VAT and Transfer Duty a Practical Reminder
31 July 2013
Posted by: Author: Varusha Moodaley
Author: Varusha Moodaley (ENS)
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, as applicable to fixed property acquired by a VAT vendor from a non-vendor on or after January 10 2012.
Where fixed property is purchased by a VAT vendor form 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 ti the amendments to 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 January 10 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 (14/114) of the lesser of the purchase consideration paid for the fixed property purchased on or after January 10 2012, or the open market value thereof. the deduction may be claimed by the vendor only to the extent that the purchase consideration has been paid to the seller. To illustrate the benefit, lets consider the following scenarios:
Bob, the VAT vendor, purchases fixed property for the purpose of making taxable supplies from John, the non-vendor, for R 550 000 on April 14 2012. Currently, no transfer duty is payable on properties with a value of R 600 000 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 R 550 000 x 14/114, which amounts to R 67 543.86.
Bob, the VAT vendor, purchases fixed property for the purpose of making taxable supplies from John, the non-vendor, for R 2 500 000 on April 14 2012. As per the current transfer duty rates, the transfer duty payable amounts to R 117 000. Bob pays the full purchase price plus the transfer duty of R 117 000. Bob is entitled to a notional input tax deduction equal to R 2 500 000 x 14/114, which amounts to R 307 017.54.
In both scenarios, 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 m=notional input tax deduction are reminded of the documentary proof that must me 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, are set out in section 20(8) of the VAT Act, and include, among others, a declaration by the supplier 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 date of payment and the value of the property.
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 five years from the date of acquisition of the fixed property. Vendors who acquired fixed property on or after January 10 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.
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