Key Conditions for Zero-Rated Industrial Property Sales
When buying or selling industrial property in South Africa, you would want to be aware of the VAT implications. While sales of property are ordinarily taxed with VAT at 15%, some sales may be zero-rated, where VAT is charged at 0%, provided some conditions are met. This article discusses how a sale of industrial property can be zero-rated in terms of the Value-Added Tax Act, 1991.
To be eligible for zero-rating, the transaction must fulfill these SARS conditions:
Seller and Purchaser Must Be VAT Vendors
In other words, both the seller and the buyer have to be VAT-registered at the time of the sale. If either one of them is not a VAT vendor, then you cannot apply the zero-rating option, and they will have to pay VAT at 15%.
The Property Must Be Sold as an Income-Generating Going Concern
Zero-rating only applies if the property is part of a business that is generating income. The property must be used mainly (more than 50%) for business.
The Property Must Be Income-Earning at the Time of Sale
The industrial property must not be empty at the time of transfer; it must have businesses or tenants in operation.
The Sale Must Include All the Assets Needed for Business Continuation
If the property forms part of a business (e.g., a warehouse rental business), the sale will have to comprise all the assets necessary to carry on the business, including current leases.
The Sale Agreement Must Clearly State Zero-Rating
There has to be a legally binding agreement between seller and buyer that:
- The property is being transferred as a going concern.
- The business is income-generating on the date of transfer.
- The sale is zero-rated for VAT.
The Transaction Must Fit into Section 11(1)(e) of the VAT Act
SARS uses section 11(1)(e) of the Value-Added Tax Act 89 of 1991 in applying zero-rating. The sale agreement should cite this provision for compliance.
A Special Sale Agreement Should Be Drawn Up by an Attorney
A well-formulated sale agreement drawn up by a VAT and SARS law-practicing attorney prevents issues.
Example of a Zero-Rated Transaction
Company A is a VAT vendor who has an industrial warehouse rented out to VAT vendors. Company B is also a VAT vendor who makes an offer to buy the warehouse with all the lease agreements intact. The agreement of sale provides that it’s a zero-rated sale in terms of section 11(1)(e). Since all SARS conditions are met, the transaction is zero-rated, and Company B does not pay VAT on the purchase price.
What If Conditions Aren’t Met?
So, if any of those SARS conditions aren’t valid, the sale’s going to be subject to a 15% VAT. The seller’s responsible for paying that VAT, and the buyer may be able to recover it as an input tax deduction, depending on how their VAT affairs stand.
Other Expenses to Consider
Even when VAT’s zero, buyers must remember to factor in some additional expenses, such as Deeds Office charges, attorney and transfer costs, as well as clearance certificates.
A zero-rated sale of a commercial property in South Africa provides significant cash flow benefits by not incurring the upfront VAT cost. Careful compliance with SARS’s requirements is, however, required. The two parties should consult a tax practitioner or VAT expert to ensure that all the requirements are properly documented and met.