Transfer Duty, VAT or Going Concern? Understanding the Tax Side of Property Deals

The South African legal system applies tax to most property transactions payable either as transfer duty or VAT.  In limited cases, VAT may apply at zero percent rate. Correct classification can have a significant impact on the overall cost of the transaction.

Transfer Duty

Transfer duty is payable by the purchaser when immovable property is purchased and is calculated on a sliding scale based on the purchase price.

It must be paid within six months of signing the sale agreement. Failure to do so results in penalties and interest from SARS, making timely planning essential, particularly where transfer is delayed.

Properties with a purchase price below R1 210 000 are exempt from transfer duty, providing relief for lower value transactions. Above this threshold, transfer duty increases progressively with value.

VAT (15%)

VAT applies where the seller is a registered VAT vendor and the property forms part of their VAT enterprise, such as property held for development or trading stock.

VAT is charged at 15%. The purchaser pays this as part of the purchase price and the seller accounts to SARS by paying it over when submitting their VAT return.

The sale agreement must clearly state whether the price is VAT inclusive or exclusive. If it does not specify, the price is deemed to be VAT inclusive, which may reduce the seller’s net proceeds.

Where both parties are VAT vendors, the purchaser may in certain cases claim input VAT, subject to the normal VAT rules.

Going Concern (0% VAT)

A property may be sold as a going concern at 0% VAT where it forms part of an income-generating business, such as a hotel, farm, or shopping centre.

To qualify, both parties must be VAT vendors, the business must continue after transfer, all assets necessary for the business must be included, and the agreement must expressly record that the transaction is a going concern and subject to a zero-rated VAT rate.

When correctly structured, this can be the most tax-efficient outcome, but strict compliance is required.

Choosing the Correct Tax Structure

In practice, the structure can be assessed by asking the following questions:

1. Is the seller a VAT vendor? If not, transfer duty applies.

2. If yes, is the property sold as a going concern? If not, VAT at 15% applies.

3. If yes, have all the going concern requirements been met? If so, the transaction may qualify for zero-rated VAT.

Ultimately, SARS determines the applicable tax implications, irrespective of how the parties structure the transaction.

Conclusion

The correct tax structure directly affects the cost of a property transaction. Transfer duty applies where VAT does not, although certain transactions may be exempt from transfer duty.

VAT at 15% applies to most commercial or development sales and going concern transactions may qualify for zero-rated VAT if all requirements are met.

Proper structuring, clear contractual wording, and early tax planning are essential to avoid unintended tax consequences.

For tailored advice and assistance in structuring your transaction correctly, contact one of our attorneys at Snymans Inc.

Written by: Mpho Molapo
Moderated and approved by: Rohula Kgabu

‍