The Withholding Tax Trap: Why Foreign Sellers of South African Property Often Overpay

Under South African law, a percentage of the purchase price is required to be withheld and paid over directly to the South African Revenue Service (SARS) as an advance to cover any potential tax liability of the non-resident seller.

This obligation to withhold an amount at prescribed rates, arises under section 35A of the Income Tax Act and applies when the seller is a non-resident as defined under South African tax law.

In practice, the provision is frequently misunderstood, particularly in transactions involving joint ownership. SARS treats each individual joint owner as a separate taxpayer, regardless of whether the co-owners are spouses or otherwise connected.

Without proper planning, withholding tax can result in excessive withholding, restricted cash flow, and delays in accessing funds offshore for the foreign seller.

Why SARS Withholds — and Why It May Be Too Much

The purpose of the withholding provision is to ensure that non-resident sellers settle their tax obligations before their money leaves the country. These may include capital gains tax and, where applicable, tax on rental income. This is where the chickens come home to roost for foreigners who own South African property that was not acquired in a fully correct manner, or who have rented the property out but never considered informing SARS of their rental income.

Section 35A requires withholding at the following rates, and depending on who owns the property being sold:

• 7.5% for individuals
• 10% for companies
• 15% for trusts

While this is intended to function as an advance payment towards Capital Gains Tax (CGT), there is also a practical issue in how the withholding is calculated.

The withholding percentage is applied to the full selling price, not the actual profit. This means that no consideration is given to the original purchase price. Even where you sell the property at the same value as you bought it for, you still suffer the full withholding rate. Also, any improvement costs incurred over time, or applicable exemptions such as the primary residence exclusion, are not taken into account. In certain cases, this can even apply where there is little to no taxable gain – the law equally applies even where you sell the property at a loss!

The result is that a foreign seller may have a percentage of the total proceeds withheld, despite their true tax liability being significantly lower or even where the final SARS liability is zero.

The R2 Million Threshold: Where Transactions Go Wrong

Where the amount payable to a foreign seller is below R2 million, no withholding is required. While this appears straightforward, it is often incorrectly applied in practice.

In a transaction involving multiple non-resident sellers, the threshold is frequently assessed against the total purchase price of the property, rather than the portion attributable to each individual seller. This misinterpretation is not uncommon and often results in unnecessary withholding.

SARS has clarified that “seller” must be interpreted at an individual level. The R2 million threshold therefore applies per seller, not per transaction. This approach aligns with broader South African tax principles, where liability is determined on an individual basis, even in cases involving spouses or jointly owned property.

Do Not Confuse with the R3 Million Capital Gains Tax Exclusion

The withholding tax that applies when a non-resident sells South African property for more than R2 million, should not be confused with the capital gains tax exclusion of R3 million applicable when selling a primary residence.

In the 2026 Budget, the CGT exemption was increased from R2 million to R3 million, effective 1 March 2026. For qualifying sellers, this raises the tax-free portion on the capital gain (profit) on the sale of a “primary residence” in South Africa by R1 million.

It is important to understand how and when these different rules apply. For non-resident sellers professional tax advice is essential to optimise the tax relief under the available exemptions.

Getting It Right: A Calculation-First Approach

When it comes to section 35A, each transaction must be assessed on its own facts, taking into account the ownership structure, residency status, and the underlying tax position of each seller.

In practice, this requires a full capital gains tax computation before transfer, rather than relying on the purchaser or conveyancer to automatically apply the withholding percentages prescribed under section 35A.

An experienced tax expert can assist with accurately calculating the withholding amount. Where a reduced or even zero withholding amount may apply, the tax professional can apply to SARS for a tax directive for the non-resident seller early in the conveyancing process. This directive ensures that the amount withheld aligns with the seller’s actual tax exposure.

A Practical Example on S35A Withholding for Joint Owners

Two non-resident individuals jointly sell their South African property for R2,595,000, with each receiving R1,297,500 of the proceeds.

In terms of section 35A, the R2 million threshold – unchanged post the 2026 Budget Speech – must be assessed per seller, not against the total transaction value. As each individual seller’s proceeds fall below the R2 million threshold, no withholding obligation arises in this instance, notwithstanding that the overall purchase price exceeds R2 million. When this provision is incorrectly applied to the full purchase price, the purchaser would have withheld 7.5% of the total value, resulting in R194,625 being paid over to SARS unnecessarily.

This would impact the cash flow of the sellers and introduces an administrative burden to recover funds that were not due.

The Obligation to Withhold Extends Beyond the Purchaser

Section 35A places the obligation to withhold on multiple parties.

In terms of the Act, a purchaser who fails to withhold when required is personally liable for the amount that should have been withheld, provided they knew “or reasonably should have known” that the seller was not a resident.

SARS’ External Guide on withholding amounts states that a conveyancer or property practitioner who knows, or reasonably should have known, that a seller is a non-resident, and failed to notify the purchaser in writing, is jointly and severally liable for the payment of the amount which the purchaser must withhold and pay over to SARS.

Further to this, a purchaser who fails to pay the withholding tax within the period allowed for payment, is liable for interest and penalties as determined by SARS.

How Foreign Sellers Can Avoid Overpaying

Section 35A should not be applied as a blanket withholding without context.

Foreign sellers can avoid overpaying by not solely relying on the automatic application of standard withholding percentages prescribed by law. Before concluding a South African property sale, it is critical to obtain tax guidance and ensure that the amount withheld reflects the non-resident seller’s actual tax exposure.