Value Added Tax (“VAT”) is a tax that is levied in terms of the Value-Added Tax Act, 1991 (Act No. 89 of 1991) (“the VAT Act”) on the value that is added by each vendor in the production chain of goods and is imposed each time a taxable supply of goods or services takes place. Each vendor is required to account to SARS for the VAT on the value which the vendor added to the good. While a VAT vendor is required to account to SARS for “output tax” on any taxable supplies made by the vendor, the VAT vendor is entitled to deduct from this accounting any “input tax” incurred by the vendor. The effect is that the VAT vendor only pays to SARS the VAT on the value which the vendor added to the good.
The VAT Act’s definition of “goods” includes fixed property and any real right in fixed property, and the definition of fixed property includes land, sectional title units and any share in a share block company.
The default position when a person sells fixed property is that the purchaser is required to pay to SARS the assessed “transfer duty” before the property is registered in the purchaser’s name.
If however the seller is a VAT vendor and the fixed property forms part of the seller’s enterprise, the seller is required to increase the purchase price of the property by 14% so as to account for VAT, and then pay that VAT over to SARS with the first VAT return submitted by the seller after registration of the property has occurred.
It is important to note that section 9(15) of the Transfer Duty Act, 1949 (Act No. 40 of 1949) (“the Transfer Duty Act”) holds that transfer duty will NOT be payable on the transfer of immovable property if VAT is levied by the seller on the sale of the property.
Hence the need to determine, for each sale of immovable property, whether transfer duty is payable or VAT. It must be one or the other – and it can’t be neither.
Transactions could therefore fall into the following categories:-
Sale by VAT vendor to a VAT vendor — The seller charges output tax of 14% of the purchase price and pays it over to SARS. The purchaser can claim an input tax credit of 14% of the purchase price and get a refund from SARS. For example, the sale by a developer of sectional title units comprising offices or storage facilities. No transfer duty is payable.
Sale by a VAT vendor to a VAT vendor of a business or enterprise as a going concern — The seller is still required to charge output tax on the purchase price of the property, however if certain requirements are met, the transaction will be zero-rated for VAT purposes. i.e. The sale price is recorded to be exclusive of VAT charged at 0%. The most common form of a zero-rated transaction is the sale of commercial property subject to an existing lease, namely a letting enterprise. Both the seller and the purchaser need to be VAT vendors at the time of the supply. No transfer duty is payable.
Sale by a VAT vendor to a non-VAT vendor — The seller is still required to charge output tax of 14 % of on the purchase price of the property, however as the purchaser is not a VAT vendor he is not entitled to claim an input tax credit in respect of the VAT. This is not unlike going to the shops to buy a shirt and simply paying the VAT. Another example is the sale of a residential unit constructed by a property developer (who is a VAT vendor). The purchaser would be considered to be the “end-user” and is therefore liable for payment of the VAT, and would not be entitled to claim an input tax credit. No transfer duty is payable.
Sale by a VAT vendor of an “exempt supply” being fixed property which previously had been let for residential purposes — No VAT is charged by the seller, but the purchaser is then liable for transfer duty. The exemption would not apply if the VAT vendor had claimed an input tax credit when buying the property or if the VAT vendor were to claim input tax in respect of expenses incurred with regard to the property.
Sale by a VAT Vendor to a VAT vendor of a building comprising primarily residential units but including commercial units — VAT must be added to the purchase price by the seller at 14%. While the purchaser will NOT be entitled to a full input tax credit for the 14%, the purchaser will be entitled to claim an input tax credit limited to the fraction which the square meterage of the commercial units bears to the total square meterage.
Sale by a non-VAT vendor to a VAT vendor — No VAT is payable as the seller is not entitled to charge VAT on the supply of the goods. Transfer duty is therefore payable by the purchaser, however the purchasing VAT vendor will be entitled to a notional input tax deduction to the extent that the property was purchased for the purpose of consumption, use or supply in the course of making taxable supplies – i.e. 14%. (It should be noted that before 10 January 2012 the notional input tax deduction was limited to the transfer duty actually paid. i.e. approximately 8%) This accordingly offers the purchaser some relief in the form of a deemed input tax credit.
To claim an input tax credit or a notional input tax credit, the purchaser must be registered as a VAT vendor at the time of supply which is the date of registration of transfer or the date upon which portion of the purchase price is paid, whichever is the earlier. If the transaction is zero rated, the purchaser must be registered as a VAT vendor at the date of signature of the agreement unless the agreement is subject to the fulfilment of a suspensive condition. It is preferable to register as a VAT vendor prior to signature of an agreement.
Vendors are referred to the SARS Interpretation Note 49 titled ‘Documentary proof required to substantiate a vendor’s entitlement to “input tax” or a deduction as contemplated in section 16(2)’, in this regard.
Sale by a non-VAT vendor to a non-VAT vendor — No VAT is payable as the seller is not entitled to charge VAT on the supply of the goods. Transfer duty is therefore payable by the purchaser.
WARNING regarding the use of the term “or nominee” — The use of the term “or nominee” should be avoided if transfer duty is payable. Unless there is strict compliance with the Transfer Duty Act, SARS regards a nomination as a second transaction and transfer duty is then payable twice. The term can be used if the transaction is subject to VAT but it is preferable not to do so. If an option is granted to an option holder or nominee, the nomination should be made by the option holder prior to the exercise of the option so that the nominee will conclude the transaction.