Transfer duty or value added tax in property transactions?

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BUSINESS NEWS - The transfer of property is an event that attracts the payment of tax in the form of either transfer duty or Value Added Tax (VAT).

It is important for practitioners to be able to advise parties in a property transaction which form of tax will be payable, by whom the payment must be made, and how does this affect the financing of the transaction.

Let’s first clarify what is transfer costs and what is transfer duty. Transfer costs refer to the costs of the transaction, including the fees of the transferring attorney and all disbursements associated with the transaction such as deeds office fees.

Transfer duty is the tax that might be payable on a transaction in terms of the Transfer Duty Act, 1949.

A purchaser is usually responsible for payment of transfer cost when acquiring immovable property, but it should first be established whether the transaction is subject to the payment of VAT or transfer duty.

To determine whether VAT or transfer duty is payable one should look at the status of the seller and the type of transaction. Experienced property consultant, Allen West, recently gave a helpful summary of the position.

VAT will be payable
If the seller is a registered VAT vendor and he sells the property in the ordinary course of the business, VAT will be payable by the seller to SARS. The Offer to Purchase should clearly stipulate whether the purchase price includes or excludes VAT. If the Offer to Purchase makes no mention of the payment of VAT and the seller is a VAT vendor, it is then deemed that VAT is included in the purchase price, and the seller will have to pay 15% (the current VAT rate) of the purchase price to SARS.

When a seller is not registered for VAT, but the purchaser is a registered VAT vendor, the purchaser will pay transfer duty but can claim the transfer duty back from SARS as input VAT after registration of the property.

Transfer duty will be payable
When the seller is not a registered VAT vendor, it is almost certain that transfer duty will be payable on the transaction. A purchaser is responsible for payment of the transfer duty.

Transfer duty payable by an individual or a legal entity (trust, company or close corporation) is currently charged at the same rate.

Transfer duty is levied on the purchase price of the property, or the value of the property, whichever is the highest. Transfer duty is payable within six months from the date that the Offer to Purchase was signed.

Where shares in a company or a member’s interest in a close corporation or rights in a trust are transferred, the transaction will usually be subject to payment of transfer duty if the legal entity is the owner of a residential property.

Zero-rated transactions
This means that VAT will be payable on the transaction but at a zero rate. If both the seller and the purchaser are registered for VAT and the property is sold as a going concern, VAT will be charged at a zero rate, for instance when a farmer sells his farm as well as the cattle and the implements.

Exemptions
Transactions up to R 1 210 000.00 are exempt from the payment of transfer duty. In instances where a party obtains a property as an inheritance or as the beneficiary of a divorce settlement, the transaction will usually also be exempt from the payment of transfer duty.

If you have questions about the application of transfer duty or VAT on a property transaction, contact Jaco Lötter at 044 – 220 0240 or 083 600 4903. We speak property, fluently.