In terms of the Value-Added Tax Act (Act No. 89 of 1991) provision is made for the sale of Commercial immovable property to be zero-rated for value-added tax (VAT) purposes in terms of section 11(1)(e) of the Act.
The requirements for a zero rating are fairly simple and logical but De La Porte Property Group always recommends that both the Seller and Purchaser take professional advice on the matter from the start of negotiation and definitely before an Offer to Purchase or a Deed of Sale is entered into.
The requirements are, inter alia, that the Seller carries on “an enterprise” in relation to the property and also that the “enterprise” is an income-bearing activity. A valid lease agreement on immovable property is deemed to be “an enterprise” provided the tenant is not in breach of any of the conditions of the lease and that the lease is in place, valid and income producing as at date of transfer.
In instances where a valid lease only comes into effect after the date of transfer or where a vacant property is sold, zero rating will not apply.
Furthermore, both the Seller as well as the Purchaser must be registered as VAT vendors. It is also to be noted that the Agreement of Sale between the Seller and the Purchaser must record that the parties agree in writing:
- that the property is sold as a going concern,
- that the property is an income-earning activity,
- that the property will constitute an income-earning activity on the date of registration of transfer,
- that the property includes all the assets (leases) which are necessary for carrying on the income-earning activity
- that the Seller and the Purchaser agree in writing that the Purchase Price is inclusive of VAT at the rate of 0%.
The Transferring Attorneys should always assess a property transaction upfront to ensure compliance with the provisions of the VAT Act and retain copies of all the relevant documents such as the Agreement of Sale as well as the relevant lease agreement(s) in case it should be lodged with SARS in order to substantiate the case.
