19 August 2010

Tax: VAT payment as security for transfer duty certificate

SARS issued correspondence on 4 August 2010 relating to the application for exemption from transfer duty in terms of Section 9(15) of the Transfer Duty Act 40 of 1949 (Transfer Duty Act) and SARS's request for security.

Generally, when immovable property is transferred, transfer duty will be calculated and paid over to SARS in terms of the Transfer Duty Act. However, section 9(15) of the Transfer Duty Act provides that no transfer duty shall be payable in respect of the acquisition of any property under any transaction which constitutes a taxable supply for purposes of the Value-Added Tax Act 89 of 1991 (VAT Act).

If the transfer of the property forms a taxable supply for purposes of the VAT Act, then section 9(3)(d) of the VAT Act provides that VAT on the transaction needs to be accounted for on receipt of the consideration for the supply, or on registration of the property, whichever date is earlier. The VAT is thus paid as output VAT by the seller and claimed as an input VAT deduction by the purchaser, provided that the purchaser will also use the property in the course or furtherance of the purchaser's enterprise. VAT output need only be accounted for by the parties in the VAT period following the time of supply provision being triggered.

SARS is seeking to enforce section 9(15)(b) of the Transfer Duty Act which provides that the Commissioner may require that security be provided for the payment of the VAT due in instances where such VAT has not yet been paid. Practically speaking, this means that notwithstanding the fact that the VAT Act allows for the output VAT to become payable once payment is made - in terms of section 16(3)(iiA) - SARS is suggesting that section 9(15)(b) empowers the Commissioner to request that such VAT be paid upfront as security for the VAT due.

In the letter issued by SARS on 4 August 2010, SARS sets out the procedure that will be followed in practice in which the VAT amount will be required to be paid as security in order for a transfer duty exemption certificate to be issued, notwithstanding the fact that the VAT is not yet due for payment to SARS.

The letter states that upon receipt of a transfer duty exemption application, SARS will assess the vendor's tax compliance concerning all taxes with regard to the submission of returns and payments. If there is repeated non-compliance ie. non-filing of returns or non-payment of taxes on more than one occasion for each tax type, the vendor must:

  • Resolve all outstanding tax obligations; or
  • Provide security for the VAT payment in respect of the property transaction for which the application is being made; or
  • Instruct the attorney to provide an undertaking for the VAT payment in respect of the property transaction for which the application is being made.

The letter further provides that, regardless of having opted to pay the security referred to above, the vendor must declare and pay the full VAT on the property transaction in question on the relevant VAT return when due in as provided for the in VAT Act. The vendor may however apply to SARS that the security paid should be offset against the VAT liability for the tax period in which the sale of the property must be declared, alternatively apply for the refund of the security.

It is uncertain at what stage SARS will allow the purchaser to claim a VAT credit, ie. whether it would be once VAT is paid as security in terms of section 9(15)(b) of the Transfer Duty Act, or only once payment is in fact made in terms of the VAT Act. In terms of the current provisions of the VAT Act, the purchaser should be entitled to claim input tax even though the seller had not actually paid output tax to SARS.

It is also questionable whether the procedure calling for the vendor to resolve outstanding tax obligations is lawful. If a taxpayer has not complied with its VAT obligations, then SARS has an arsenal of weapons available to it under the VAT Act to force compliance. However, there is no provision in the Transfer Duty Act or the VAT Act that allows SARS to withhold a transfer duty exemption certificate because a taxpayer has not complied with its tax obligations.

Similarly, the provisions of section 9(15)(b) of the VAT Act state that security must be provided, not that VAT must be paid, as SARS is suggesting in its correspondence. Effectively, SARS is holding taxpayers involved in a property transaction at ransom without any power to do so and using attorneys as its - unpaid - agents to do its dirty work.

The above measures will lead to further delays in property transfers, often to the detriment of innocent purchasers.

Ben Strauss, Director, Tax
Mariette Cruywagen, Senior Associate, Tax

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