The sale of fixed property in South Africa is subject to either value added tax (VAT), or transfer duty. Both value added tax (VAT) and transfer duty in South Africa, forms part of governments tax income base, of which payment is compulsory in terms of the country’s tax laws.
Double taxation i.e. the payment of both value added tax (VAT) and transfer duty will not occur. It will either be value added tax (VAT) or transfer duty that is payable.
Which tax is payable?
Value added tax (VAT) will always takes preference over transfer duty, meaning that firstly it needs to be established if a specific transaction falls in the category of a VAT transaction. If not, transfer duty will be payable.
It is the status of the seller that will determine if VAT needs to be levied on a transaction. If the seller is registered as a VAT vendor, VAT will be attracted to the transaction. If the seller is not VAT registered, transfer duty will be payable instead of VAT.
The VAT status of the purchaser, being registered as a VAT vendor or not, will not be a consideration in deciding if the transaction will attract VAT or not.
View the detailed explanation in the video below:
Zero rated transactions:
Provision is made for a scenario where both the seller and the purchaser is VAT registered and the fixed property is sold as part of a going concern. Though VAT will still be payable on the transaction, it will be calculated at a zero rate.
Examples of zero rated transactions:
- A fixed commercial property is sold as part of the business assets, together with the rest of the inventory that is necessary to keep the business operations going. Typically, the property will be the premises where the business is housed.
- A fixed commercial property is sold while there is a current lease agreement with a commercial tenant. It can now be viewed that the line of business is property rental and the fixed property is the asset needed to conduct the business.
- A farm is sold together with the implements and what is needed to transfer it to the purchaser so that farming activities will continue as usual. This may be viewed as a going concern.
In summary, the three factors that needs to be present when a transaction is anticipated at a zero rate are as follows:
1. Seller is a registered VAT vendor.
2. Purchaser is a registered VAT vendor.
3. The fixed property is sold as part of a going business concern.
1. When a seller is registered as a VAT vendor and the purchaser is not registered as a VAT vendor, VAT will be payable at the normal VAT rate.
2. When it is second hand property, (mostly commercial property) that is sold, it is common practice that the purchase price will exclude VAT and that the sale agreement will specifically include a clause stating that VAT will be added to the sale price. The liability to pay VAT remains with the seller who is the VAT vendor.
3. When newly developed residential property is sold, it is very likely that the developer will be registered as a VAT vendor and that the purchaser will be a private individual. It is often seen that these properties are advertised with specific mention that no transfer duty is payable. Though this is true, the seller (developer) still need to pay VAT on these transactions. It is however common practice that VAT is included in the price and VAT is then paid by the seller from the proceeds of the transaction.
4. When both the seller and the purchaser are VAT vendors, it is possible that the transaction will attract VAT at a zero rate as explained above. It needs to be noted that it will always be at the discretion of SARS if a transaction will be allowed at zero rate or not.
Notional input tax:
When we have a scenario where the seller is not a VAT registered vendor, but the purchaser is a Vat registered vendor, transfer duty will apply.
As the purchaser will need to pay VAT when the property is sold in future, legislation allows the purchaser a claim for notional input tax. The permission of allowing notional input tax claims are mostly to provide dealers the ability to purchase second hand trade goods from non-registers vendors. Notional input tax claims do however include fixed property (when the required criteria are met). It needs to be noted that the notional input tax claim may only be the lower of the calculated VAT amount or transfer duty which was paid.
The most important thing to remember when it is decided if a property transaction will attract VAT or transfer duty, is to establish the VAT status of the seller. Secondly, it is important to clearly describe how VAT is going to be dealt with in the transaction by including a specific clause in the sale agreement contract.
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Author: Cobus van der Merwe.
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