There are several pitfalls one may encounter when attempting to rate VAT at 0% for a commercial property transaction. Previously, it was a fairly simple procedure to purchase a Private Company (PTY) or Close Corporation (CC) and quickly register it for VAT in order to facilitate a 0% VAT rated sale. “This, however, is no longer the case,” says Leon Breytenbach, National Manager of the Rawson Property Group’s commercial division. “It is mandatory for any business to register for VAT, if the income earned in any consecutive twelve month period exceeded or is likely to exceed R1 million, or an income of R83 333.00 per month.” Be aware that this includes income over any consecutive 12 month period as well as income which is likely to be earned over a forthcoming 12 month period.
Any business, where the income exceeded R50 000.00 in the past 12 month period, may choose to register for VAT voluntarily. Thus the monthly income must be above R4 166.00. This proviso does not include possible future income.
If the above mentioned thresholds cannot be met, it is most unlikely that registration of the CC or PTY for VAT will be achieved prior to the transfer taking place. Since it is a prime requirement that both legal entities are to be registered for VAT to structure the transaction at 0% VAT, the chances of the transaction being granted a zero-rated status are thereby extremely slim.
Purchasing a vacant commercial property
If the desired commercial property is not tenanted, it will have no rental income. Therefore the purchasing entity will have difficulty proving that, on transfer, the business being purchased is a concern or has an income generating activity at the time of sale. Similarly, explains Breytenbach, “SARS will not give weight to any argument that the property could potentially be let out prior to transfer or soon thereafter.” As a result, unless the legal entity purchasing the property has other sources of income which exceed the required thresholds, the transaction will most likely not be granted the desired zero-rated status.
Tax affairs must be up to date
As with any property sale, a tax clearance certificate is necessary before the transfer may be completed. “Similarly, all tax affairs must be in complete order, warns Breytenbach, including the VAT returns of the seller, as SARS will not issue a tax clearance certificate until all the requirements meet their satisfaction, which delays the transfer significantly.”
Entities which once were registered for VAT may have subsequently been deregistered, either by the Commissioner or voluntarily at the request of the vendor. “Should the vendor wish to initiate the deregistration for VAT, he may apply to the Commissioner in the event that the value of taxable supplies is less than the compulsory registration threshold of R1 million in any consecutive 12 month period,” says Breytenbach.
Deregistration may also be applied for if the vendor has ceased to carry on all aspects of the enterprise. In this instance the vendor must specify the actual date of cessation as well as whether he intends to carry on any enterprise within 12 months from the date of the cessation.
“Be aware that SARS cannot finalise your cancellation,” cautions Breytenbach, “until all the outstanding liabilities and obligations in terms of the VAT Act have been resolved or settled.”
In order for the Commissioner to initiate the cancellation of a vendor’s VAT registration, the Commissioner must be satisfied of the existence of one or more of the following criteria:
The value of taxable supplies will be less than either the compulsory or voluntary registration threshold, whichever is applicable, in any consecutive 12 month period.
The vendor has failed to furnish a return which is required for purposes of calculating the tax.
The vendor was registered under the voluntary registration category and has no fixed place of business; does not keep proper accounting records; has not opened a bank account in respect of the enterprise, or was previously registered under the VAT Act or Sales Tax Act and failed to perform any duty imposed under those acts.
“Where the vendor has ceased all enterprises,” states Breytenbach, “the cancellation normally takes effect from the last day of the tax period in which the enterprises ceased. However, the Commissioner may determine the effective date to be otherwise.”
It is therefore possible that a seller provides a previous VAT registration number and details, for an entity which has been deregistered, whether voluntarily or by the Commissioner, thus further delaying the transfer and reducing the possibility of successfully zero-rating the transaction.