[Question] Vat on property sale transaction

[QR Smith]

Individual purchased plot in 1997. During 1999 individual registers for vat as a result of starting farming activities on the plot. Originaly plot was used for residence. After registration no vat was claimed by the individual on the property transaction.

Later the plot gets subdivided as a new road is build through it. Individual then sells off the smaller piece to an individual non vat vendor.

Is the transaction one for Vat or transfer duty?

[Marq]

I would guess not being a tax expert that:-

Not having any vat originally attached to the property makes this a non vat transaction.
The farming activities relates to the business and vat - the property remains residence unless you have transfered the property out of the individuals name.
If you can still classify as residence - no vat - transfer duty.
What I do not know is whether CGT comes into this picture?

[Sieg]

VAT on property transaction

The VAT act lays down a little test to determine whether the transaction is vatable:

1. Is the seller registered as a vat vendor? if yes, then:

2. Has the Seller sold the property "in the course or furtherance of the Seller's enterprise"? If answer is yes, again,

then it is a vatable transaction (whether vat is paid is another aspect as it could be vatable but zero rated).

If the transaction is then vatable, no transfer duty is payable (as the transaction is exempt from transfer duty in terms of section 9(15) of the Transfer duty act.

Sieg

[Dave A]

And for the benefit of QR who might not know this already, Sieg is a rather competent conveyancer who is probably worth his fee to go over the exact details for you if needed.

[QR Smith]

As the transaction was not structured in the manner of selling an enterprise and the purchaser is a non vat vendor it does not fall in the ambit of section 11(1)(e) to classify it as a going concern to be vatable at a zero rate.

Some more facts, I represent the purchaser. Transaction was concluded in 2006 and purchaser paid transfer duty on registration, seller now instituted legal action to recover Vat from the purchaser, but has never declared the transaction for Vat purposes. The purchase agreement provides for Vat if applicable.

Based on your test: Yes the seller is a vat vendor, but only registered for vat two year after he had purchased the property, and he never claimed vat - deemed.

Did he sell it to furtherance his enterprise; he is arguing that now in 2009.

Problem I have with the test is any asset then sold "in the course or furtherance of the Vat vendors enterprise", i.e. personal furniture , motor vehicles, other property, will attract Vat after you have registered for Vat as an individual as it could be argued that it enhanced your business.

We argue that he did not sell it "in the course or furtherance of the enterprise" as he never intended it to form part of his farming activities (no deemed vat claimed), nor did he declare the transaction in 2006 as part of his vat return for business purposes.

Will we be successful with this argument, and should we maybe consult SARS on this matter.

[Sieg]

VAT on property transaction

My thoughts:

1. The Seller can only claim the VAT if he is actually going to account for it to SARS. If he does not do so, he will be committing an offence [in fraudem legis / fiscus";

2. In order to claim the VAT, he must provide the Purchaser with a VAT invoice and which vat the Purchaser will be able to claim as an input credit;

3. If transfer duty was paid at the time of conclusion of the transaction, then it is, in my opinion, a Fait accompli and vat cannot now be claimed: do the two not mutually exclude each other?

4. If vat is now paid, the transfer duty must be claimed back. can this be done? Will the claim for a refund of transfer duty be sucessful?

5. Can't the claim at this late stage by the Purchaser for the VAT, not be warded off? One needs to check out "expiry" periods in the VAT act and be aware that prescription could apply. [Prescription is a deathly defence!]

6. The wording used in the sale agreement, particularly the clause making vat payable, must be studied most carefully and in depth. Our courts apply the oft quoted dictum of Lord Steyn: "in law, context is everything."

My gut feel is that the claim by the Seller to recoup vat at this late stage, must be warded off with vigour and determination.

Good luck!
Sieg

[QR Smith]

Thanks Sieg, will keep to forum updated as it all unfolds.