Demystifying VAT, Transfer Duty, and CGT in Property Transactions

A common question in real estate is whether Vat or Transfer duty is applicable to a transaction. Before answering the question, one must understand the terminology referred to in the property market.

 

TRANSFER DUTY

Transfer Duty is a tax imposed on the purchase of immovable property when it is transferred from one person to another. The buyer is responsible for paying this tax, which is calculated based on a sliding scale according to the purchase price. The conveyancer handling the property transfer collects the transfer duty and pays it to the South African Revenue Service (SARS) before registering the property. If transfer duty is exempt, a transfer duty receipt or exemption certificate is required for registration.

 

Important to note is that transfer duty is payable within 6 months of signing of an agreement for the sale or transfer of immovable property. Late payment of transfer duty leads to penalties and interest being levied by SARS. This is a very important point for consideration by parties entering into agreements providing for registration at a later date. It is a good idea to seek the advice of a reputable conveyancer or tax professional when faced with this type of scenario.

 

VAT (VALUE ADDED TAX)

VAT is a tax levied on the supply of goods and services in South Africa. Not all goods and services are subject to VAT, and certain items are exempt. In the context of property transactions, VAT is paid by the seller to SARS upon registration. The rate of VAT is typically 15%, but some transactions may qualify for a 0% rate. Whether VAT or transfer duty applies depends on the seller’s VAT registration status and the intended use of the property by the buyer.

 

VAT OR TRANSFER DUTY

In the normal course of business any entrepreneur who reaches a threshold of attaining a turnover of more than R1 million in any 12-month period or, who is reasonably expected to reach the threshold in any 12-month period, must register as a VAT Vendor and account for VAT to SARS.

 

If a seller is registered for VAT and the property forms part of their VAT-registered business, VAT will be applicable. On the other hand, if the property is not part of their business, transfer duty will be payable.

 

Example 1: If the property from where a hairdresser operates is owned by the hairdresser privately and does not form part of the business, then the sale of the property would not attract VAT, but it would attract transfer duty.

 

Example 2: If the seller is a retailer and operates the business from a property that is owned by the retail business (which is registered for VAT) then VAT would be applicable to the sale of the property as it forms part of the vatable business.

 

It’s important to clearly state whether the purchase price includes VAT or not in the sale agreement to avoid any misunderstandings.

 

ZERO-RATED TRANSACTIONS

Zero-rated transactions are specific cases where VAT is applicable but levied at a 0% rate. These transactions usually involve both the buyer and seller being VAT-registered, and the sale is considered a going concern.

 

This type of transaction is very specific and in order to qualify as a zero-rated transaction the sales agreement must be specific and include the following terms:

 

1. Confirmation that both parties are registered for VAT on the date that the agreement is signed.
2. That the transaction is to be recorded as a zero-rated transaction and that both parties agree that it is recorded so in terms of Section 9 and 11 of the Tax Act.
3. That the property is sold as a going concern.
4. That the property is sold with an income-generating activity.

 

What is important to note is that the income-producing activity must continue when in the hands of the new owner. If the income-producing activity is discontinued by the purchaser, they may have difficulty rating the transaction as a zero-rated transaction.

 

The above serves as a basic example and it is advisable for parties to seek the assistance of a qualified tax consultant or conveyancer. Each set of circumstances is different and the above should not be considered as exhaustive or as tax advice with regard to the status of any particular transaction.

 

CAPITAL GAINS (CGT)

Capital Gains Tax (CGT) is a tax on the profit made from the sale of capital assets, including property. The calculation of CGT can be complex, and it is advisable to consult a tax professional. Certain exclusions apply, such as the primary residence exemption, where the first R2 million of capital gain is not subject to tax. The rate of CGT varies depending on the taxpayer type: 18% for individuals, 22.4% for companies, and 36% for trusts.

 

What is obvious from the above rates is that properties placed in companies and trusts will pay a higher rate and for that reason, it is not always a good idea to register property in the name of a trust or a company if the intention is to dispose of the property in the short term.

 

In conclusion, understanding VAT, Transfer Duty, and CGT in property transactions can be challenging. Seeking professional advice from property practitioners and investors is always recommended to ensure compliance with the relevant tax regulations.

For more information, please contact Hammond Pole Attorneys: NeilM@hammondpole.co.za