Property Tax: VAT or Transfer Duty Made Simple

When it comes to the sale of immovable property in South Africa, buyers and sellers alike often find themselves navigating the complexities of tax law, specifically, whether a transaction is subject to Value-Added Tax (VAT) or Transfer Duty. While both are forms of taxation on property transactions, a critical rule governs their application: a property sale is never subject to both VAT and transfer duty. It will be one or the other, never both.

This article unpacks the key differences, when each tax applies, and the practical implications for property professionals and clients alike.

 

VAT Takes Precedence Over Transfer Duty

 

The South African Revenue Service (SARS) mandates that VAT takes precedence over transfer duty where it applies. This means that if a transaction is subject to VAT, no transfer duty is payable, even if it might otherwise have been due.

Determining whether VAT applies is primarily a question of the seller’s VAT status and the nature of the property being sold.

 

Is the Seller a VAT Vendor?

 

The first and most decisive question is whether the seller is a VAT vendor; that is, registered for VAT with SARS. If the seller is not a VAT vendor, the transaction cannot be subject to VAT, and transfer duty will apply instead.

However, if the seller is a VAT vendor, the analysis doesn’t stop there.

 

Is the Property Part of the Seller’s Enterprise?

 

Even if the seller is a VAT vendor, VAT will only be applicable if the property being sold forms part of the seller’s VAT-registered enterprise: in other words, the business activities the seller conducts that are subject to VAT.

 

Examples include:

1. A property developer selling newly developed units;
2. A commercial landlord selling office buildings currently let out;
3. A company selling real estate used in its income-generating operations.

Conversely, if a VAT-registered seller sells property not used in the business, such as a private home, the sale is not subject to VAT, and transfer duty will apply instead.

 

What About Residential Investment Properties?

 

A common grey area arises with residential rental properties. Even if such properties are owned for investment and rented out long-term, they are generally exempt from VAT. That’s because long-term residential letting is not regarded as a taxable supply under the VAT Act.

Accordingly, when these properties are sold, even by a VAT vendor, the transaction is typically subject to transfer duty, not VAT.

However, if the property forms part of a short-term rental pool or serviced accommodation enterprise, the facts may support a vatable transaction. A close examination is always required.

 

Zero-Rating: VAT at 0%

 

There is a special category of VAT application known as a “zero-rated” sale. This occurs when:

1. Both buyer and seller are VAT vendors;
2. The property is sold as part of a going concern (i.e., an income-generating enterprise continues post-sale);
3. The contract explicitly states that the enterprise is being sold as a going concern and that VAT is levied at 0%.

This allows the seller to account for VAT (at a 0% rate), while the buyer avoids upfront VAT costs, thus improving cash flow and simplifying VAT returns.

A typical example: a VAT vendor sells a tenanted commercial property, with leases and business operations in place, to another VAT-registered buyer. If all criteria are met and recorded correctly in the sale agreement, the sale can be zero-rated.

 

Notional Input VAT and the Role of Transfer Duty

 

When a VAT-registered purchaser buys property from a non-VAT vendor, the transaction is subject to transfer duty, since the seller cannot levy VAT. However, the purchaser may be entitled to claim notional input VAT, effectively treating the purchase as if VAT had been charged.

This can significantly reduce the tax burden on the purchaser, but only if the property is acquired for the purpose of making taxable supplies.

Recent litigation has even challenged SARS’ narrow interpretation of “consideration” when calculating notional VAT. In a recent Cape Town Tax Court decision (Case No.: VAT 1857), the court ruled that transfer duty paid by the purchaser could be included in the calculation of notional VAT, a ruling which SARS is now appealing. Vendors should be cautious and seek legal advice before relying on this judgment.

 

Special Case: Residential Property Companies and Share Block Schemes

 

Some transactions involve not the sale of physical property, but the transfer of shares in a company that owns the property.

 

1. If a company qualifies as a residential property company—where more than 50% of its asset value is in residential property, the purchase of shares will be subject to transfer duty, unless the seller is a VAT vendor and VAT applies.
2. Share block companies also trigger transfer duty on the sale of shares, again, unless VAT applies.

The structure of the transaction therefore has a direct impact on tax liability.

 

Exemptions from Both VAT and Transfer Duty

 

While rare, certain transactions are exempt from both taxes. These include:

1. Transfers pursuant to inheritance;
2. Transfers between divorced spouses in accordance with court orders;
3. Transfers between related companies during approved restructures;
4. Transfers under certain land reform laws.

Each of these situations is governed by detailed statutory requirements. Legal advice is essential to avoid costly missteps.

 

Why It Matters: The Cost of Getting It Wrong

 

A misstep in applying VAT or transfer duty can be financially devastating. If a sale is incorrectly treated as subject to transfer duty when VAT should apply, SARS will deem the purchase price to include VAT, meaning the seller effectively absorbs the VAT liability out of their net proceeds.

This error could cost hundreds of thousands of rands, often far exceeding the transfer duty the purchaser would otherwise have paid.

Property practitioners, conveyancers, and clients alike must exercise due diligence when drafting sale agreements and determining tax obligations.

 

Conclusion: VAT or Transfer Duty, Never Both

 

In the realm of property transactions, one simple rule holds firm: either VAT or transfer duty applies, but never both.

Understanding which tax applies requires a careful examination of:

1. The seller’s VAT registration status;
2. The nature and use of the property;
3. Whether a going concern exists;
4. Whether the buyer is a VAT vendor (in specific contexts like notional VAT or zero-rating);
5. And whether the property falls under statutory exemptions.

With significant financial implications at stake, parties to a transaction should consult with tax and property law professionals at the earliest stage, ideally before signing any agreements.

Contact our property law team today to ensure your next transaction is structured and taxed correctly, saving you money, time, and legal headaches.