When selling property, it is important to keep the VAT / transfer duty tax in mind, as the implication of omitting these details in a deed of sale can be a very costly experience for the parties involved.

The VAT and transfer duty tax bases “overlap”, and consequently, where VAT is payable on a property transaction, no transfer duty is payable.

There is currently no differentiation between natural and juristic persons when calculating VAT or transfer duty.

Every year in the Budget speech the minister of Finances will announce any changes to the transfer duty rates.  Currently all properties sold for more than R 1 100 000 will attract transfer duty, if VAT is not payable.

The current VAT rate in South Africa is 15%, but there are situations where a ZERO vat rate will apply to a property transaction.

What are the requirements to have a zero VAT rate apply to a transaction?

1.            Seller is registered for VAT

2.            Purchaser is registered for VAT

3.            Income generating -example:  Farm / Rental - The seller must be earning an income from the property, and the purchaser will continue to earn an income – Proof is usually required by SARS

4.            The OTP (offer to purchase / deed of sale) must state:  0% VAT, and confirm the 3 requirements in writing on the deed of sale

Section 2(1) of the Alienation of Land Act 68 of 1981 states explicitly that the sale of a property must be in writing and signed by parties, but what happens if the OTP does not state if VAT is part of the purchase price or not:

In these instances, section 64(1) of the Value-Added Tax Act finds application.  It states that any price charged by any vendor in respect of any taxable supply of goods or services shall for the purposes of the Act be deemed to include any tax payable in terms of section 7(1)(a) in respect of such supply; whether or not the vendor has included tax in such price. Where an agreement of sale is silent on the issue of VAT, it will be assumed that VAT is included in the purchase price.

Example:

Where the sale of property is therefore subject to the payment of VAT, a well-drafted agreement should expressly state whether the VAT amount is included in or excluded from the purchase price. Where VAT is included, the purchase price will include VAT at the standard rate of 15%. For example, if the purchase price is R800 000.00 and is VAT inclusive, the seller will be obliged to pay the VAT out of the R800 000.00.

This will effectively mean that the purchase price is less than R800 000.00, namely R695,652.17 and the VAT payable is R104,347.83. In such a case, the buyer will not have to pay the VAT on top of the purchase price as it is included.

In turn, where the purchase price excludes VAT, the buyer will have to pay VAT in addition to the purchase price to the seller.

Transfer duty receipts must be done within 6 months from date of the transaction / date of sale.  If not, the penalty may be severe and due and payable with interest to SARS.

Before signing a commercial sale agreement for property, it is important to obtain proper financial advice from your financial planner and that all the information is given to the attorney drafting the agreement, to ensure that all the parties are properly protected and no additional taxes become due and payable due to a badly drafted agreement.