains derived from the disposal of a capital asset irrespective of where the asset is situated.

Non-residents are liable for CGT if the assets in question constitute fixed or immovable property in South Africa, any interest or right to or in immovable property situated in South Africa or any asset that is attributable to a permanent establishment of that non-resident in South Africa.

Paragraph 2(2) of the Eighth Schedule to the Income Tax Act defines “immovable property” to include any interest or right of whatever nature of a person to or in immovable property situated in South Africa. The definition does not include the right to mine, prospecting rights, and right to work mineral deposits or other natural resources.

It becomes necessary to consider the definition of “immovable property” in the context of international tax treaties when considering non-residents, and given the number of tax treaties South Africa has in force with countries around the world.

In terms of Article 6 of the Organisation of Economic Co-operation and Development (OECD) Model Tax Treaty, the term “immovable property” includes in its definition “the rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for working of, or the right to work, mineral deposits, sources and other natural resources”.

There is clearly a difference between the two definitions, which SARS is seeking to correct through the proposed amendment by aligning it with the OECD Model Tax Treaty’s definition. In doing so, the term “immovable property” will in future include the right to variable payments or fixed payment as consideration for the working of or right to work mineral deposits, sources and other natural resources. The effect of the amendment will be to create certainty for non-residents in respect of the definition of “immovable property” and is likely to give rise to unplanned tax implications if not managed proactively.

The proposed amendment will come into operation on 1 January 2016.