Written By Mthokozisi Gumede, MaxProf Senior Auditor

Purchasing fixed property in South Africa – such as land, commercial buildings, or even rights in such property is not just a legal transaction. It’s a tax event with major VAT consequences. Whether you are a tax practitioner, accountant, investor, or property developer, understanding how VAT applies could mean the difference between a smart deduction and an unexpected tax bill.

In this article, we’ll demystify VAT on fixed property by unpacking what the VAT Act stipulates, what SARS requires for a valid claim, and how you can practically apply the rules – with examples.

The Legal Foundation: VAT Act 89 of 1991

The cornerstone of VAT law in South Africa is the Value-Added Tax Act No. 89 of 1991 (“the VAT Act”). The VAT Act defines “fixed property” in Section 1(1).

“Fixed property” includes:

• Land and any improvements thereto (e.g., buildings or fixed structures),
• Real rights in land (e.g., leasehold rights, mineral rights)
• A unit as defined in the Sectional Titles Act, and
• Shares in a share block company conferring a right to use Fixed property.

VAT in the purchase of Fixed Property

As standard practice, if section 20 of the VAT act is met, VAT Vendors may claim input VAT on the purchase or development of Fixed properties that are used in the furtherance of an enterprise. Generally, for a VAT vendor to be able to claim Input VAT on purchases, the seller must also be a VAT vendor, who upon making the sale, will pay over the levied VAT to the South African Revenue Services (SARS). Thus, if the seller is not registered as a VAT vendor, the purchaser is unable to claim any Input VAT. Question is, does the same principle apply to Fixed property? How is fixed property included in the sale of an enterprise as a going concern treated for VAT purposes?

Purchase of Fixed property from a non-VAT vendor

If the seller is not a VAT vendor, the property purchased is then considered to be a second hand good under the VAT Act, allowing the purchaser to claim notional input tax, provided that the purchaser is a registered VAT Vendor, the property will be used in the making of taxable supplies, and the following documentation is in place:

• Purchase agreement.
• Proof of payment.
• Tax invoice, clearly displaying the details of the Seller and the Purchaser.

The notional input tax claimable is calculated on the lesser of the paid consideration or the Open Market Value (OMV) as of the time of the purchase. See the below formula to be used in calculating Notional input tax:

Notional input Tax = 15/115 x lesser of (Purchase price or Open Market Value)

Note: The above is stipulated and allowed by section 16(3)(a)(ii), the 57^th Binding General Ruling, read together with Paragraph (b) of the definition of Input Tax.

Since the Seller is not a registered VAT vendor, the purchaser will have to pay transfer duties, however, the paid transfer duties will not form part of the paid consideration for the purposes of calculating notional input tax. The notional input tax claimable is limited to the consideration actually paid by the purchaser, thus, if the total consideration is paid in parts, the notional input tax is claimable in parts, as and when payment is made.

Purchase of Fixed property as part of a Going concern

If Fixed property is purchased as part of the purchase of an enterprise as a going concern, the VAT implications are to the whole purchase, the fixed property included therein is not treated separately. Thus, the purchase will attract VAT at the rate of zero, if the following provisions are met:

• The seller and the Purchaser are both registered VAT Vendors.
• Both parties to the purchase agree in writing that the enterprise purchased will be an income earning activity on the date of transfer.
• All the assets (including the fixed properties) necessary for carrying on the enterprise will be disposed of by the Seller to the Purchaser.
• Both parties to the purchase agree in writing that the purchase is inclusive of VAT at the rate of Zero per cent.

Note: The above provisions are stipulated in Section 11(1)(e).

If the above provisions are met, the purchaser of the Fixed property cannot claim Input VAT at the rate of 15%, however, if the transaction is not the purchase of a going concern, the purchaser can claim Input VAT.

Please see the examples below:

Example 1: Standard VAT Transaction

• Purchaser: ABC (Pty) Ltd (VAT vendor)
• Seller: XYZ Developers (VAT vendor)
• Purchase Price: R4,600,000 (including VAT)
• Use: Renting office space (taxable supply)

ABC may claim the R600,000 input VAT, provided all required documents as per section 20 of the VAT act are in place.

Example 2: Notional Input tax by a Municipality from a Non-Vendor

Purchaser: City View Municipality (registered VAT vendor, accounting on the payment basis in terms of Section 15(2)(a))

Seller: ABC (Pty) Ltd (not a VAT vendor)

Purchase Price: R2,300,000 (excluding transfer duties)

Use of Property: Municipal logistics centre (used in the course of making taxable supplies)

When all conditions are met, the total notional input tax claimable would be calculated as:  R2,300,000 * 15/115 = R300 000.

Note: Because the Seller is not a VAT vendor, the purchase is subject to transfer duties and the transfer duties are not part of consideration paid when calculating notional input tax, and the notional input tax claimed will be to the extent of payment made by the Purchaser.

Example 3: Sale of a Going Concern

• Seller: Rid (Pty) Ltd (VAT vendor)
• Buyer: Ram (Pty) Ltd (VAT vendor)
• Business: Coffee shop (includes all movable and immovable assets)
• Price: R500,000 * All necessary agreements are done in writing
•  Sale qualifies as a zero-rated VAT under Section 11(1)(e). Thus, Ram won’t claim Input VAT on the purchase at 15%.

Time of Supply

The general rule for time of supply is the earlier of an invoice being issued or payment of consideration being made. However, for the supply of Fixed property, time of supply is the earlier of:

• The date of registration of transfer of the property in the Deeds Registry, or,
• The date on which any payment in respect of the consideration for the purchase is made.

The Seller will consider the time of supply to be when payment is received.

In the event where payment for Fixed property is made into a trust account of an attorney or any third party, pending the registration of the property in the name of the Purchaser, such payment does not trigger a time of supply, thus, the Purchaser is not entitled to an input tax claim, and the Seller is not liable for declaring Output tax. With such third-party arrangements, time of supply is the earlier of:

• Registration of property in the Deeds Registry in the name of Purchaser, or,
• Payment of consideration by the Purchaser and receipt of payment by the Seller.

The above principles apply even in the case of claiming Notional input tax.

Note: The above is stipulated in Section 9(3)(d). Read together with SARS VAT 409 Guide for Fixed Property and Construction.

Value of Supply

The Value of supply is generally the amount on which VAT is charged, the exclusive VAT amount. Thus, the Consideration amount is inclusive of VAT. This general rule does not apply if:

• The supply of the Fixed property is between connected persons, and/or,
• The supply is made for no consideration, or the supply is made for a consideration that is less than the Open Market Value, and/or,
• The Purchaser is either a non-vendor, or if registered for VAT, the Purchaser would still not be entitled to claim the full Input tax.

In all the above exceptions, the Value of supply is calculated on the Open Market Value (OMV).

Note: OMV is inclusive of VAT.

Note: The above is stipulated in Section 10(1) and 10(2). Read together with SARS VAT 409 Guide for Fixed Property and Construction.

Conclusion

In determining VAT implications accurately on the purchase of Fixed Properties, the main considerations should be the VAT status of the parties to the transaction, the intended use of the property, the nature of the sale agreement, and the existence of third parties facilitating the transaction.

***All section references contained in this article are from the Value-Added Tax Act No. 89 of 1991***