As a general rule transfer duty and value added tax (“VAT”) are not levied concurrently on the transfer of immovable property. In terms of section 9(15) of the Transfer Duty Act 40 of 1949 (“Transfer Duty Act”) a transfer of property that is subject to VAT will be exempt from transfer duty, provided certain formalities are met.
Treatment of the sale of immovable property by a municipality prior to and after 1 July 2006
Prior to the enactment of the Small Business Tax Amnesty and Amendment of Taxation Laws Act, No. 9 of 2006 (“Taxation Laws Amendment Act, 2006”) certain supplies made by municipalities were exempt or non-taxable for VAT purposes. Where the sale of immovable property fell within with this category, the purchaser would have been liable for transfer duty, which is payable within 6 months after the sale contract was concluded by the parties.
With the enactment of the Taxation Laws Amendment Act, 2006 supplies made by a municipality that were previously exempt became taxable at the standard or zero rate after 1 July 2006. The result is that immovable property purchased after 1 July 2006 will generally be subject to VAT (assuming the municipality is registered as a VAT vendor).
Liability for VAT and transfer duty
Although the indirect tax rules applicable to the sale of immovable property are quite clear where the property is transferred either before or after 1 July 2006, there is still some uncertainty as to whether VAT or transfer duty will be payable where the contract was concluded before 1 July 2006, but the property is transferred after such date.
Take the following example: an agreement is concluded in January 2004 between a purchaser and the municipality for the sale of a piece of land subject to the suspensive condition that the property be rezoned. At the conclusion of the contract the sale is deemed to be non-taxable for VAT purposes. However, the suspensive condition (i.e. the rezoning) and the subsequent transfer of property only takes place in January 2012, after the implementation of the new rules and the sale is now subject to VAT at the standard rate. Will the purchaser be liable for transfer duty or VAT or both?
Liability for transfer duty
In terms of section 3 of the Transfer Duty Act, transfer duty is payable by the purchaser and is due within six months of the acquisition date of the property. The term ‘acquisition date’ is defined as -
“in the case of the acquisition of property by way of a transaction, the date on which the transaction was entered into, irrespective of whether the transaction was conditional or not or was entered into on behalf of a company already registered or still to be registered ….” (emphasis added).
Therefore, even though the suspensive condition contained in the sale agreement was not fulfilled until January 2012, the purchaser would have been liable to pay the transfer duty by July 2004.
Liability for VAT
In terms of the Value-Added Tax Act 89 of 1990 (“VAT Act”), the time of supply for immovable property is at the time transfer of the property to the purchaser occurs or when the purchaser pays part of the purchase price. In our example, VAT only becomes due when the suspensive condition is fulfilled and the property is transferred to the purchaser i.e. January 2012.
Therefore, we are left with a situation where the transaction is subject to transfer duty until 30 June 2006 and is due before the end of July 2004. On the other hand when the property is transferred, VAT is payable as result of the changes to the VAT legislation applicable from 1 July 2006. As result, it would seem, in theory at least, that both VAT and transfer duty could be applicable to the same transfer of property.
Refund of transfer duty
The next question that arises is that if the transaction is subject to VAT, will the purchaser be able to claim a refund of any transfer duty already paid? Section 20 of the Transfer Duty Act allows for a refund of excess duty paid by the purchaser. However, any claim must be made within five years from the date of acquisition of the property. In the current instance the purchaser would not be able to claim a refund as the five year period will have elapsed in July 2009.
Penalties on the late payment of transfer duty
Where the purchaser did not pay the transfer duty due, the following two questions arise -
- will the purchaser still be liable for the transfer duty, even though the transaction is subject to VAT?
- if transfer duty is still payable will there be any interest or penalties applicable?
Is transfer duty still payable?
In theory, the transfer duty will still be payable unless the requirements in section 9(15) of the Transfer duty Act have been complied with, these are -
- the seller (i.e. the municipality) issues a declaration that VAT is payable and has been paid;
- the purchaser lodges security with the South African Revenue Service (“SARS”) for the payment of VAT where the VAT has not been paid; and
- SARS issues a certificate that the requirements for granting the exemption have been met.
Therefore, to the extent that the above requirements are not met there is no basis in terms of the legislation for an exemption from transfer duty. In practice, however, it seems unlikely that SARS will pursue a taxpayer for the non-payment of transfer duty where the transaction is subject to VAT.
Will interest or penalties applicable to the outstanding duty?
In terms of section 4 of the Transfer Duty Act, where transfer duty remains unpaid on a transaction entered into before 1 March 2005, a penalty equal to 10% of the outstanding duty payable will be levied for each year that the duty remains outstanding. For transactions concluded after 1 March 2005, interest becomes payable at a rate of 10% of the outstanding duty. Therefore, in our example, if the purchaser failed to pay the applicable transfer duty, penalties calculated from 1 August 2004 until the date of payment, will become payable in addition to the outstanding transfer duty amount.
In theory, where a purchaser enters into an agreement for the purchase of immovable property from a municipality prior to 1 July 2006 and the property is only transferred after such a date, both transfer duty and VAT are payable on the transaction.
In practice though, where a purchaser has not already paid transfer duty, it is unlikely that SARS will require the payment of both transfer duty and VAT. However, it suggested that clarity be sought from SARS via the Advance Tax Ruling avenue.