Selling property? One of the first questions to settle is who pays what: is the transaction subject to transfer duty or to VAT? Knowing the answer early can make or break your property deal.
What is VAT?
The Value-Added Tax Act 89 of 1991 came into effect on 30 September 1991. It provides for an indirect tax, VAT, levied on goods and services supplied by a registered VAT vendor in the course or furtherance of any enterprise carried on by that vendor.
Importantly, the VAT Act defines “goods” to include any real right in fixed property, excluding rights under a mortgage bond or pledge. The disposal of property can therefore be subject to VAT, provided the transaction falls within the ambit of the Act.
What is transfer duty?
The Transfer Duty Act 40 of 1949 came into effect on 1 January 1950. It provides for a tax levied on the value of property acquired by any person, paid into the National Revenue Fund. Section 2 of the Act imposes transfer duty on property acquired by way of a transaction, and on the amount by which the value of a property has been enhanced.
Which one applies to your transaction?
The first step is to establish the status of the seller. Ask this two-part question:
- Is the seller a vendor as defined in the VAT Act? Ask the seller for their VAT registration certificate (VAT 103), or use the VAT vendor search on the SARS eFiling website.
- Is the seller selling for purposes of their enterprise? The disposal must be linked to the vendor’s business: an enterprise carried on continuously or regularly, in the course of which goods or services are supplied for consideration.
If both answers are yes, VAT is payable on the transaction and the onus is on the seller to ensure that negotiations include VAT. If the deed of sale does not specify VAT, the purchase price is deemed to include it. Conveyancers and estate agents must be meticulous when drawing up deeds of sale on behalf of developers.
Knowing whether transfer duty or VAT applies can make or break your property deal.
If VAT does not apply
Where VAT is not applicable, transfer duty is payable. It is levied on the fair market value of the property and is paid by the purchaser. In practice, the amount is paid into the conveyancer’s trust account, and the conveyancer pays it over to SARS on the purchaser’s behalf. SARS issues a transfer duty receipt, which serves as proof of payment.