658 - Sale of property

An item that is often overlooked when buying or selling property is the issue of value-added tax (VAT) and whether it is payable and by whom. Property sale agreements generally stipulate how this should be dealt with, but in some cases agreements can be silent on the issue of VAT. What then is the correct position?

In terms of section 2(1) of the Alienation of Land Act, 1981, an agreement for the sale of any immovable property has to be in writing. In such an agreement, the seller and buyer have to, amongst other things, agree on the property to be sold as well as the purchase price to be paid. It is usually also here that the agreement stipulates whether VAT will be payable on the agreed purchase price or not. This is important, as an agreement for the sale of immovable property can attract tax in the form of either VAT or transfer duty and this must be clearly established to avoid undesired financial complications for the seller and buyer.

VAT is a tax levied on the price of goods or services that are supplied by a VAT vendor in the scope and furtherance of its enterprise. Immovable property is included in the definition of “goods” in terms of section 1(1) of the Value-Added Tax Act, 1991 (the VAT Act), and the supply of immovable property can therefore attract VAT. In contrast to transfer duty, VAT is payable by the seller. Therefore, if the seller is a VAT vendor and sells the property in the course of an enterprise, for example, it is in the business of buying and selling properties,  it will be obliged to pay VAT on the sales price charged for such property. If the seller does not meet the aforementioned requirements for charging VAT, the default position will be that transfer duty is payable by the buyer. For purposes of this article, it is assumed that the seller is a VAT vendor and sells the property in the course of an enterprise.

Where the sale of property is therefore subject to the payment of VAT, a well-drafted agreement should expressly state whether the VAT amount is included in or excluded from the purchase price. Where VAT is included, the purchase price will include VAT at the standard rate of 15% (assuming the sale does not qualify to be zero-rated). For example, if the purchase price is R800 000.00 and is VAT inclusive, the seller will be obliged to pay the VAT out of the R800 000.00. This will effectively mean that the purchase price is less than R800 000.00, namely R695,652.17 and the VAT payable is R104,347.83. In such a case, the buyer will not have to pay the VAT on top of the purchase price as it is included.

In turn, where the purchase price excludes VAT, the buyer will have to pay VAT in addition to the purchase price to the seller. Clearly, express reference as to how VAT must be dealt with is important as it may hold serious consequences for buyer and seller if there is uncertainty.

But what happens if the agreement makes no mention of VAT at all?

In such an instance, section 64(1) of the VAT Act finds application. Section 64(1) provides that any price charged by any vendor in respect of any taxable supply of goods or services shall for the purposes of the Act be deemed to include any tax payable in terms of section 7(1)(a) of the VAT Act in respect of such supply; whether or not the vendor has included tax in such price. Where an agreement of sale is silent on the issue of VAT, it will therefore be assumed that VAT is included in the purchase price where the provisions of section 64 apply. Our courts have confirmed the aforementioned position and have held that section 64(1) creates a presumption that any purchase price for the sale of immovable property charged by a VAT vendor is deemed to include VAT. This means that where a seller is a VAT vendor, and the sale is a taxable supply, the purchase price shall be deemed to be VAT inclusive and VAT will not be collectable from the buyer in addition to the purchase price unless the agreement specifically states that the purchase price excludes VAT.

Given the impact that VAT can have if not properly dealt with in a purchase agreement, it is advisable to pay careful attention to one’s purchase agreement and the wording thereof or the absence of wording in regard to VAT to ensure there are no unexpected consequences.

Deonay Scholtz

PH Attorneys

Acts and Bills

·           Alienation of Land Act 68 of 1981: Section 2(1);

·           Value-Added Tax Act 89 of 1991: Sections 1(1) (definition of “goods”), 7(1)(a) & 64(1).