Value Added Tax (VAT) or Transfer Duty…which tax will be applicable to your purchase of immovable property and who will be liable for payment of that tax? The answer to both questions depends on the type of transaction the parties entered into.
WHEN AND WHO PAYS FOR VAT?
Firstly determine whether the Seller is a registered VAT Vendor, i.e. he / she is a business owner which generates an annual taxable income in excess of R 1 000 000.00. Secondly look at whether the property in question is being sold in the course of his / or business, i.e. the property relates to his / or business from which the business’ income is derived. If the answer to both these questions are yes, then VAT will be applicable to the transaction at a flat rate of 14% of the purchase price. In this instance the Seller is liable to pay SARS, unless of course the contract stipulates otherwise.
Should the answers to the above two questions be no, Transfer Duty will be applicable.
Take care to familiarise yourself with the wording of the clause dealing with the purchase price – it should stipulate whether or not the purchase price is inclusive or exclusive of VAT. Where the clause is silent on the subject VAT is deemed to be included in the purchase price, so Sellers: be aware and take note!
Fun fact: Where both Seller and Purchaser is a Registered VAT Vendor and the property in question is being sold as a going concern, VAT will payable, but at a rate of 0%.
HOW IS TRANSFER DUTY CALCULATED AND WHO PAYS?
From the discussion above it is clear that Transfer Duty is payable where the Seller is not a Registered VAT Vendor, or where he / or she is a Vendor, but the property being sold is not being sold in the course of the Seller’s business. The Purchaser is responsible for payment of Transfer Duty, which is payable to SARS within six months of signature of the offer to purchase by the Seller.
The amount payable as Transfer Duty is determined on a scale, which calculated by looking at the reasonable value of the property – usually the purchase price. Where however the market value is higher that the purchase price Transfer Duty will be calculated on the higher value. If acquisition of the property is as a result of a divorce or in terms of a last will of testament, the transaction will be exempted from Transfer Duty.
The scale remains the same regardless of whether the Purchaser is an individual, a trust or company:
- The first R 600 000.00 of the value is exempted from transfer duty, i.e. zero rated;
- Thereafter transfer duty is levied at 3% of the value up to
R 1 000 000.00, i.e. R 12 000.00;
- From R 1 000 001.00 to R 1 500 000.00, transfer duty will be R12 000 plus 5% on the value above R 1 000 000.00;
- On R 1 500 001.00 and above transfer duty is R37 000 plus 8% on the value above R 1 500 000.00.
Companies, Closed Corporations and Trusts take note: 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.
We hope that we have demystified the issue regarding tax payable when transferring immovable property. Should you have any further questions or would like us to draft or scrutinise an offer to purchase we are ready and geared to be of service.