If you are purchasing or selling a property, you may have heard the words “Transfer Duty” and/or “VAT” regarding the transaction of the property. There is a great misconception as to what distinctly defines the two taxes, and which one applies to a property in question and to the relevant parties involved.
Breaking it down will shed some light on the matter. Transfer Duty is defined by SARS as “a tax levied on the value of any property acquired by any person by way of a transaction or in any other manner.” Transfer duty is calculated by SARS on a sliding scale ranging from 3% to 11% dependent on the purchase price of the property.
VAT (Value Added Tax) defined by SARS, “is the indirect tax on the consumption of goods and services in the economy.” VAT is calculated on a flat rate of 15%. Therefore, transfer duty is the usual tax levied on the purchase of immovable property and VAT is levied on the supply of goods and services by a VAT vendor.
In general, purchasing a property is subject to transfer duty which is payable on the property unless the seller is VAT registered where vat would be payable. In the event however of the property being sold as a going concern, the property could be ZERO rated where neither transfer duty nor vat would be payable.
Where does the responsibility of the transfer duty lie and where does the responsibility of VAT lie?
The transfer duty is usually paid by the buyer and VAT is usually paid by the seller. South African law states that VAT must be included in the purchase price unless the sales contract specifically states otherwise. The seller must take this into account when setting the purchase price to avoid being unexpectedly having to pay SARS 15%. A buyer will not be responsible for the payment of transfer duty if the transaction is vatable. Buyers must also be aware of the implication VAT has on a sale in the event of the transaction being vatable in the hands of the Purchaser which should still be within the buyer’s affordability. This is to be noted because when VAT is included in a sale price it will exaggerate the value of the property by 15% giving you a false assessment of the value of purchase. Always understand the true value of purchase excluding the VAT.
It is important to note that there are specific tax exemptions when paying transfer duty. These include:
• Exemptions up to an amount of R1 000 000 of the purchase price
• When purchasing a property in a new development
• Religious institutions
• Educational institutions
• Charitable institutions
• Properties in possession
The exemptions only apply to transfer duty, not transfer costs where attorneys are involved.
In conclusion, the differences and pros and cons of transfer duty versus VAT are clear. The effects and implications on the buyer and seller individually are important and should be reflected upon. So before signing any offer to purchase make sure that you as the buyer and seller ask the agent the pertinent questions to correctly understand the agreement as to where your tax responsibility lies, enabling the correct figures to be budget for.
Contact Intro Real Estates for further information… It’s the right choice.
