And keep the South African Revenue Service smiling. Tax expert's VAT checklist.
When it comes to selling VATable property it is imperative you understand just what's involved. Although pretty straight forward, the basics are sometimes overlooked or misunderstood. Realestateweb's guest columnist David Warneke, Tax Partner at Cameron & Prentice, spells it out.
The transfer of immovable property in South Africa is either subject to Transfer Duty or to VAT. Basically, VAT takes preference over Transfer Duty and the sale will be subject to VAT if the seller is a registered VAT vendor, and the property forms part of the vendor's enterprise. In this case Transfer Duty falls away.
Where these two conditions are not met, the sale is subject to Transfer Duty and not to VAT. Of course, the rate of VAT is a flat 14% and that of Transfer Duty a maximum of 8%, the rate of Transfer Duty depending on the juristic nature of the purchaser. Given that the rate of VAT is so much higher, it is worth explaining how it is that, in so many property advertisements, one sees "no Transfer Duty" listed as a positive feature.
There are three reasons for this. Firstly, since in terms of the VAT Act, prices are deemed to be inclusive of VAT, the advertised price of the property is all that the purchaser will pay in a VATable transfer - besides of course, legal and bond costs. In a non-VATable transfer, Transfer Duty will have to be added to the advertised price, making it that much more expensive. Secondly, as I understand their practice, banks are more willing to finance the VAT component of the price of a property than the Transfer Duty. Thirdly, it makes for astute marketing.
Where the transfer is VATable and is between registered VAT vendors, in order to avoid the inconvenience of having the seller pay VAT to SARS and the purchaser wait for a refund, the transaction may be zero-rated, meaning that it is VAT neutral for both parties.
However, and herein lies the rub: in order for the zero-rating to be effective, the VAT Act contains a number of requirements, all of which must be fulfilled.
These include:
The property transferred must constitute an "enterprise" that is a "going concern" i.e. it must be capable of independent operation;
The agreement of sale must state that the enterprise is disposed of as a going concern;
The agreement of sale must state that such enterprise will be an income-earning activity on the date of transfer (this implies that if it is a tenanted property, a lease must cover the date of transfer);
The agreement of sale must state that the stated price is inclusive of VAT at the rate of zero percent; and
All of the assets which are necessary for the running of the enterprise must be transferred from the seller to the buyer.
If any of these requirements is not fulfilled, the zero-rating falls away and, in order to cover this possibility, it is usual to insert a clause to the effect that should the transfer of the property turn out not to be zero-rated, the stated price is deemed to be exclusive of VAT.
Next time you are involved in a zero-rated transaction, be sure to run through this checklist!
Disclaimer: This article does not constitute personal financial advice. You are urged to consult a professional in connection with your own transactions.
