Buying property is one of the biggest financial decisions most people will make. In addition to the purchase price, buyers must budget for several costs associated with the transfer of a property. One of the most important questions is whether the transaction is subject to Transfer Duty or Value-Added Tax (VAT).
Although these taxes generally do not apply simultaneously to the same property transaction, determining which one applies can significantly impact the overall cost of the transaction.

Transfer Duty
Firstly, let’s discuss the difference between Transfer Duty and VAT. Transfer Duty is a tax imposed by the South African Revenue Service (SARS) on the acquisition of immovable property. It is generally payable by the purchaser, unless an exemption applies.  For example, transactions involving estate inheritances, transfers of assets between spouses following a divorce, asset-for-shares transactions, and transactions subject to VAT are all exempt from Transfer Duty. The amount of Transfer Duty depends on the property's value and is calculated using a progressive sliding scale. Transfer Duty is not simply a fixed percentage of the purchase price. The applicable progressive sliding scale means the duty increases as the property's value increases. Currently, Transfer Duty is payable on property values above R1 210 000.00 (One Million Two Hundred and Ten Thousand Rand).

VAT transactions
VAT, on the other hand, is a consumption tax charged by a VAT-registered vendor on taxable supplies made in the course or furtherance of that vendor’s business. In a property transaction, VAT may therefore apply where the seller is a VAT vendor, and the sale of the property forms part of the seller’s taxable business activities. This is commonly encountered when property is sold by developers, property companies, property trusts, and other entities whose activities involve the development, construction, or sale of property. The current VAT rate is 15%.
 
However, this does not mean that every property sold by a VAT-registered seller automatically attracts VAT. A common misconception is that if the seller is VAT registered, VAT automatically applies. That is not necessarily correct. A seller may be VAT-registered, but the specific property transaction may fall outside the seller’s business. For example, the sale of a residential property or holiday home will generally not become a VAT transaction merely because the seller happens to be VAT registered. The facts of the transaction must therefore be considered carefully. The crucial question is whether the particular property sale constitutes a taxable supply made in the course of the seller’s business.

The difference between VAT and Transfer Duty can have a substantial effect on the purchaser’s cash-flow requirements. For example, where VAT applies, the purchaser should establish whether the purchase price is VAT-inclusive or VAT-exclusive. This should be addressed clearly in the Offer to Purchase. A clause stating that “VAT is payable” without clarifying whether the agreed purchase price includes VAT can create unnecessary uncertainty and potentially lead to a significant financial dispute.

Similarly, where Transfer Duty applies, the purchaser must budget for Transfer Duty, conveyancing costs, and other transaction expenses.

The tax position of the transaction should not be left until the transfer process has already commenced. Before signing the sale agreement, the parties should establish:

• Whether the seller is a VAT vendor;
• Whether the sale is made in the course or furtherance of the seller’s enterprise;
• Whether VAT or Transfer Duty applies;
• Whether the purchase price is VAT-inclusive or VAT-exclusive;
• Whether the agreement contains appropriate tax provisions; and
• Whether any exemptions may apply.

Getting this wrong at the beginning of the transaction can result in an unexpected financial liability later. Purchasers and sellers should therefore make sure that the tax implications of their transaction are understood. A simple question, “Is this transaction subject to VAT or Transfer Duty?”, to your conveyancer would suffice.

At PH Attorneys, our conveyancing team can assist you in understanding the legal and conveyancing implications of your property transaction and ensure that the appropriate requirements are addressed from the outset.

Disclaimer: This article is the personal opinion/view of the author(s) and does not necessarily present the views of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever, and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken based on this content without further written confirmation by the author(s).