We’ve all driven past those billboards showcasing a glitzy new apartment block or housing development proclaiming in big, bold letters: “No Transfer Duty”. While it may be technically true, this is one of the most commonly misunderstood – and often misrepresented – areas of property sales: when does Transfer Duty apply, and what other costs come into play when Transfer Duty is not payable?
“The basic rule of thumb,” says Tony Clarke, Managing Director of the Rawson Property Group, “is that Transfer Duty always applies unless the seller is VAT registered and the property forms part of their enterprise.” Clarke explains that this is often the case with new sectional title developments, since people seldom take on such large projects in their individual capacity. Because of that, units in new developments are often not subject to Transfer Duty, but are, instead, subject to 14% VAT.
“The confusion comes in when you start looking at who pays for what,” says Clarke, “since the transfer duty is usually paid by the buyer, but VAT must be paid to the receiver by the seller. Because South African law states that VAT must be included in the purchase price unless the sales contract explicitly says otherwise, it’s very important that the seller is aware of this when setting the price of the property. If not, they are likely to get a very nasty surprise when the Receiver of Revenue suddenly demands a 14% cut.”
Likewise, buyers should be aware of the implications VAT has on a sale, and Clarke cautions against assuming the value of a property is equal to the VAT inclusive price. “When VAT is included in the sales price, it artificially inflates the apparent value of the property by 14%,” he explains, “so you should always consider the purchase price minus VAT when assessing the true value of a purchase.”
Clarke also warns buyers that VAT is more expensive than Transfer Duty, and can add significantly to the cost of a transaction which should be taken into account when assessing affordability. “Transfer Duty is calculated by SARS on a sliding scale ranging from 3% to 11% depending on the purchase price of the property,” he says. “VAT, on the other hand, is a calculated at a flat 14%, which works out to a lot more than Transfer Duty would be on the same sale.”
While Clarke admits that a Transfer Duty free sale is not always a good thing for the buyer, he also believes VAT should not necessarily put a buyer off making a purchase. “Just because you pay VAT on a purchase doesn’t mean it can’t be a good deal,” he says, “especially in instances like buying off plan from a developer. The value of a well-chosen property can easily outgrow the initial transaction costs to give a great return on investment at the end of the day.”
As in all property transactions, however, Clarke recommends that sellers and buyers both use a reputable agent to facilitate any sale. “A good agent will be able to look after your best interests and ensure that you are well aware of all the potential Transfer Duty or VAT implications so that you can make an informed decision with no surprises.”
To find out more about VAT or Transfer Duty on property transactions, contact a Rawson Property Group franchise near you.
