When a registered VAT vendor sells a property, that transaction is subject to VAT and not to transfer duty. Where the purchaser of the property is itself a VAT vendor, input tax may be claimed against the acquisition price paid for the property, and which will in most instances effectively equate to the VAT charged by the seller-VAT vendor, therefore leaving the purchaser eventually in a VAT neutral position subsequently once the input tax is paid back to it.
Where the purchaser-vendor however buys immovable property from a non-VAT registered seller, the transaction is not subject to VAT, but rather to transfer duty being levied on the purchaser and which transfer duty is payable over to SARS. The question which then often arises in practice is whether the purchaser-vendor is entitled to claim input tax on the acquisition of the property, and whether that input tax claim should be limited to the transfer duty charge levied against the purchaser-VAT vendor.
In terms of section 16(3) of the VAT Act, VAT vendors are entitled to claim an amount of input tax against amounts incurred to acquire “second-hand goods” from non-VAT vendors. In the case of immovable property, this rule similarly applies, and immovable property too may amount to “second-hand goods”, it being defined as “… goods which were previously owned and used”.
Paragraph (b) of the definition of “input tax” is the relevant provision governing the relevant VAT treatment. Assuming that a sale of immovable property entered into between a non-VAT vendor seller and a VAT vendor purchaser is undertaken at open market value, the “input tax” definition then determines that the input tax to be claimed by the VAT vendor on the acquisition would equate to an amount equal to the “tax fraction” (also a defined term, being 14 / 114) as applied to the price paid for the property.) Assume for example that a property is purchased for R1.14m by a VAT vendor from a person not registered for VAT. Applying the transfer duty rates to this transaction, an amount of transfer duty of R7,200 would be payable by the purchaser to SARS. This notwithstanding though, the purchaser-vendor may also claim a deemed VAT input tax amount of R140,000 (being 14 / 114 x R1.14m) during that relevant VAT period.
This position was not always the case. Previously, in terms of a proviso to paragraph (b) of the definition of “input tax”, an input tax claim would have been limited to the amount of transfer duty payable by the VAT vendor when it acquired the property. This is however now no longer the case, and the applicable proviso has since been deleted.
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)