TRANSFER OF A PROPERTY: IS VAT OR TRANSFER DUTY PAYABLE?

a1_bA purchaser is responsible for payment of transfer cost when acquiring an immovable property, but it should further be established if the transaction is subject to the payment of VAT or transfer duty to SARS.

When an immovable property is transferred, either VAT or transfer duty is payable. To determine whether VAT or transfer duty is payable one should look at the status of the seller and the type of transaction.

VAT

If the seller is registered for VAT (Vendor) and he sells the property in the course of his business, VAT will be payable to SARS. A vendor is a person who runs a business and whose total taxable earnings per year exceed R1 000 000. He will then have to be registered for VAT. A further stipulation is that the property that is being sold must be related to his business from which he derives an income.

The Offer to Purchase should stipulate whether the purchase price includes or excludes VAT. If the Offer to Purchase makes no mention of the payment of VAT and the seller is a VAT vendor, it is then deemed that VAT is included and the seller will have to pay 14% of the purchase price to SARS. It is the seller’s responsibility to pay the VAT to SARS, except if the contract stipulates otherwise.

When a seller is not registered for VAT, but the purchaser is a registered VAT vendor, the purchaser will still pay transfer duty but can claim the transfer duty back from SARS after registration of the property.

Transfer duty

When the seller is not a registered VAT vendor it is almost certain that transfer duty will be payable on the transaction. A purchaser is responsible for payment of the transfer duty. Transfer duty is currently payable on the following scale:

  1. The first R750 000 of the value of the property is exempted from transfer duty.
  2. Thereafter transfer duty is levied at 3% of the value of the property between R750 000 and R1 250 000.
  3. Where the value of the property is from R1 250 001 up to R1 750 000, transfer duty will be R15 000 plus 6% on the value of the property above R1 250 000.
  4. If the value of the property falls between R1 750 001 and R2 250 000, transfer duty will be R45 000 plus 8% of the value of the property above R1750 000.
  5. On a property with a value of R2 250 001 and above transfer duty is R85 000 plus 11% on the value of the property above R2 250 000.

Transfer duty payable by an individual or a legal entity (trust, company or close corporation) is currently charged at the same rate.

Transfer duty is levied on the reasonable value of the property, which will normally be the purchase price, but should the market value be higher than the purchase price, transfer duty will be payable on the highest amount. Transfer duty is payable within six months from the date that the Offer to Purchase was signed.

In instances where a party obtains a property as an inheritance or as the beneficiary of a divorce settlement, the transaction will be exempted from payment of transfer duty.

Where shares in a company or a member’s interest in a close corporation or rights in a trust are transferred, the transaction will be subject to payment of transfer duty if the legal entity is the owner of a residential property.

Zero-rated transactions

This means that VAT will be payable on the transaction but at a zero rate. If both the seller and the purchaser are registered for VAT and the property is sold as a going concern, VAT will be charged at a zero rate, for instance when a farmer sells his farm as well as the cattle and the implements.

Exemption

Transfer duty, and not VAT, will be payable when a seller who is registered for VAT sells a property that was leased for residential purposes.

It is thus important for a purchaser to establish the status of the seller when buying a property. The seller who is registered for VAT should carefully peruse the purchase price clause in a contract before signing, to establish if VAT is included or excluded.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

A NEW TWIST IN THE QUESTION: IS THE BUYER OF AN IMMOVABLE PROPERTY RESPONSIBLE FOR PAYING THE SELLER’S OUTSTANDING MUNICIPAL ACCOUNT?

Municipalities are required to issue rates clearance certificates without which a property cannot be transferred from a seller to a buyer. The rates clearance certificate certifies that outstanding debts owing to a municipality up to the date of transfer have been settled.

Property buyers relied on these certificates as proof that all previous debt on the property have been fully settled and that transfer of the property to the buyer could proceed.

However, in some cases rates clearance certificates are issued while all charges for the period before the transfer date of a property to a new owner are not yet allocated to the municipal accounts of the previous owners. The question then is: can the new owner of the property be held liable for these historic debts incurred before it became owner of the property?

The first court case

In a court case between a municipality and a ratepayer in May 2013, the judgement made by the court was incorrectly interpreted by municipalities. Based on their interpretation, municipalities held new property owners liable for municipal debt incurred by previous owners and refused to issue rates clearance certificates until all such debt were paid.

In addition, municipal services to a property would be cut off and municipalities would refuse to reconnect such services until all debt were fully settled. Buyers who wanted to take transfer of the property had no choice but to settle debt for services not consumed by themselves.

The second court case

A subsequent court case issued judgement on 8 September 2014, stating that the municipalities’ interpretation of the previous judgement was wrong. The following principles were laid down:

  • A municipality’s right to payment, although attached to a specific property, ended when a property was transferred to a new owner. Outstanding municipal debts up to date of transfer had to be recovered from the seller.
  • Payment of debt for services consumed by a previous owner remained the responsibility of that owner. The buyer of a property is not liable for debt incurred for services consumed prior to the transfer of the property.

What happened next?

The second judgement referred to above was the subject of an appeal to the Supreme Court of Appeal (City of Tshwane Metropolitan Municipality v PJ Mitchell (38/2015) [2016] ZASCA 1). The appeal was successful, with obvious serious consequences for property owners.

As a result of the successful appeal, new home owners can in law be liable for municipal debts of their predecessors in title. Consequently, it would now be up to property owners themselves to recover these amounts from previous owners, and no longer the duty of the municipality seeking to recover its debts to do so. The obligation for ensuring that no outstanding municipal debts exist upon transfer has therefore now shifted definitively to property buyers, and away from municipalities in issuing rates clearance certificates (which is different from the position prior to the successful appeal a few months ago).

This is an arduous task, and one which property buyers should take very seriously when purchasing a property to ensure that no unpleasant surprises materialise in the months (or even years) following the transfer of the property in the deeds office to their name.

Reference List:

Accessed on 21 April 2016:

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

IS THE BUYER OF AN IMMOVABLE PROPERTY RESPONSIBLE FOR PAYING THE SELLER’S OUTSTANDING MUNICIPAL ACCOUNT?

A2_bAre buyers of property responsible for the payment of outstanding municipal debt run up by the previous owner of the property? The short answer is “Not anymore”. For the long answer please read the rest of this article.

What happened in the past

Municipalities had to issue rates clearance certificates without which a property couldn’t be transferred from a seller to a buyer. The rates clearance certificates certified that all outstanding debts owing to a municipality up to the date of transfer have been settled in full.

Property buyers reasonably relied on these certificates as proof that all previous debt on the property have been fully settled and that transfer of the property to the buyer could proceed.

However, in some cases it happened that rates clearance certificates were issued while all charges for the period before the transfer date of a property to a new owner were not allocated to the municipal accounts of the previous owners yet.

The first court case

In a court case between a municipality and a ratepayer in May 2013, the judgement made by the court was incorrectly interpreted by municipalities. Based on their interpretation, municipalities held new property owners liable for municipal debt incurred by previous owners and refused to issue rates clearance certificates until all such debt were paid.

In addition, municipal services to a property would be cut off and municipalities would refuse to reconnect such services until all debt were fully settled. Buyers who wanted to take transfer of the property had no choice but to settle debt for services not consumed by themselves.

The second court case

A subsequent court case issued judgement on 8 September 2014, stating that the municipalities’ interpretation of the previous judgement was wrong. The following principles were laid down in this court case:

  •  A municipality’s right to payment, although attached to a specific property, ended when a property was transferred to a new owner. Outstanding municipal debts up to date of transfer had to be recovered from the seller.
  •  Payment of debt for services consumed by a previous owner remained the responsibility of that owner. The buyer of a property is not liable for debt incurred for services consumed prior to the transfer of the property.

What happened next?

As a result of the judgement in the second court case, property buyers who had to settle a debt in favour of a municipality which was incurred by the seller before transfer of the property, could request a refund from municipalities.

Municipalities could not refuse to issue rates clearance certificates or to connect municipal services on sold properties based on the fact of unsettled debt between the municipality and a previous owner. The issue of unsettled debt incurred before the transfer date was between a municipality and the previous owner, and the buyer did not automatically become a party to this relationship.

The only way that a buyer can become responsible for settling the previous owner’s municipal debt is if it is specified or implied in the sales contract. Buyers are advised to include a clause in sales contracts that explicitly states that municipal debt incurred up to date of transfer will be settled by the seller.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Reference List:

Accessed on 21 June 2015: