Understanding Zero-Rated VAT Transactions On Property Sales
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It can be quite confusing understanding when VAT is payable on the transfer of immovable property and if the VAT percentage can be zero rated.
The first aspect that needs to be determined is whether the Seller is a VAT vendor, as it is the Seller's VAT registration status that determines whether VAT is payable.
If an entity is registered for VAT, such an entity is called a VAT VENDOR. This entity is then obliged to levy a charge of 15% on every sale /service rendered in its business and to pay this VAT (output tax) to SARS at the end of the relevant VAT cycle.
To determine whether VAT is payable in a property transaction, we need to ask 2 questions, namely:
- Is the seller registered (or obliged to be registered) for VAT, and
- Is this transaction in the course and furtherance of the seller's business?
For example, If a property developer is a VAT vendor and sells property that it has developed, these sales will be subject to VAT; alternatively, if this same developer sells his or her entire company or part of the company this would also be subject to VAT.
It is important to note that, in transactions where VAT is payable, the Receiver demands the amount due from the SELLER, not from the purchaser.
The seller must therefore ensure that the sale price he negotiates includes the 15% VAT, alternatively he must expressly arrange with the purchaser that the purchaser will, in addition to the purchase price, also be liable to pay to the seller an additional 15%.
The ultimate responsibility to pay the Receiver vests with the seller, and he cannot pass this responsibility on to the purchaser.
In summary, if a fixed property forms part of the taxable supplies of a Seller then the Seller, as a VAT vendor, must add VAT to the purchase price. If the Purchaser of that fixed property is a VAT vendor and he or she purchased the property for making taxable supplies, they may claim the VAT paid (Input Tax) when filing their VAT returns.
Zero-rating
Certain sales may be of a going concern and qualify for zero-rating, which means that VAT is charged at a rate of zero.
In order for a sale to qualify for zero-rating, there are a number of requirements that need to be met:
- The Seller must be a VAT vendor;
- The Purchaser must be a VAT vendor;
- The subject of the sale must be a going concern (in other words, an existing, income-generating business);
- The parties must agree in writing that the supply is a going concern.
- The parties must agree in writing that the business is an income-earning activity on the date of transfer.
- The assets necessary for carrying on the business must be included in the sale.
- The parties must agree in writing that the sale includes VAT at the zero-rate.
- The entire business, including any part which could operate independently, must be included in the transaction and all existing contracts must remain in place, e.g. cleaning or security.
- The business must be generating an income at the time of the transaction and have a strong likelihood of continuing to generate income up to and including the date of transfer.
Examples of transactions relating to property that will qualify for a zero rating are:
- Mr X sells his grocery store - he sells both the business and the building in which the shop is situated as part of the same transaction to the same purchaser.
- Mrs Y sells an office block owned by her. The offices are let out to various tenants and she effectively "sells" (cedes) the leases together with the building. The new purchaser will thus continue to derive rental income from the building.
It must be highlighted that the zero-rating of a transaction might not apply. It is important that the income earned by the Seller is derived from a third party, eg. a tenant leases the property which is sold to a Purchaser. The rental received by the Seller satisfies the income-generating requirement and the tenant satisfies the third party requirement.
In the event of an Agreement of Sale that specifically states that a vacant building is disposed of as a going concern, the zero rate will not apply as the supply of a vacant building cannot constitute an income earning activity.
Conclusion
Negotiating the somewhat complex process of property sales that are VAT or zero-rated VAT transactions, requires a well-constructed sale agreement, ensuring that all the requirements are met. A reputable transferring attorney will provide the necessary know-how to transform what might otherwise have been a minefield of requirements, red-tape, legalities, and pitfalls into a successful transaction.
Author: Du Plessis & Co
