It is a generally accepted practice that where a commercial property that is being let (thus, making it an enterprise), is sold as a going concern, then it will attract value-added tax (VAT) at the rate of 0%, provided that the transaction falls within the ambit of section 11(1)(e) of the Value-Added Tax Act 89 of 1991 (VAT Act).
Section 11(1)(e) of the VAT Act provides that the supply of goods and services will be charged with VAT at the rate of 0% where: (i) the subject matter constitutes an “enterprise” as defined in the VAT Act; (ii) such enterprise is being disposed of as a going concern; (iii) it has been agreed in writing that at the date of conclusion of the agreement, the enterprise will be an income-earning activity on the date of transfer; (iv) all the assets of such enterprise necessary for the continued operation of the enterprise are being sold; and (v) both the seller and purchaser are registered VAT vendors.
However, a sale of residential property will result in transfer duty being payable, as opposed to VAT (even in the event that it is subject to a lease and the seller is a VAT vendor).
Following this, the question then arises, what are the VAT and transfer duty consequences in respect of the sale of a property which is being let for both retail and residential purposes (i.e. a hybrid-use property)?
SARS Interpretation Note No. 57 states that:
- Paragraph 4.12.2 provides that in the event that the goods (i.e. the property) is used mainly (that is, more than 50%) for the purposes of an enterprise and partly for other purposes which are supplied as part of the supply of the going concern, then all goods (i.e. the entire property enterprise) is deemed to form part of the going concern.
- Paragraph 4.12.3 provides that in the event that the goods (i.e. the property) is not used mainly for the purpose of an enterprise, then the supply cannot be a going concern as contemplated in section 11(1)(e) and will be subject to VAT at the standard rate. In instances where the vendor can sufficiently distinguish between the parts of the supply to make it reasonable to sever them and apportion accordingly, the portion of the selling price which relates to the going concern may be zero-rated. The remainder of the portion which is not a going concern must be charged with VAT at the standard rate or transfer duty.
Based on the above, in instances where a hybrid-use property is being sold, we need to consider what the property is “mainly” (i.e. more than 50%) being used for.
If the property being sold is being used mainly for purposes of an enterprise, then the whole transaction will be deemed to be zero-rated in terms of section 11(1)(e) of the VAT Act (including the portions of the property not being used for purposes of the enterprise).
However, in the event that the property is not being used mainly for purposes of an enterprise, then the portion of the purchase consideration payable for the property which is used for carrying on the enterprise qualifies for the zero rate in terms of section 11(1)(e), and VAT at the standard rate or transfer duty will be payable on the balance purchase consideration payable for the remaining part of the property (i.e. the portion of the property not being used mainly for purposes of an enterprise). In instances where the apportionment contemplated above cannot be made, the whole transaction will be subject to VAT at the standard rate or transfer duty, as the case may be.