Transfer Duty or VAT: Which form of taxation is applicable to your property transfer?

When a sale agreement is concluded between a seller and a purchaser, there are a few charges that may arise in addition to the purchase price.

This article focusses specifically on taxation in respect of the sale of immovable property.

The South African Revenue Service (SARS) has enforced taxation through two means:

1. VAT

2. Transfer Duty

What is Transfer Duty and when is it payable?

Transfer Duty is a tax levied on the value of immovable property and is payable by the person acquiring a property. The general rule of thumb is that if a transaction is exempt from VAT, then Transfer Duty is payable on the purchase price. When a purchaser is not a registered VAT vendor, and the purchase price is more than the R 1 100 000 (one million one hundred thousand rand) threshold as stipulated by SARS, then Transfer Duty is payable. It is important to note that VAT and Transfer Duty are mutually exclusive, which means that only one or the other can be applicable in a single transaction.

Transfer Duty is calculated by means of a tiered scale, based on the purchase price of the immovable property, as shown below:

Purchase Price (In Rand)	Transfer Duty Payable (In Rand and %)
1 – 1 100 000	0%
1 100 001 - 1 512 500	3% of the value above R 1 100 000
1 512 501 - 2 117 500	R 12 375 + 6% of the value above R 1 512 500
2 117 501 – 2 722 500	R48 675 + 8% of the value above R 2 117 500
2 722 501 – 12 100 000	R97 075 +11% of the value above R2 722 500
12 100 001 and above	R1 128 600 + 13% of the value exceeding R12 100 000

The Transfer Duty Act lists several exemptions where Transfer Duty is not payable:

• Property acquired by the government

• Property that is subject to VAT

• Property transferred as an inheritance from a deceased estate; and

• Property transferred as a result of divorce

When is VAT payable?

If the seller is registered for VAT and sells immovable property in the course of his or her business, VAT will be payable to SARS. A vendor is a person who runs a business and whose total taxable earnings per year exceed R 1 000 000.00 (one million rand). Such person must be registered for VAT. A further stipulation is that the property being sold must be related to his or her business from which he or she derives an income. Generally, the agreement of sale will stipulate whether the purchase price includes or excludes VAT. If the agreement makes no mention of the payment of VAT and the seller is a VAT vendor, it is then deemed that VAT is included and the seller will have to pay 15% of the purchase price to SARS.

It is the seller’s responsibility to pay the VAT to SARS, unless the agreements stipulate otherwise. When a seller is not registered for VAT, but the purchaser is a registered VAT vendor, the purchaser will pay transfer duty and may then claim it back from SARS after registration of the property transfer. This is known as a ‘notional input tax credit’.

When is a property zero-rated for VAT?

SARS offers the benefit of zero-rating commercial property transactions where both the seller and the purchaser are VAT vendors, provided that they comply with additional 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 following requirements must 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

SARS have the authority to demand that the full VAT amount be payable if the application for zero VAT rating is unsuccessful. It is therefore important that a clause be inserted in the agreement of sale which states that the purchase price will increase to cover the potential addition of VAT to the sale price.

Conclusion

It can be quite confusing understanding when VAT is payable on the transfer of immovable property and when Transfer Duty is payable. The aim of this article was to make the process of selling or buying a property and the taxation relating thereto a bit clearer. Should you require any further information regarding the applicable taxation during the transfer of property, kindly contact our experienced Conveyancing and Property Law team.

Disclaimer

This article is intended for general information purposes only and is not intended to stand alone as legal advice. Always consult a qualified property law practitioner on any specific problem or matter.