When Do You Pay VAT or Transfer Duty With Property Sales?
Buying a property comes with a number of expenses in addition to the basic sale price, one of which will be either VAT or Transfer Duty. Every property transaction will incur one of these two forms of tax, but it is important to understand the difference and know which will be applicable as they have different consequences for the buyer and seller in a transaction.
Transfer duty is governed by the Transfer Duty Act, 40 of 1949. This tax is calculated in terms of a formula issued by SARS and is based on the purchase price or the value of the property, whichever is the greater. This calculation is normally evaluated and updated annually after the national budget announcement.
Transfer Duty is payable on all transactions relating to immoveable property, with the only exception being where the seller is registered for VAT.
VAT Transactions
Determining whether VAT applies to a property transaction rather than Transfer Duty is based on whether the seller is registered for VAT, regardless of whether the buyer is also registered.
In situations where the seller is VAT registered, the amount of VAT payable on the transaction is typically included in the purchase price of the property. This is in accordance with the general rule in South Africa that all purchase prices should be VAT inclusive. However, it is possible to alter this to stipulate that the sale price excludes VAT if specifically outlined in the contract of sale.
This is an important aspect for both buyer and seller. A seller, unaware of the general rule may be disappointed when VAT is later deducted from the purchase price, and a buyer can be caught with unforeseen costs if the purchase price was specified as excluding VAT and the contract of sale is not carefully examined.
Tax Credits
Although determining whether Transfer Duty or VAT is payable on a property transaction is dependent on the VAT status of the seller, the status of the buyer also has significant implications on tax payable.
If a buyer is registered for VAT, it is possible to claim the VAT portion of a property transaction from the Receiver of Revenue as a tax credit at the time of completing quarterly VAT returns. In situations where a transaction incurred Transfer Duty rather than VAT, it remains possible for a VAT registered buyer to claim the VAT portion back in the same way. It is worth noting that proof of transfer and proof of VAT or Transfer Duty payment may be required by the Receiver of Revenue in order to process a requested refund.
Should the property sale be that of a going concern and both buyer and seller are VAT registered, the transaction may be zero rated. In such a case, the contract of sale should make provision for this and must be submitted to SARS whose determination of the value and type of tax payable will be final.
In the case of uncertainty it is advisable to instruct the conveyancers to get a tax directive from SARS on the system.