VAT AND TRANSFER DUTY

B1We are often asked whether the sale or purchase of immovable property is subject to VAT or to transfer duty. Confusion appears to creep in especially in those cases where only either the seller or purchaser is a registered VAT vendor.

The answer to the question lies in the Transfer Duty Act,[1] and specifically in sections 2 and 3 of that Act which determine that the transfer duty is payable on the value of immovable property acquired by any person, and that the duty is payable by the acquirer. In other words, the transfer duty is a tax on the purchaser.

Section 8 of the Transfer Duty Act provides for instances where the purchaser of the property will be exempt from transfer duty being levied against it. The list of potential exemption includes instances where the sale is a “VATable” transaction.[2] In other words, where the sale of the immovable property concerned is therefore a taxable supply for VAT purposes, no transfer duty will be leviable. (This is however subject to certain compliance related requirements being met, including that the prescribed declarations are submitted, that security is tendered for the tax to the extent necessary and that the Commissioner issues a certificate that this transfer duty exemption’s requirements have all been met.[3])

By implication therefore, since the sale will have to be a taxable supply for VAT purposes for the transfer duty exemption to be met, the implication is that the sale must be made by a VAT vendor, and therefore subject to VAT. The status of the seller (i.e. whether it is VAT registered or not) determines whether the purchaser is liable for either VAT or the transfer duty.

To summarise therefore, whether transfer duty or VAT is payable by a purchaser of immovable property is determined with reference to the status of the seller: if VAT registered, VAT is levied and not transfer duty. If the seller is not VAT registered, transfer duty is payable as the default position (and unless any of the other exemptions in section 8 of the Transfer Duty Act applies). Therefore, the purchaser of immovable property will always as a default be required to pay transfer duty, unless the seller is a VAT vendor (and the property is sold as part of its enterprise). In such an instance, the sale will be subject to VAT at 14% and payable by the purchaser, rather than transfer duty which would otherwise have been payable and according to the applicable sliding scales.

[1] 40 of 1949

[2] Section 8(15) of the VAT Act

[3] Section 8(15)(a) to (c) of the Transfer Duty Act

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)

TRANSFER DUTY

B3Transfer duty is a tax levied upon the purchaser of immovable property situated in South Africa.[1] The duty is levied in accordance with the following sliding scale and is based on the value of the property which is the subject of the transfer:

Value of the property (R)

 

Rate

 

0 – 900 000

 

0%

 

900 001 – 1 250 000

 

3% of the value above R900 000

 

1 250 001 – 1 750 000

 

R10 500 + 6% of the value above R 1 250 000

 

1 750 001 – 2 250 000

 

R40 500 + 8% of the value above R 1 750 000

 

2 250 001 – 10 000 000

 

R80 500 + 11% of the value above R2 250 000

 

10 000 001 and above

 

R933 000 + 13% of the value above R10 000 000

 

While the sliding scale above previously only applied to natural persons acquiring property, this is no longer the case, and legal persons too are subject to transfer duty based on the above table. (Previously, legal persons were subject to transfer duty simply at the maximum rate in the table being applied to the entire value of transfers where a legal entity bought property).

Based on the above table therefore property transfers involving property worth less than R900,000 are effectively exempt from transfer duty, although the tax exposure may quickly thereafter jump to involve significant amounts. From the perspective of individuals buying property financed by way of a mortgage bond registered in favour of a lending bank, the duty quickly becomes a material consideration when purchasing a property, considering that the financing of the duty is typically not covered by financing provided by a commercial bank and which therefore may require the duty to be settled by way of existing cash resources available to prospective buyers.

Most notably, property transfers on which the transfer duty may be levied are not limited to transfers of immovable property only, but also includes the transfer of shares of so-called “property rich residential companies”, that is the sale of shares in a company where more than 50% of the value of such a company is derived from residential property owned by that company.[2] [3]

Various exemption apply in respect of transfers of property where the transfer duty will not be levied.[4] These include where the transfer involves a transaction where the relevant group relief provisions of the Income Tax Act[5] are applied, or where the transfer is subject to VAT (i.e. where the seller sells the property as part of its VAT enterprise).[6]

[1] Section 2(1) of the Transfer Duty Act, 40 of 1949

[2] See paragraphs (d) and (e) of “property” in section 1 of the Transfer Duty Act.

[3] Interestingly, the anti-avoidance provision does not extend to shares transferred in companies which own non-residential property.

[4] Section 9 of the Transfer Duty Act.

[5] 58 of 1962

[6] Section 8(15)

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)