Parties to sale agreements of immovable property should take great care when drafting the value-added tax (VAT) clauses.
Consider the recent case of Lezmin 2358 CC v Tomeridian Properties CC and others  JOL 33210 [GJ].
The facts of the case are complex. Put simply, the seller sold commercial immovable property to the buyer. The sale agreement, which went through a few permutations, stated that:
"The purchase price is the sum of R25 000 000 (Twenty Five Million Rand) exclusive of VAT which is payable..."
Under the heading 'Transfer and Bond Costs' the agreement provided that the buyer "shall pay all costs of transfer, transfer duty and/or VAT and bond registration costs". However, initially no VAT payment was contemplated because the property was subject to a lease and was sold as a going concern. Accordingly, the transaction was zero-rated for VAT purposes in terms of s11(1)(e) of the Value-Added Tax Act, No 89 of 1991. (That provision states that if a VAT vendor sells a business to another VAT vendor and certain requirements are met, the transaction attracts VAT at a rate of zero percent).
The agreement provided further that if the South African Revenue Service (SARS) ruled that VAT was payable (as the zero-rating did not apply for some reason), the buyer had to pay the VAT against delivery of a tax invoice.
After the sale, but before transfer, the lease was cancelled. Accordingly, the transaction was no longer zero-rated for VAT purposes. SARS indicated that VAT was payable at the standard rate of 14%.
The parties then settled a dispute between them about the agreement on the basis that the property was to be transferred to the buyer 'forthwith' and that the (reduced) purchase price, 'exclusive of Value-added Tax' had to be paid by way of bank guarantees within a stipulated time period.
The seller conceded that VAT in terms of the contractual relationship between the parties, was payable by the buyer either on delivery of a tax invoice or, in the absence thereof, on the registration of transfer of the property into the buyer's name.
In crisp issue was this: On a proper interpretation of the agreements between the parties, should VAT have been considered as part of the purchase price and therefore not separately and, accordingly, when the seller called for a guarantee, was the buyer obliged to provide a guarantee for the purchase price only or for the purchase price plus VAT?
The court held that the buyer was only obliged to provide a guarantee for the purchase price portion, and not the VAT portion.
What the case highlights is that, while it is not always possible for the parties to legislate for all the 'unknown unknowns'
(in the words of the US Secretary of Defense, Donald Rumsfeld), the parties should at least provide for the following in the sale agreement:
Parties should determine beforehand whether the buyer and seller are both registered VAT vendors. Often the buyer is not a vendor at the time of the sale. In that case, the parties should state by when the buyer must be registered for VAT and what happens if the buyer is not registered for VAT timeously (that is, whether the sale will be cancelled or whether the proceeds of the sale will increase on the basis that the buyer must pay VAT at the standard rate).
The parties should determine whether the immovable property is truly a going concern and, accordingly, whether the transaction can be zero-rated for VAT purposes. The parties should also determine whether some or all of the assets necessary for carrying on the enterprise are disposed of to the purchaser. Commercial immovable property cannot be transferred as part of going concern without further ado. For zero-rating to apply, an enterprise must be carried on in relation to the property. For example, the property must be let, or the seller must carry on its business on the property (say, by way of a manufacturing plant).
The agreement should state precisely what the purchase price is and whether it includes or excludes VAT. (If the agreement says nothing about that, then the price is deemed to include VAT).
If the transaction is structured as a going-concern, zero-rated transaction then the parties should include the prescribed statements in the sale agreement, notably, that the business is sold as a going concern, that the price includes VAT at 0% and that the business will be an income-earning activity on transfer.
The agreement should state what happens if SARS decides not to zero-rate the transaction. Ideally, the agreement should state that the buyer must pay VAT at the standard rate (14%) in addition to the price. The agreement should also state at what time the VAT would then be payable.
It should be noted that, when immovable property forms part of the supply of a going concern, then the time of supply for VAT purposes is the earlier of (i) the date that an invoice is issued or (ii) the date that any payment of the consideration is made. Usually, when immovable property is included in a going concern, the invoice will be issued and the payment will be made on registration of transfer of the property in the name of the buyer. But the parties should make it clear when the VAT will be due. That is, on the date of the issue of the invoice or the date of payment of the price.
The agreement should also state that, if the invoice will be issued and the price will be paid on transfer, the buyer must provide a guarantee for both the purchase price and the amount of VAT.