VAT, TRANSFER DUTY AND FIXED PROPERTY (PART 1)

fhbc_rocketmailer_dec_01_10SARS levies a tax on the sale of fixed assets either in the form of VAT or transfer duty.

The question arises as to which is payable – VAT or transfer duty?  The answer will depend on the nature of the particular transaction and the status of the parties.

Fixed property is defined in the VAT Act as:

1. Claims must relate to a taxable supply from a vendor:
A taxable supply is any supply of goods or services on which VAT can be charged on, including zero-rated supplies. A VAT vendor as defined in the VAT Act must always levy VAT on the sale of a fixed property.
2. Charge 14% on the sale of property that forms part of sellers’(vendor) business assets and is used in the course of the sellers’ enterprise:
VAT at 14% must be charged when a business asset (fixed property) that was used in the course of earning taxable supplies is sold.
3. Claim the input tax on a fixed property purchased:
The purchaser – a VAT vendor – may claim the 14% back as long as the vendor will also use the fixed property to earn taxable supplies.

The purchaser will need a valid tax invoice to substantiate the input tax claim. The claim can be made at the earlier of the registration or payment date.

4. If the seller is a non-vendor, the sale is treated as the sale of second-hand goods:
If a vendor purchase a fixed property from a non-vendor, it is classified as second-hand goods.

  • In terms of the Transfer Duty Act this means that transfer duty will be payable on such a sale.
  • The seller (non-vendor) must complete a VAT264 for the records of the purchaser (vendor).

If the purchaser (vendor) will be using the property to make taxable supplies he/she can claim notional input tax (tax fraction 14/114 x purchase price) on the purchase of the property.

  • The time of supply is the earlier of the registration or payment date.
  • The notional input tax will only be claimable to the extent that payment of the purchase consideration has been made; and
  • Only if the fixed property has already been registered in the name of the vendor when the deduction of the notional input tax is made.
5. The full amount of input tax paid cannot be claimed if the fixed property will be used for both taxable and exempt supplies.
In this situation, the purchaser can only claim a portion of the input tax relating to the portion of the fixed property bought that will be used to make taxable supplies (for example, office rental).

The input tax claimable will be limited to the fraction which the square meterage of the commercial units bears to the total square meterage of the fixed property. This same % must be used going forward for all future input tax claims.

6. When a vendor sells, an exempt supply being fixed property which was let for residential purposes NO VAT is payable.
If the fixed property sold was used to make exempt supplies (residential accommodation) no VAT is payable by the vendor (seller). The purchaser is liable for transfer duty.
7. Sale of a going concern (meets the requirements of the VAT Act) by a VAT vendor still a vatable transaction.
A sale by a vendor to a vendor of a business as a going concern which meets the requirements of the VAT Act is a zero-rated transaction for VAT purposes. No transfer duty.

The answer to the question – VAT or transfer duty? – when buying or selling fixed property is now much easier to answer when you had a look at the 7 points above.

The following is transactions regarding the sale of fixed property that is not covered by the 7 points above:

8. Sale by a Vendor of a shareblock and loan account in a shareblock company.
  • This transaction will attract VAT.
  • The transfer of the shares will be exempt from the payment of stamp duty.
  • The subsequent conversion of the shareblock to a sectional title will be exempt from transfer duty if the current market value of the unit at the time of transfer is the same as the purchase price.
Note: Transfer duty will however be payable on the difference between the purchase price and the current market value of the unit if the value of the unit at the time of the conversion to sectional title is higher than the purchase price paid for the shareblock and loan account.

9. Sale by a Non-Vendor of a shareblock and loan account in a shareblock company.
  • This transaction will NOT attract VAT.
  • Transfer duty will be payable.
  • When converting to a sectional title, the purchaser will be exempt from payment of transfer duty on the market value of the unit.
10. A sale in execution of fixed property.
  • This transaction will attract VAT, unless
  • The Deputy Sheriff is satisfied that the execution debtor (whose property is sold) is not a vendor, transfer duty will then be payable by the purchaser.

The most important thing to remember is that it is either the one or the other, NEVER both.

If you have any enquiries, please contact Petri Westraadt at pwestraadt@fhbc.co.za

Source Reference

VAT, Transfer duty and fixed property – Roger Green, Cox Yeats (January 2008). Tax Insight – Value added tax and transfer duty … a practical reminder (25 June 2013).
From: https://www.ensafrica.com/news/Value-added-tax-and-transfer-duty-a-practical-reminder?Id=1068&STitle=tax%20ENSight (accessed 29 November 2016)

Buying or selling fixed property? (18 June 2013).
From: http://fspbusiness.co.za/articles/vat/buying-or-selling-fixed-property-follow-these-five-special-vat-rules-and-put-cash-back-into-your-business-2295.html (accessed 29 November 2016)
Text books: SILKE (2016)