-VAT or Transfer Duty…

VAT or Transfer Duty?:

Very often the question arises as to whether the purchaser must pay transfer duty on a particular property transaction, OR whether there is no transfer duty payable because the transaction is in fact a VAT transaction.

The answer is usually easily determined by looking at the VAT status of the SELLER. As a general rule, if the seller is in fact registered for VAT purposes, and specifically for matters relating to the sale of the property that is being sold, then VAT is payable on the transaction… and if VAT is payable, then NO transfer duty will be payable by the purchaser. However if the seller is not registered for VAT purposes for matters relating to the sale of the property, then transfer duty IS payable on the transaction by the purchaser. There are a few technical exceptions to the general rule which a tax adviser could better advise you on.

The other question which arises is whether VAT is included in the purchase price or not. As a general rule in South Africa, any purchase price must be VAT inclusive, unless stated otherwise. Accordingly, if the transaction is a VAT transaction, then the purchase price will be inclusive of VAT unless the contract specifies that the purchase price is excluding VAT. One must therefore be VERY careful in calculating the purchase price where the seller is a VAT vendor, as very often the VAT vendor does not take into account that the selling price of the property includes VAT, and then later the seller is upset when he/she discovers that a portion of the purchase price which the seller has received from the purchaser, must be paid to the Receiver of Revenue by way of a VAT payment. So it is imperative for sellers to keep all this in mind when doing their calculations.

From the purchaser’s point of view, the fact that the purchase price includes VAT and the purchaser does not have to pay transfer duty should mean that the purchaser should be willing to pay a higher price for the property being purchased, as effectively the purchaser is not paying transfer duty, and is therefor getting the amount which he/she would have paid as transfer duty, as a discount on the purchase price for the property.

 If the sale of the property is one which is a VAT transaction and the purchaser is registered for VAT purposes, the purchaser is entitled to claim the VAT which forms part of the purchase price of the property as a VAT input. This effectively means that the purchaser will get a credit for this amount from the Receiver of Revenue on the purchaser’s VAT when the purchaser submits the purchaser’s next VAT return. The Receiver of Revenue may of course conduct a VAT audit on the purchaser before allowing the input, and this will often be the case if any monies are to be paid by the Receiver of Revenue to the purchaser.

 If the purchaser is a VAT vendor but the seller is NOT registered for VAT, the purchaser is entitled to claim the transfer duty which the purchaser has paid on the transfer of the property as a VAT input. Effectively therefore the purchaser will recover the amount of the transfer duty from the Receiver of Revenue. Again the same will be by way of a claim for a VAT input on the purchaser’s next VAT return and again the Receiver of Revenue may decide to audit the same prior to allowing the claim or paying a refund. Normally the Receiver of Revenue will not allow the claim unless he has received proof that the transfer has actually taken place and would normally require a copy of the transfer duty receipt as proof that the actual transfer duty was paid.

In the event that the property forms part of a business and the business is sold as a going concern, if both the purchaser and the seller are registered for VAT purposes, then VAT will still be payable but the transaction would be zero rated. In other words effectively no VAT or transfer duty would be payable on the transaction. To qualify, however, the assets which are necessary to carry on the enterprise must also be disposed of by the seller to the purchaser and the enterprise must be an income earning activity on the effective date.

It would be wise in such instance to include a clause along the following lines in the contract for the sale of the business to ensure that the Receiver of Revenue will in fact agree that the VAT in the transaction should be zero rated:-

“1. Both parties hereby warrant that they are registered as vendors in terms of Section 23 of the Value Added Tax Act No. 89 of 1991 (“(the Act”). The parties record that:-

(a) The business together with the assets and the stock-in-trade constitutes an enterprise as the term is defined in the Act, and the supply of the enterprise as contemplated herein is that of a going concern chargeable with value-added tax (“VAT”) at zero rate in terms of Section 11 (1)(e) of the Act.

(b) The enterprise shall be an income-earning activity on the effective date, it being recorded that all of the assets which are necessary for the carrying on of such enterprise are hereby simultaneously being disposed of by the Seller to the Purchaser.

  1. In the event of Vat being levied at a rate other than zero, the VAT so payable shall be paid by the Purchaser to the Seller on demand, provided that the Seller furnishes the Purchaser with a VAT invoice as contemplated in the Act to enable the Purchaser to claim an input credit in respect of the VAT so paid.”

So… in summary… Although the question as to whether VAT or transfer duty is payable often presents problems to the lay person, in actual fact it is a question which can be determined relatively easily by looking at the status of the seller.

Effectively the status of the Seller determines whether VAT is payable…

and the status of the Purchaser determines whether or not the purchaser can recover the VAT or the transfer duty from the Receiver as a VAT input.

Please note: the above information is supplied in good faith, but we are not tax consultants or attorneys and you should always consult with a tax expert or conveyancing attorney before making any decisions.

Please contact us if you have any questions or need guidance on selling or buying property. We specialize in making the process as smooth as possible.

We look forward to hearing from you…