Achieving zero-rated VAT property transactions

The VAT Act makes VAT payable on the supply by a VAT vendor of goods supplied in the course and furtherance of any enterprise carried on by the vendor. In the case of a property transaction, if the seller is a VAT vendor, and the sale is in the course and furtherance of the seller's enterprise, VAT would ordinarily be payable at the rate of 14%.

Conditions for zero-rated tax

• Seller and the purchaser must be VAT vendors;
  
• Seller and the purchaser must agree in writing that the property is sold as a going concern;
  
• Property must be an income earning activity and the parties must agree in writing that the property will constitute an income earning activity on the date of registration of transfer;
  
• Sale of the property must include all the assets which are necessary for carrying on the income earning activity
  
• Seller and the purchaser must agree in writing that the purchase price is inclusive of VAT at the rate of 0%.

Example

Where a VAT vendor, in the furtherance of its enterprise, sells a property leased to a third party, the transaction may qualify for a zero rating. The sale agreement must specify that the going concern comprises the letting of the property, and as indicated above the purchaser must effectively acquire the property, together with the lease and all the assets required to carry on the business of letting the property as a separate enterprise. In a transaction of this type, the question may be raised regarding the level of occupancy of the property, which is required to constitute the sale of a going (letting) concern. It is recommended that more than 50% of the property should be let to a third party, or third parties, in order for SARS to treat the property as income earning.

Furthermore, the parties should ensure that they keep all the relevant documents (for example, the sale agreement and the lease) in case it should become necessary for them to substantiate their entitlement to the zero rating.