VAT ON PROPERTY TRANSACTIONS
Category Legal
In which instances are VAT applicable to immovable property transactions, and when can the VAT percentage be zero-rated? This is a question often asked by sellers, buyers, and estate agents alike.
Firstly, one must determine whether the seller is a registered VAT vendor. A such registered entity is obliged to charge 15% on every sale and service rendered, which in turn must be paid to SARS.
Two things determine whether VAT is payable on an immovable property transaction, namely:
- Is the seller registered for VAT?
- Is this transaction done in the course and furtherance of the seller's business?
An everyday example will be when a property developer (a VAT Vendor) sells sectional title units to individual buyers he will pay VAT to SARS on the purchase prices obtained, and the buyers will not pay transfer duty on their purchases as taxes are not payable twice on the same transaction.
SARS will demand the amount of VAT due from the seller, and not the buyer. The seller should therefore ensure that the sale price includes the VAT, or he will receive less than expected.
Therefore, if a fixed property forms part of the taxable supplies of a VAT vendor (seller), then the seller must add VAT to the purchase price. If the Purchaser of that property is a VAT vendor too, and he purchases the property for making taxable supplies, he may claim the VAT back from the Receiver of Revenue.
Estate Agents must carefully check and amend their printed contract should it make reference to the VAT being included in the selling price. Similarly, also point out to the seller if their professional fee is exclusive of VAT, should their agency be a registered VAT vendor.
On some property sales VAT might be charged at a rate of zero. To qualify for zero-rating a number of requirements must be met:
- The Seller must be a VAT vendor;
- The Purchaser must be a VAT vendor;
- The subject of the sale must be a going concern (in other words, an existing, income-generating business);
- The parties must agree in writing that the supply is a going concern.
- The parties must agree in writing that the business is an income-earning activity on the date of transfer.
- The assets necessary for carrying on the business must be included in the sale.
- The parties must agree in writing that the sale includes VAT at the zero rate.
- The entire business, including any part which could operate independently, must be included in the transaction and all existing contracts must remain in place, e.g. leases, cleaning, or security.
- The business must be generating an income from a third party (eg rental income) at the time of the transaction and have a strong likelihood of continuing to generate income up to and including the date of transfer. The sale of a vacant building will therefore not qualify as a zero-rated transaction.
When dealing with the sale of an enterprise as a going concern, one must take heed of Interpretation Note IN 57 issued by SARS under the heading "Supply of an income-earning activity" stating "The purchaser must be placed in possession of a business which can be operated in that same form, without any further action on the part of the purchaser. ...". An asset which is merely capable of being operated as a business does not constitute an income-earning activity. There must be an actual or current operation. For this reason, the agreement to dispose of a business yet to commence or a dormant business is not a going concern.
Negotiating the somewhat complex process of property sales that are VAT or zero-rated VAT transactions, requires a well-constructed sale agreement, ensuring that all the requirements are met. It is therefore important to employ the assistance of a professional in the field.
Author: Adrie Barnard
