VAT vendors urged to acquaint themselves with new VAT policy on property transactions

A new South African Revenue Service (SARS) policy concerning VAT payments on property transactions that are subject to Value Added Tax could negatively impact the cash flow of unwary buyers, sellers and developers.

According to leading corporate and commercial law firm, Werksmans Attorneys, the new policy allows the SARS, at its discretion, to insist on an upfront payment of VAT on the sale of certain properties. This is instead of payment falling due on the date of registration of transfer as had previously been the case.

Werksmans director, Aidan Kenny, explains that in the past the transferring attorney would provide the SARS with an irrevocable undertaking that VAT would be paid on the date of registration, and the conveyancer would then pay the required funds to the SARS on transfer of the property.

"This process ensured that the VAT component of the transaction had no impact on the cash flow of any of the parties to the sale or purchase of the property," says Kenny, "however, under the new policy, a request by the SARS for upfront VAT payment could not only restrict the cash flow of some of the parties, but also delay the transfer process as the conveyancer would not be able to lodge the transaction at the Deeds Office without a VAT receipt."

Kenny is quick to point out, however, that the new policy is only likely to be implemented in situations where the property transaction is deemed by the SARS to represent a risk. He also emphasises that, in such cases, the SARS would generally be willing to accept a suitable guarantee of VAT payment.

"To avoid a potential stalemate between seller and purchaser, parties to any property transaction - particularly those involving development - would be well-advised to consult an attorney," he recommends, "and also to amend their contracts to make provision for a scenario in which the SARS may require VAT payments upfront."

Kenny explains that this relatively simple amendment to the deed of sale is the best way of averting a potential property transaction disaster.

"The simple process of indicating on the contract that the purchaser may be obliged to pay VAT prior to registration, or that the guarantee for the balance of the purchase price is issued in favour of the seller or the SARS, could not only protect the parties involved," he explains, "but also ensure that cash flow problems don't jeopardise the completion of a property transaction or the successful completion of a development."