When purchasing a fixed property in South Africa, either Value-Added Tax (“VAT”) or Transfer Duty will always be payable on the transaction. Both VAT and Transfer Duty are calculated based on the purchase price or value of the property to be sold. A transaction cannot be subject to both VAT and Transfer Duty – it is either one or the other.
- WHAT IS VAT?
VAT is an indirect tax levied on the supply of all goods (which includes fixed property) and services by a VAT vendor in the course and furtherance of any enterprise carried on by the vendor.
- WHAT IS TRANSFER DUTY?
Transfer Duty is the tax levied on the reasonable market value of any immovable property that is transferred from one person to another in terms of a transaction, and falls within the ambit of the Transfer Duty Act and is paid to the South African Revenue Service (“SARS”).
When immovable property is sold, Transfer Duty or VAT is always payable. A transaction cannot be subject to both VAT and Transfer Duty – either one or the other will be applicable to the transaction. In order to ensure that the sale of fixed property is not subject to both VAT and Transfer Duty, the Transfer Duty Act contains an exemption from Transfer Duty to the extent that the supply is subject to VAT (at a standard or zero-rate). VAT can therefore not be discussed in isolation, as there is always a relationship between VAT and Transfer Duty. It is, however, not always easy to determine which tax is payable on a property transaction and can best be determined by answering a few questions, as will be further set out in this article.
- WHAT IS THE STATUS OF THE SELLER?
- The first and most important key in determining whether a transaction is subject to VAT or Transfer Duty is by asking whether the Seller is a VAT vendor for the purposes of this transaction.
- Any person or legal entity that earns income from selling goods or earns fees from services supplied where such taxable supplies are in excess of R 1 million turnover in any consecutive 12 month period, is obliged to register as a VAT vendor and will be obliged to charge VAT on the goods and services provided. However, a person may choose voluntarily to register for VAT if the taxable supplies made in last 12 months period exceeded R50 000.00.
- If the question of whether the Seller is a VAT vendor is answered in the affirmative, it is possible that the transaction will be subject to the payment of VAT and not Transfer Duty. However, a further enquiry will be necessary. If the question is answered in the negative, then Transfer Duty will most likely be payable and one should proceed to answer the questions regarding the application of the Transfer Duty Act.
- The second part to the question relating to VAT, is whether the Seller is a VAT vendor for the purposes of this transaction. The property must have been supplied in the course or the furtherance of the Seller’s enterprise (business). The property must therefore be linked to the business. If the Seller is a registered VAT vendor but the property does not form part of the Seller’s enterprise as a taxable supply, then Transfer Duty will be payable on the transaction. For instance: where a Seller sells his private residence, the sale would then not be subject to VAT, but rather to Transfer Duty.
- It is also important to note that SARS demands the amount due for VAT from the Seller and not the Purchaser. The Seller must therefore ensure that the sale price he negotiated takes VAT into account. Thus, if VAT is not specified to be excluded from the purchase price in the Deed of Sale, it will be deemed to be included.
- IS THE TRANSACTION VAT EXEMPT?
- VAT is a form of tax with a very wide application and very few transactions are VAT exempt. The VAT Act does, however, provide for exempt supplies. This means that some supplies of goods or services are exempt supplies, where VAT is not chargeable either at the standard rate (currently 15%) or the zero-rate.
- The most common exemption that finds application to the sale of immovable property is when the property has previously been leased for residential purposes and is now being sold. Section 12 of the VAT Act lists the exemptions relevant to the sale of immovable property, which include:
- The sale of a share or member’s interest in a company or close corporation that owns residential property;
- The sale of shareblock shares which relate to residential properties;
- The sale of any “right of occupation” as defined in Section 1 of the Housing Development Scheme for Retired Persons, Act 65 of 1988; and
- The supply of land, together with any improvements to such land, where such land is situated outside the Republic of South Africa and such supply is made by way of sale or by way of letting.
- If the transaction is VAT exempt, one must revert to asking the questions applicable to Transfer Duty, as Transfer Duty will then probably be payable on the transaction.
- IS THE TRANSACTION ZERO-RATED FOR VAT PURPOSES?
- If a transaction is subject to VAT, but not VAT exempt, it will mean that VAT is indeed payable and then you will have to determine whether VAT will be payable at the standard rate of 15% or at a zero-rate (0%).
- Where an enterprise (or part of an enterprise) is sold by a registered VAT vendor to another registered VAT vendor as a going concern, the sale is subject to VAT at the zero-rate. There are a number of requirements that have to be met in order for a transaction to qualify as a zero-rated transaction, which requirements will be dealt with in a further article. In the instance, however, where any of the requirements are not met, the sale will be subject to VAT at the standard rate of 15%.
- IS THE TRANSACTION SUBJECT TO TRANSFER DUTY?
- Once you have established that the Seller is not a VAT vendor for the purposes of the transaction or that the transaction is VAT exempt, it is then rather certain that Transfer Duty will be payable on the transaction, unless it is exempt from Transfer Duty in terms of the Transfer Duty Act. Section 9 of the Transfer Duty Act provides for a number of instances where Transfer Duty is not payable on the transfer of an immovable property, but most sales of property which are not subject to VAT will be subject to Transfer Duty.
- Transfer Duty is levied on the value of any property which includes land, real rights in land, right to minerals, a share or interest in a “residential property company” or a share in a share block company. As from 1 March 2020, Transfer Duty is payable on all properties valued over R1 million on a sliding scale as can be seen below. This scale will be amended from time to time by the Minister of Finance.
|Value of the property (R)||Rate|
|1 – 1000 000||0%|
|1 000 001 – 1 375 000||3% of the value above R1 000 000|
|1 375 001 – 1 925 000||R11 250 + 6% of the value above R1 375 000|
|1 925 001 – 2 475 000||R44 250 + 8% of the value above R1 925 000|
|2 475 001 – 11 000 000||R88 250 +11% of the value above R2 475 000|
|11 000 001 and above||R1 026 000 + 13% of the value exceeding R11 000 000|
- Contrary to VAT, the Purchaser is liable to pay Transfer Duty to SARS within 6 months from the date of acquisition. If Transfer Duty is paid late, interest will run at a rate of 10% per month.
- Although the question whether VAT or Transfer Duty is payable on a transaction may seem very intricate, it is actually a simple point of fact which can be answered by determining the tax status of the Seller. This remains the rule of thumb in determining whether VAT or Transfer Duty will be payable on the transaction.
- In determining whether Transfer Duty or VAT is payable, you would have noted that the Purchaser’s VAT status is not relevant. It is only relevant to determine whether the Purchaser will be so fortunate as to be able to claim an input tax deduction.
- It is therefore important to consult a conveyancer prior to concluding a Deed of Sale, especially where VAT may be payable, in order to determine the tax implications of the transaction and avoid any unforeseen costs with the sale or purchase of a fixed property. Specific care needs to be taken when it is the intention of the Purchaser and Seller to conclude the transaction as a zero-rated transaction, and the conveyancer will have to ensure that all of the requirements have been met and that VAT will be payable at a zero-rate. Therefore – before signing a Deed of Sale, send it to an attorney or conveyancer to peruse and to ensure that both parties get the desired outcome.
Should you furthermore require assistance with proposed property transactions, please feel free to contact our offices for one of our experienced attorneys or conveyancers to assist you.
Property and Commercial Department
Phone: 012 361 9823