ZERO RATED PROPERTY TRANSACTIONS

Either transfer duty or VAT is payable when immovable property is transferred from one owner to another. VAT is payable when the seller is a VAT vendor for purposes of the transaction wherein immovable property is to be transferred. If the seller is not a VAT vendor or where the transaction is VAT exempt, transfer duty will be payable.

VAT is normally calculated at a rate of 14% of the purchase price. There are, however, specific instances where VAT is calculated at a rate of 0% of the purchase price. These transactions are called Zero-rated transactions. Zero-rated transactions should be distinguished from transactions that are VAT exempt. Transfer duty will still be payable if a transaction is VAT exempt whereas this is not the case when the transaction is Zero-rated since in the latter case, the transaction is subject to VAT, even though it is charged at a rate of 0%.

For purposes of this newsletter, we have referred to VAT Practice Note No 14 as is available on the SARS website at www.sars.gov.za. There are certain requirements for applying the zero rate:

1. The Seller must be a vendor

A vendor is a person who carries on an enterprise and whose annual total value of taxable supplies exceeds or will exceed R300 000.00. This includes a person who is required to be a registered vendor, but has not applied for registration.

2. The Purchaser must be a registered VAT vendor

The time at which the Purchaser must be registered is the time at which the supply takes place. If the Purchaser is not a registered VAT vendor on conclusion of the agreement of sale, it is advisable that the provision of the zero rate is made subject to him registering as a VAT vendor before the supply takes place. The Receiver of Revenue, on certain conditions can backdate the registration as a VAT vendor.

3. The parties must agree in writing that the enterprise is being sold as a going concern

If the parties have not agreed on this in writing, the zero rate will not apply.

4. The enterprise must be a going concern

The parties must agree in writing that the enterprise will be an income-earning activity on the date the ownership of the enterprise is transferred. The intention should be that the new owner can take over an active and operating business without having to take any action from his side. The assets, which are necessary for the carrying on of the enterprise, should also form part of the sale.

The Practice Note provides certain examples as to what will constitute an income earning activity. We mention a few:
(a) Farming activities
The mere sale of the farm will not constitute the sale of a going concern. In order to qualify as a sale of a going concern, the parties should also include the sale of the equipment, grazing, cropping, etc.
(b) Leasing activities
The leasing activity should be disposed of together with the fixed property in order to constitute the sale of a going concern.
(c) Fixed property sold to tenant
The sale of the tenanted property does not constitute the sale of a going concern.
(d) Seller leases back a building
There is no agreement to sell an income earning activity where the agreement provides that the seller of a commercial building shall lease it back to the purchaser.
An example of a zero-rated clause which can be included in a deed of sale can be requested from our firm. Please contact Una du Toit at una@legaledge.co.za to obtain your copy.

Written by Una du Toit
PETZER, DU TOIT AND RAMULIFHO