VAT, Transfer Duty and Structuing Property Transactions

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One my associates is currently dealing with a matter on behalf of a client which arose as a result of the client taking advice “from a friend” on tax issues relating to the purchase of a property. The facts of the case are briefly as follows:

The client purchased a smallholding some time ago and registered the property in the name of a trust. The smallholding in question was of a residential nature and was not an enterprise as defined by the VAT Act. In other words, no farming activities were carried out on the property. However, on the advice of a friend, the trust registered as a VAT vendor.

The object of the exercise was to enable the trust to claim back the transfer duty which was payable when the property was purchased. The transfer duty which was paid amounted to R16000.00. This amount was duly claimed back from Revenue Services as a deemed input. The property was sold recently for R1.1 million and because the trust was registered as a VAT vendor, VAT and not transfer duty was payable on the purchase price.

The general rule is that when a seller is not a registered VAT vendor, transfer duty is payable on the purchase price by the Purchaser. However, when the seller is a VAT vendor, then VAT is payable on the purchase price by the Seller. As a result, the end result for the client was that she “saved” R16 000,00 when she originally purchased the property by claiming back the transfer duty, but became liable for the payment of VAT of R135 000,00 when she sold the property.

The above case illustrates how careful people must be when structuring property transactions. The seller and the purchaser must make sure that they know whether VAT or transfer duty is going to be payable on the sale and must then make certain that the Deed of Sale sets out the correct position in this regard.

In my article which appeared in the Property Post on 3 April this year, I dealt in some detail with the tax which is payable on property transactions. Our website will soon be up and running and this previous article will be available on our website. I will publish our website details in a future article.

On the subject of tax implications, buyers of residential properties who are considering registering the property in the name of a legal entity (company, cc or trust) must also give careful consideration to the capital gains tax implications of doing this.

Care should be taken with the structuring of property transactions and the drafting of contracts relating thereto. Sellers and buyers often come to me after transfer has been registered or after the Deed of Sale has been signed with problems that have arisen due to badly structured transactions or poorly drafted contracts. At this stage it is often too late to do anything to assist and they simply have to live with the consequences.

My advice to sellers and buyers is to seek expert advice before signing the Deed of Sale.

(Disclaimer: This article is for information purposes only and do not constitute legal or other professional advice)