Transfer duty or VAT? That is the question!
Transfer Duty or VAT, whichever is applicable, is payable on transfer of fixed property in South Africa and is calculated on the purchase price of the property. A transaction cannot be subject to both VAT and Transfer Duty; it is either one or the other. However, VAT always takes preference.
What is VAT?
Value-Added Tax is an indirect tax levied on the supply of all goods and services by a VAT Vendor, which is then paid directly to SARS rather than deducted from an individual’s income.
What is Transfer Duty?
Transfer Duty is the tax levied on the reasonable market value of any immovable property acquired by way of a sales transaction, paid to SARS on transfer.
What is a VAT Vendor?
Certain Businesses (individuals, companies, estates, municipalities or family trusts etc) that supply goods and services are required in accordance with the VAT Act to register as Vendors and act as Agents in collecting and charging VAT.
Any Person or Legal Entity running a business may register for VAT.
Businesses that earn more (or are estimated to earn more) than R1 million turnover in any consecutive 12-month period are obligated to register as VAT Vendors and charge VAT on the goods and services provided.
Alternatively, Businesses may voluntarily register as VAT Vendors if their annual taxable income is more than R50 000 and subsequently claim VAT back on expenses.
What determines whether VAT or Transfer Duty is payable?
The Seller’s tax status (whether the Seller is a registered VAT Vendor) essentially determines if VAT or Transfer Duty is payable.
The Buyer’s tax status determines whether s/he can claim the VAT/Transfer Duty amount from SARS as a VAT Input after registration.
When is VAT on an Immovable Property applicable?
- If the Seller is a registered VAT Vendor and the property forms part of the Seller’s taxable earnings, VAT is payable to SARS and not Transfer Duty.
In terms of a VAT Transaction (one/all parties are registered for VAT), the purchase price is VAT inclusive unless otherwise stated in the Offer to Purchase. The Seller needs to take care to calculate the purchase price accordingly to include the portion payable to SARS.
When is Transfer Duty on an Immovable Property applicable?
If the Seller is not a registered VAT Vendor or the property is not related to the Seller’s business, Transfer Duty is payable and not VAT.
If the Seller is a registered VAT Vendor but the property sold is his private residence and leased for residential purposes, Transfer Duty is payable and not VAT.
Who is responsible for paying the Transfer Duty?
The Buyer is responsible for paying Transfer Duty to SARS on transfer if the Seller is not a registered VAT Vendor.
Who is responsible for paying the VAT?
The Seller is responsible for paying 15% of the purchase price of the property to SARS.
If the Seller is a registered VAT Vendor, the Seller pays VAT on the purchase price of the property and no Transfer Duty is paid. The Buyer will pay the VAT over and above the purchase price and it is then the Seller’s responsibility to process the VAT in accordance with the VAT Act and to pay the VAT over to SARS.
When both the Seller and the Buyer are registered for VAT and the property is sold as a going concern (the business will continue to operate and draw a profit for the foreseeable future); VAT is payable but will be charged at a zero rate.
When VAT is applicable and the Buyer is a registered VAT Vendor, the Buyer may claim the VAT that forms part of the purchase price as a VAT Input from SARS in the form of a credit on their next VAT return/direct payment. SARS may conduct a VAT audit on the Buyer before approving the Input.
If the Buyer is a registered VAT Vendor but the Seller is not, the Buyer may claim back the Transfer Duty paid on transfer as a VAT Input from SARS after registration if the nature and ordinary course of the Buyer’s business is trading in property (i.e. developers or investors). SARS may conduct a VAT audit on the Buyer before approving the Input.
Sellers and Buyers who are unsure of whether Transfer Duty or VAT is payable are advised to consult their Conveyancing Attorney to help clarify the matter.