When an agreement of sale is entered into for the sale of immovable property between a seller and purchaser, there are a number of charges which may arise in addition to the purchase price. Like all sales and transactions, some form of taxation is applicable.
In the interest of property, SARS has enforced taxation through two means, VAT and transfer duty. It is important to note that VAT and transfer duty are mutually exclusive and only one of them can be applicable in a single transaction.
When is transfer duty payable?
The general rule is that if a transaction is exempt from VAT, then transfer duty is payable on the purchase price. When the purchaser is not registered for VAT and the purchase price is greater than the stipulated SARS threshold of R1,000,000 (as it currently stands) then transfer duty is applicable.
This is calculated by means of a tiered scale, based on the to the purchase price of the immovable property.
The current formula for transfer duty is:
|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 R 1 375 000|
|1 925 001 – 2 475 000||R44 250 + 8% of the value above R 1 925 000|
|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|
Exemptions from transfer duty are regulated by section 9 of the Transfer Duty Act. The Act enlists several exemptions some of which include:
- Property acquired by the government
- Property that is subject to VAT
- Property transferred from a deceased estate; and
- Property transferred as a result of divorce.
When is a property zero-rated for VAT?
SARS has offered the benefit of zero-rating commercial property transactions where both parties are VAT vendors and they comply with all additional SARS requirements.
Where a VAT vendor sells a property, which forms part of his or her enterprise, to another VAT vendor as a going concern, the sale is zero-rated for VAT purposes. In order for a sale to be a going concern for VAT purposes the listed requirements will need to be met:
- The seller and purchaser must both be VAT vendors;
- The property must consist of an enterprise or part of an enterprise that is capable of operating separately;
- The parties must agree in writing that the supply is a going concern;
- The parties must agree in writing that the enterprise is an income-earning activity on the date of transfer;
- The assets necessary for carrying on the enterprise must be included in the sale; and
- The parties must agree in writing that the sale includes VAT at the zero-rate.
Notational input tax credit
If the purchaser is a VAT vendor for the purpose of trading in property and the seller is not a VAT vendor, then the sale will not be subject to VAT and normal transfer duty will be payable. In such instances, the purchaser could qualify for a “notional input tax credit”. This means that the purchaser could claim the transfer duty paid on the transaction back from SARS, as if the amount was VAT which was paid by the purchaser to the seller on the purchase.
Risks of zero-rated VAT
SARS have the authority to demand that the full VAT amount be payable if the application for zero VAT rating is unsuccessful. A clause must be included in the purchase agreement stating that the purchase price will increase to cover the potential addition of VAT to the sale price.
To avoid any problems with zero-rating the property transaction, the purchaser should check that the seller’s tax affairs are fully up to date and paid up. It is also important to ensure that the offer to purchase agreement has been properly drawn up to contain all the relevant information and required clauses.
Speak to a conveyancing expert
Negotiating the somewhat complex process of property sales that are VAT or zero-rated VAT transactions, requires a well-constructed sale agreement, ensuring that all the requirements are met. It is of great importance that one is acquainted with relevant provisions and policies prior to initiating the transfer of property.
Should you require any further information regarding the applicable taxation during the transfer of property, please contact our experienced Conveyancing and Property Law team.
For Conveyancing and Property Law expertise
The articles on these web pages are provided for general information purposes only. Whilst care has been taken to ensure accuracy, the content provided is not intended to stand alone as legal advice. Always consult a suitably qualified attorney on any specific legal problem or matter.