When buying or selling property, VAT is an important issue that is sometimes overlooked. Whether VAT or transfer duty applies, and who is responsible for paying it, can have a significant financial impact.
A written agreement of sale must clearly identify the property and the purchase price. It should also clearly state how VAT will be dealt with, particularly where the seller is a registered VAT vendor.
VAT applies where a registered VAT vendor sells property as part of their business activities. In these circumstances, VAT is generally payable by the seller.
If the seller is not a VAT vendor, the transaction will generally be subject to transfer duty, which is payable by the buyer.
For purposes of this article, we are assuming that the seller is a VAT vendor.
Is VAT included in the purchase price?
If VAT applies, the agreement should clearly state whether the purchase price is VAT inclusive or exclusive.
For example, if a property is sold for R800,000 including VAT, the seller must pay the VAT from that R800,000. At the current standard VAT rate of 15%, this means the purchase price before VAT is R695,652.17 and the VAT is R104,347.83. The buyer does not pay an additional R120,000 in VAT.
However, if the agreement states that the purchase price is excluding VAT, the buyer will have to pay the VAT in addition to the agreed purchase price.
What if the agreement says nothing about VAT?
This is where things can become particularly important.
Section 64(1) of the Value-Added Tax Act provides that where a VAT vendor charges a price for a taxable supply, that price is deemed to include VAT, whether or not VAT was specifically added to the price.
Our courts have confirmed that this principle applies to the sale of immovable property. Therefore, if a seller is a VAT vendor and the agreement does not say that the purchase price excludes VAT, the purchase price will generally be regarded as VAT inclusive.
This can have serious financial consequences for a seller who expected to receive the agreed purchase price plus VAT.
VAT should never be treated as an afterthought when buying or selling property. A few words in an agreement can make a substantial difference to the amount ultimately received or paid.
Before signing a property sale agreement, make sure you understand whether VAT or transfer duty applies and, where VAT is applicable, whether the agreed purchase price includes or excludes it.
If you are unsure, it is advisable to obtain legal advice before signing the agreement rather than discovering the VAT implications afterwards.
Shaun Mathie is an attorney with Drake Flemmer & Orsmond Attorneys. He can be contacted on (043) 722-4210
