Although old news to some, there still seems to be little awareness regarding the interplay between value-added tax ("VAT") and transfer duty, and the benefits stemming from the 'not so recent' amendments to the Value-Added Tax Act 89 of 1991 ("the VAT Act"), as applicable to fixed property acquired by a VAT vendor from a non-vendor on or after 10 January 2012.
Where fixed property is purchased by a VAT vendor from a non-vendor, transfer duty will be payable thereon by the purchaser. The purchasing VAT vendor will then be entitled to a notional input tax deduction to the extent that the property was purchased for the purpose of consumption, use or supply in the course of making taxable supplies.
Prior to the amendment of the VAT Act, a vendor acquiring fixed property (which is regarded as second-hand goods in terms of the VAT Act) for the purpose of making taxable supplies, was entitled to a notional input tax deduction limited to the transfer duty actually paid in respect of the acquisition of such fixed property. With effect from 10 January 2012, this limitation has been removed and the notional input tax deduction is now treated largely the same as the notional input tax deduction available for second-hand goods. Vendors are therefore now entitled to a notional input tax deduction equal to the tax fraction of 14/114 the lesser of the purchase consideration paid for the fixed property purchased on or after 10 January 2012, or the open market value thereof. The deduction may only be claimed by the vendor to the extent that the purchase consideration has been paid to the seller.
To illustrate the benefit we shall consider the following 2 scenarios:
Scenario 1: Bob the VAT vendor purchases fixed property for the purpose of making taxable supplies from John, the non-vendor for R550 000 on 14 April 2012. Currently, no transfer duty is payable on properties with a value of R600 000 or less. There will therefore be no transfer duty payable by Bob. Bob pays the full purchase price on registration of the property into his name. Bob is entitled to a notional input tax deduction equal to R550 000 x 14/114 which amounts to R67,543-86.
Scenario 2: Bob the VAT vendor purchases fixed property for the purpose of making taxable supplies from John, the non-vendor for R2,500,000 on 14 April 2012. As per the current transfer duty rates, the transfer duty payable amounts to R117,000. Bob pays the full purchase price plus the transfer duty of R117,000. Bob is entitled to a notional input tax deduction equal to R2, 500 000 x 14/114 which amounts to R307,017-54.
In both scenarios outlined above, Bob the vendor is left in a positive tax position having been entitled to notional input tax deductions which are greater than the transfer duty actually paid.
Vendors wishing to claim the notional input tax deduction are reminded of the documentary proof that must be obtained and retained in order to substantiate an entitlement to an input tax deduction. The failure to obtain and retain the specified documentation will result in the input tax deduction being disallowed. The relevant supporting documents in respect of fixed property, being second hand goods, is set out in section 20(8) of the VAT Act, and includes, inter alia, a declaration by the supplier stating that the sale of the property is not a taxable supply as well as certain specified particulars pertaining to the supplier and the terms of the sale, for example the supplier's name and address, the date of sale, the date of payment and the value of the property etc. The agreement of sale will be sufficient documentary proof provided that it contains the necessary particulars as set out in section 20(8) of the VAT Act. Vendors are also referred to the SARS Interpretation note 49 titled 'Documentary proof required to substantiate a vendor's entitlement to "input tax" or a deduction as contemplated in section 16(2)', in this regard.
Lastly, it is worth mentioning that section 16 of the VAT Act allows for an input tax deduction to be claimed within a period of 5 years from the date of acquisition of the fixed property. Vendors who acquired fixed property on or after 10 January 2012, and who were unaware of their notional input tax entitlement, may thus still claim the deduction provided that the relevant supporting documents are available.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.