VALUE-ADDED TAX: WHEN IS A TRANSACTION ZERO-RATED?
When the transfer of immovable property occurs, either Transfer Duty or Value-Added Tax (VAT) is payable to the South African Revenue Service (SARS). VAT is payable when the seller is a registered VAT vendor for the purposes of the specific transaction wherein immovable property is transferred.
If the seller is a VAT vendor, it is important to ask whether they are a VAT vendor for the purposes of the specific transaction. Therefore, the property must have been supplied in the course of the seller’s ordinary business for the transaction to be subject to VAT.
Is the transaction VAT exempt?
Section 12 of the Value-Added Tax Act, No. 89 of 1991 (the VAT Act) lists those transactions that are exempt from VAT. Only a few of these exemptions are relevant to immovable property. The most common example is property that has previously been leased for residential purposes, and which property is now being sold, is exempt from VAT.
Zero-rated vs VAT exempt
As mentioned above, VAT exemptions are contained in section 12 of the VAT Act. These transactions fall outside of the VAT net altogether.
When a transaction is zero-rated, the transaction still falls within the VAT net. Therefore, VAT is still payable, but calculated at a rate of 0% of the purchase price, instead of the usual 15%.
Requirements for applying the zero-rate
When an enterprise is sold by a registered VAT vendor to a registered VAT vendor as a going concern, the sale will be subject to VAT at the zero rate. Herewith the requirements set out in more detail:
1. The Seller must be a VAT vendor
The Seller is deemed as a VAT vendor whenever its annual turnover exceeds R1 000 000.00, even if it has not been formally registered as a vendor. “Vendor” includes a person who is required to be registered as a vendor but has not applied for registration. Anyone can voluntarily register as a VAT vendor if their annual turnover exceeds R50 000.00.
2. The Purchaser must be a VAT vendor
The purchaser must be a formally registered VAT vendor.
3. The enterprise sold, must be a going concern
A “going concern” is an “income generating activity.” The enterprise will be regarded as a going concern if it is still running and earns an income at date of registration.
4. The parties must specifically agree in writing that the enterprise sold is a going concern. Therefore, this must be stipulated in the Offer to Purchase immovable property.
5. The property must consist of an enterprise or part of an enterprise, which is capable of separate operation.
6. The assets necessary for carrying on the income earning activity, must also be sold to the purchaser.
Example of a zero-rated clause in an Offer to Purchase:
“The parties place on record that:
a) The property is sold as a going concern, being the lease of premises for business purposes;
b) The concern will, on date of transfer to the Purchaser, be an income generating enterprise;
c) The consideration for the supply includes VAT at the zero-rate;
d) The Seller is a registered VAT vendor, with VAT registration number 4123456789;
e) The Purchaser is a registered VAT vendor, with VAT registration number 4234567890.”
Note: If SARS rules that a transaction does not qualify for a zero rating, the purchaser will be responsible for the payment of VAT and any penalties thereon, in addition to the purchase price.
Contact JVN Incorporated for any queries.
