Transfer of property - a taxing business

Nearly all transactions related to the transfer of immovable property involve the payment of some form of tax to SARS. Depending on the role that one plays in a transaction and the circumstances relating to that transaction, different forms of tax may come into play.

Generally speaking, a property transfer will either be subject to transfer duty, levied in terms of the Transfer Duty Act, or Value Added Tax, levied in terms of the VAT Act. The tax status of the Seller determines whether transfer duty or VAT is payable by the purchaser. If the seller is a VAT vendor for the purposes of the transaction, then VAT will be added to the purchase price and the purchaser will pay 14% VAT on the purchase price, which will be paid to the seller on transfer, and in turn by the seller to SARS.

If the seller is not a VAT vendor for the purposes of the transfer, then the purchaser will be liable for transfer duty. The amount of transfer duty is calculated as a percentage of the purchase price and if the purchaser is an individual, it is calculated on a sliding scale, with the percentage of transfer duty increasing as the purchase price increases. If the purchaser is a company, trust or close corporation, then transfer duty is payable at a flat rate of 8% of the purchase price. Transfer duty is payable to SARS prior to transfer of the property and should be paid within 6 months of the date of the transaction to avoid penalties being imposed by SARS.

Certain amounts may be required to be added to the purchase price in order to determine the amount of transfer duty payable. Items such as Levy Stabilisation Fund payments which are payable in addition to the purchase price may need to be included in the transfer duty calculation. If, however, VAT is payable on these amounts, then transfer duty will not be levied on these items.

If the parties to a transaction are related to each other, then SARS will usually call for an estate agent’s valuation of the property to determine whether the property is being sold at fair market value.

If both the seller and purchaser are VAT vendors and the property being sold is sold as part of a going concern (e.g. a letting enterprise), then provided the requirements as set out in the Act are complied with in the sale agreement, the transaction may be zero-rated by SARS. This effect of this is that VAT will be payable on the transaction at 0%.

Certain agreements of sale are signed by purchasers on behalf of a company or close corporation to be formed. This has no adverse transfer duty implications provided the company or close corporation is formed within the time period set out in the agreement.

Another consideration for the seller is whether he will be liable for the payment of Capital Gains Tax (“CGT”) in respect of the property he disposes of. If the property does not constitute his primary residence or if it is his primary residence but the gain that he makes from the disposal of the property is above the threshold set out in the Act, namely R1 500 000,00, then the seller may be liable for CGT. This amount is not payable at the time of transfer of the property, and it is the seller’s responsibility to include provision for the amount of CGT on his personal income tax return for that particular year of assessment. The amount of CGT payable is calculated with regard to the profit made on the disposal of the property taking into account amounts spent on the acquisition, disposal and improvement of the property.

It is also necessary for a purchaser and the conveyancers attending to a property transaction to determine whether the seller is a non-resident of South Africa, i.e. a foreign seller. This is because if the purchase price of the property exceeds R2million and the seller is a foreign seller, section 35A of the Income Tax Act becomes applicable to the transaction. This section provides that any person who purchases immovable property from a foreign seller must withhold certain amounts from the purchase price, which are:

• 5% if the foreign seller is a natural person;
• 7,5% if the foreign seller is a company or close corporation; and
• 10% if the foreign seller is a trust.

In practice, the conveyancers should make the enquiry and obtain an affidavit from the seller to the effect that the seller is/is not a non-resident. If the seller is non-resident the purchaser should then authorise the conveyancers to retain the applicable amount from the purchase price and to pay it to SARS as soon as possible after the transfer is registered.