Do you pay VAT on the Sale of a Property in South Africa
It can be confusing to know when VAT or transfer duty is due when buying property. In this blog we clear up the uncertainty around the topic and whether tax is levied on the purchase price of a property sold by a registered VAT Vendor.
We need to determine the first aspect, which is whether the seller is a VAT vendor. The seller determines whether VAT is payable, so this needs to be the first point of call. If the seller is registered for VAT, you may need to pay VAT. If the seller is not registered for VAT, you may need to pay transfer duty.
Just because the seller is a VAT vendor, it doesn't necessarily imply that VAT is due. VAT is only applicable if the property being sold is part of the vendor's taxable supplies. Should the property be utilized by the VAT vendor for generating income that is liable to VAT (standard rated or zero-rated), it is mandatory for him or her to impose VAT on the property's sale.
If a VAT vendor sells their private residence, the sale is not subject to VAT but transfer duty instead. In other words, if the sale of a property is not subject to VAT, it will be subject to transfer duty.
If a property developer sells property they developed, they must pay VAT. The same applies if they sell their entire company or part of it.
If a taxpayer owns residential properties as investments, selling them won't have VAT. This is because residential accommodation is exempt from VAT, meaning it's not taxed at the standard rate or zero-rated. The sale would therefore be subject to transfer duty.
If a company owns residential properties and sells the company or part of it, there is no VAT on the sale. However, the sale may be subject to transfer duty.
Residential Property Company
If you buy shares in a residential property company, you may have to pay transfer duty. A residential property company is a company that owns mostly residential properties.
If you buy a share in a share block company, you will need to pay transfer duty. This is unless the seller is a VAT vendor. In that case, you pay VAT instead.
Zero-rating
There's also a chance that when a VAT vendor disposes of a property, which is part of their business, to another VAT vendor, the transaction can be treated as a sale of a going concern and zero-rated for VAT, meaning VAT is charged at 0%.
This would reduce the cost of the property payable by the buyer. It would also improve cash flow.
The buyer could have claimed the input regardless. To qualify as a going concern for VAT purposes, the sale must meet several requirements:
- 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.
A typical example is when someone sells a building that is currently being rented out for business purposes. Commercial letting is considered to be a taxable supply. You can zero-rate such a sale if you meet all the requirements.
The same would apply to a vendor who engages in the supply of goods. Here the sale will be VAT inclusive if that property was used in the production of income and sold. If sold as a going concern then the sale is Xero-Rated.
Conclusion
Should a fixed asset be included in a seller's taxable supplies, the seller, acting as a VAT vendor, is obligated to impose VAT on the transaction. Should the buyer of the immovable property be a VAT vendor who acquired the property for the purpose of generating taxable supplies, they are entitled to claim the VAT paid as input tax during their VAT return filing.
In case the acquisition was from a seller not registered for VAT and the property is 'used', the buyer has the right to claim theoretical/notional input VAT. This means they can claim VAT even if the sale did not include VAT; nonetheless, this transaction would still be liable to transfer duty.
Some sales might be an ongoing business and could be zero-rated; in such cases, the buyer is not required to pay any VAT.
It's important to highlight that if VAT is due, it will supersede transfer duty, and it's impossible for VAT and transfer duty to be present simultaneously.
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