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Property Investments in South Africa

TRANSFER DUTY
On the 14th of April 2005 SARS issued a statement entitled SARS LAUNCHES A NEW ELECTRONIC TRANSFER DUTY SYSTEM. According to SARS this new transfer duty system will improve client service and will ensure that all parties comply with South African tax law. New transfer duty forms will be used for all transaction concluded after the 1st of May 2005. Effectively SARS will only issue the relevant transfer duty receipt on condition that all parties concerned are not only registered but that all their tax returns and taxes are up to date.

In essence now, SARS will use all property transactions in South Africa to monitor everyone’s tax status, not only in relation to the property purchased or sold but in relation to their tax status in general.

Additional Information ...
As such, the following additional information will now have to be obtained from all parties concerned:
 

  •     VAT registration numbers of both Purchaser or Seller (if applicable)
  •     Details of directors, shareholders, members etc (if either party is a legal entity)
  •     Details of the original purchase price paid by the Seller and the actual date of acquisition of the property
  •     Method of payment of the purchase price by the Purchaser i.e. details of bond grant and institution granting bond
  •     Income Tax numbers of both Seller and Purchaser
  •     VAT registration number of estate agency (if applicable)
     

Regrettably it now takes a few days longer to obtain a transfer duty receipt from SARS due to the fact that they now proceed to check all details and the tax status of all parties concerned before SARS will issue the necessary transfer duty receipt. This places an additional burden on conveyancers and could potentially delay transfers where for instance either the Seller or the Purchaser is deemed to have outstanding tax issues with SARS. These outstanding tax issues will first have to be resolved and only thereafter will SARS provide the necessary transfer duty receipt.

SOLUTION

As transferring attorneys we, without delay and immediately after obtaining payment of the transfer costs which will include the transfer duty, approach SARS with a request to provide the necessary transfer duty receipt. If there is a problem in regard to the tax status of either party, this will be detected at an early stage which will then provide the relevant party the necessary opportunity to approach SARS and correct any outstanding issues.

Estates agents should at an early stage advise their sellers and buyers of the above and inform them that should they not be tax compliant the registration process will be delayed due to the fact that the Receiver of Revenue will refuse to issue the necessary transfer duty receipt. This will give both parties ample opportunity to resolve any outstanding issues with SARS. We suggest you add the following clause in your agreement:-

“As a result of the South African Revenue Services (SARS) doing risk analysis on both the transferor and the transferee on all property transactions both the Seller and the Purchaser warrant to each other and the agent that all tax issues (whether personal or otherwise) including but not limited to tax returns and tax payments are current and up to date. The defaulting party will be liable for all costs incurred and damages suffered by the aggrieved party as a result of a breach of this warranty. The aggrieved party shall also be entitled to place the defaulting party on terms and thereafter cancel the agreement if this warranty is breached. These remedies are in addition to all rights which the parties have in terms of this agreement or in Law.”

Agents need not concern themselves with completing TD1 – TD7 forms as it is our responsibility to complete the same and obtain the necessary information.

DEATH AND TAXES ARE CERTAIN

The Receiver of Revenue will now do a risk analysis regarding outstanding taxes on both the transferor and the transferee on all transfer transactions. If there are any taxes outstanding by either of the parties, the Receiver will not issue the relevant transfer duty receipt until the taxes have been paid or an arrangement for payment has been made. The Receiver will accept an undertaking in certain circumstances from the conveyancing firm concerned that the taxes will be paid on the date of registration of the transfer. Any person whose income tax is not up to date will not be able to purchase or sell property until the same has been resolved. This will unfortunately result in a delay of approximately 5 working days in the issuing of the transfer duty receipts.

The Receiver of Revenue, in addition to the above, also require certain information with regards to the Estate Agent/Agency involved in the transfer transaction before issuing a transfer duty receipt. The information referred to includes amongst other, the amount of commission payable to the Agent/Agency, and the Agent’s/Agency’s VAT Registration Number, if registered. According to the Receiver, the relevant information will be utilised to determine whether certain Agents/Agencies are evading the payment of or registration for VAT on commission earned.
 

Dykes, van Heerden Inc

NEWSFLASH

VAT OR TRANSFER DUTY

Very often the question arises as to whether the purchaser must pay transfer duty on a particular transaction or whether there is no transfer duty payable as the transaction is in fact a VAT transaction. This question can arise where the seller is registered for VAT but the purchaser is not or the seller is not registered for VAT and the purchaser is registered for VAT or both parties are registered for VAT or neither party is registered for VAT. The answer is usually easily determined by looking at the status of the seller. As a general rule, if the seller is in fact registered for VAT purposes, VAT is payable on the transaction and no transfer duty is payable by the purchaser in the transaction. If the seller is not registered for VAT purposes, then transfer duty is payable on the transaction by the purchaser. There are a few technical exceptions to the general rule but an exception to the general rule happens so seldom that it does not serve any purpose in discussing such exemptions in an article of this nature.

Is VAT included in the price...

The other question which arises is whether VAT is included in the purchase price or not. As a general rule in South Africa, any purchase price must be VAT inclusive. Accordingly, if the transaction is a VAT transaction, then the purchase price will be inclusive of VAT unless the contract specifies that VAT is excluded from the purchase price. One must therefore be very careful in calculating the purchase price where the seller is a VAT vendor as very often the VAT vendor does not take into account that the selling price of the property includes VAT and the seller is upset when the seller discovers that a portion of the purchase price which the seller has received from the purchaser must be paid to the Receiver of Revenue by way of a VAT payment. From the purchaser’s point of view, the fact that the purchase price includes VAT and the purchaser does not have to pay transfer duty should mean that the purchaser should be willing to pay a higher price for the property being purchased as effectively the purchaser is getting the amount which the purchaser would have paid as transfer duty as a discount on the purchase price for the property.

VAT transactions...

If the sale of the property is one which is a VAT transaction and the purchaser is registered for VAT purposes, the purchaser is entitled to claim the VAT which forms part of the purchase price of the property as a VAT input. This effectively means that the purchaser will get a credit for this amount from the Receiver of Revenue on the purchaser’s VAT when the purchaser submits the purchaser’s next VAT return. The Receiver of Revenue may conduct a VAT audit on the purchaser before allowing the input particularly if any monies are to be paid by the Receiver of Revenue to the purchaser. Sometimes the audit does not take place if there is no actual payment of monies from the Receiver of Revenue to the purchaser.

If the purchaser is a VAT vendor...

If the purchaser is a VAT vendor but the seller is not registered for VAT, the purchaser is entitled to claim the transfer duty which the purchaser has paid on the transfer of the property as a VAT input. Effectively therefore the purchaser will recover the amount of the transfer duty from the Receiver of Revenue. Again the same will be by way of a claim for a VAT input on the purchaser’s next VAT return and again the Receiver of Revenue may decide to audit the same prior to allowing the claim or paying a refund. Normally the Receiver of Revenue will not allow the claim unless he has received proof that the transfer has actually taken place and would normally require a copy of the transfer duty receipt as proof that the actual transfer duty was paid. One should therefore make arrangements with the conveyancing attorneys to expedite the relevant documentation after the transfer has been registered in order that the purchaser can obtain the relevant documentation as soon as possible to support a claim for the return of the transfer duty in the form of a VAT input.

In the event that the property forms part of a business...

In the event that the property forms part of a business and the business is sold as a going concern, if both the purchaser and the seller are registered for VAT purposes, then VAT will still be payable but the transaction would be zero rated. In other words effectively no VAT or transfer duty would be payable on the transaction. To qualify however the assets which are necessary to carry on the enterprise must be disposed of by the seller to the purchaser and the enterprise must be an income earning activity on the relevant effective date. It would be wise in such instance to include a clause along the following lines in the contract for the sale of the business to ensure that the Receiver of Revenue will in fact agree that the VAT in the transaction should be zero rated:-

1. Both parties hereby warrant that they are registered as vendors in terms of Section 23 of the Value Added Tax Act No. 89 of 1991 ("(the Act"). The parties record that:-

(a) The business together with the assets and the stock-in-trade constitutes an enterprise as the term is defined in the Act, and the supply of the enterprise as contemplated herein is that of a going concern chargeable with value-added tax ("VAT") at zero rate in terms of Section 11 (1)(e) of the Act.

(b) The enterprise shall be an income-earning activity on the effective date, it being recorded that all of the assets which are necessary for the carrying on of such enterprise are hereby simultaneously being disposed of by the Seller to the Purchaser.

2. In the event of Vat being levied at a rate other than zero, the VAT so payable shall be paid by the Purchaser to the Seller on demand, provided that the Seller furnishes the Purchaser with a VAT invoice as contemplated in the Act to enable the Purchaser to claim an input credit in respect of the VAT so paid.”

Although the question as to whether VAT or transfer duty is payable often presents problems to the lay person, in actual point of fact it is a question which can be determined relatively easily by looking at the status of the seller. Effectively the status of the seller determines whether VAT is payable and the status of the purchaser determines whether or not the purchaser can recover the VAT or the transfer duty from the Receiver as a VAT input. However it should be emphasized that if one is in doubt one should always first discuss the matter with either an auditor or an attorney before giving advice as to whether the transaction is a VAT transaction or not as the consequences of giving incorrect advice could be harmful for the parties involved.

The above should be seen as very brief comments and our interpretation thereof and should not be seen as an extensive guideline. Should you need any additional information, please do not hesitate to contact Johan van Heerden or Peter Dykes at Tel: 955-4787