There seems to be some confusion regarding Vat, Transfer Duty and Property. When is Vat charged? May it be claimed back? When is transfer duty payable? The answers to these questions follow below.

Both Vat and Transfer Duty are taxes. Only one of these is applicable in any property transaction, either Vat or transfer duty, but never both. If a buyer pays Vat, transfer duty is not applicable and vice versa.

The Value Added Tax Act, 1999, (the Act), makes a clear distinction between taxable supplies and exempt (non-taxable) supplies. Section 12(c)(i) of the Act provides that the supply of a dwelling under an agreement for letting is exempt from Vat. Therefore, the renting out of residential property is not a taxable (vatable) supply. The renting out of commercial property, on the other hand, is not exempt and attracts Vat.

The developers of both residential and commercial properties have to register for Vat if their turnover exceed R300 000 in any given 12 month period. The developer of residential property is not supplying a “dwelling under an agreement for letting”, it is in fact selling (supplying) the actual property, therefore Vat applies and the developer has to charge Vat. A person buying the property for own use or for letting purposes may not claim back any of the Vat paid. Even if the buyer happens to be a Vat vendor, the buyer may not claim the Vat paid, as the buyer is not going to make any taxable supply with the property. (The letting of the residential property is Vat exempt). If the buyer claimed such Vat by mistake, SARS may claim the amount back and charge the offender interest and penalties.

When a buyer buys a residential property from someone other than a developer, Vat does not apply. In this case transfer duty applies. Transfer duty is charged on the purchase consideration of the property, as follows:

Rnil to R500 000 = 0%; R500 000 to R1m = 5%; and R1m+ = 8%.

Many people buy a residential property and convert it into offices for their own commercial/professsional use or for commercial letting purposes. Again, no Vat is applicable and the buyer pays transfer duty. Once the property is converted to and rezoned for offices, the buyer may claim a deemed input Vat not exceeding the amount of transfer duty paid. The property is no more of residential nature as it became a commercial property ("change in use") and therefore Vat applies. On the sale of the property, the vendor will have to charge Vat.

When a registered Vat vendor buys a commercial property from another registered Vat vendor, the seller charges Vat and the buyer claims it back after transfer of the property. Transfer duty is not applicable.

When a property investor who is also a registered Vat vendor, sells a commercial property that is rented to a tenant, the property is deemed to be income earning and therefore a going concern. In this case Vat is charged at 0% (zero rated) in stead of 14%. Treasury introduced this mechanism of zero rating for going concerns to ease the administrative burden on both themselves and the parties involved in the transaction. Certain rules, however, need to be observed in this case. These rules are detailed in Vat Practice Note Number 14 issued on 20 January 1995. This Practice Note can be viewed on the website under “Documents”.

It is our experience that many Offer to Purchase and Buy & Sell Agreements are not clear with regards to Vat (whether Vat is included or excluded in the asking price) or with regards to Zero rating when dealing in comercial property. We also regularly come across attorneys who are not aware of the existence of or acquainted with Vat Practice Note 14. If there is any doubt you should have the documents checked to ensure they are correct in all respects.

Jannie Rossouw