VAT or transfer duty — which one?
Even with income tax deferred under section 42, an entry tax still applies when the property moves. Which one bites turns on a single question: is the seller a VAT vendor supplying enterprise property? If so, the sale carries 15% VAT rather than transfer duty. If not — for instance a private seller, or a residential rental, which is an exempt supply — the acquisition attracts transfer duty instead.
VAT and transfer duty are generally mutually exclusive: where a supply of fixed property is subject to VAT, the Transfer Duty Act relieves it from duty (section 9(15)), so you do not usually pay both on the same acquisition. Say generally, not never both — the interaction can be more nuanced in edge cases, and the safe step is to establish the VAT status of the seller and the property before assuming which tax applies.
(15) No duty shall be payable in respect of the acquisition of any property under any transaction which for purposes of the Value-Added Tax Act, 1991, is a taxable supply of goods to the person acquiring such property if— (a) the transferor of the property under such transaction, in a declaration in such form as the Commissioner may prescribe, certifies that value-added tax payable under the said Act has been paid to him in respect of the said supply by the transferee and has been accounted for by him in a relevant return required to be furnished by him under the said Act or will be so accounted for in such return within the time allowed under that Act for the rendering of such return, or where such supply was subject to the said tax at the rate of zero per cent, such information regarding such supply as the Commissioner may require has been furnished to him; (b) any security required by the Commissioner for the payment of such tax has been lodged, if such tax has not yet been paid; and (c) the Commissioner has issued a certificate to the effect that the requirements of this subsection for the granting of the exemption have been met.
Note — This is the statutory mechanism that keeps the two taxes apart: where a property transaction is a taxable supply for VAT, transfer duty is relieved — subject to the conditions in (a)–(c), principally the Commissioner’s exemption certificate under (c).
Going-concern zero-rating
Where the property is enterprise property and the seller is a vendor, the default is 15% VAT at the standard rate. But if the whole enterprise is sold as a going concern — the business and all the assets necessary to carry it on, including the fixed property — the supply can be zero-rated (VAT at 0%):
Fixed property which is sold by a vendor will usually attract VAT at the standard rate. However, it is also possible for the fixed property concerned to form part of the supply of a going concern where an entire enterprise and all the necessary assets (including the fixed property) are sold to the purchaser. In such cases, the supply of the whole business, including the fixed property, may qualify as a zero-rated supply. (See Interpretation Note 57 “Sale of an Enterprise or Part Thereof as a Going Concern” which deals with this topic in more detail.)
The conditions that VAT 409 refers to are set out in SARS Interpretation Note 57. To qualify for zero-rating under section 11(1)(e) of the VAT Act, all six requirements must be met:
In order for the supply to qualify as being zero-rated in terms of section 11(1)(e), the following requirements must be met: The seller and purchaser must be registered vendors. The supply must consist of an enterprise or part of an enterprise which is capable of separate operation. The parties must agree in writing that the supply is a going concern. The seller and purchaser must, at the conclusion of the agreement, agree in writing that the enterprise will be an income-earning activity on the date of transfer thereof. The assets necessary for carrying on the enterprise must be disposed of to the purchaser. The parties must agree in writing that the consideration for the supply includes VAT at the zero rate.
Note — This is SARS Interpretation Note 57 (“Sale of an Enterprise or Part Thereof as a Going Concern”, 31 March 2010), the note cross-referenced in VAT 409 para 2.8 above.
Zero-rating is not the same as exemption. A going-concern supply remains a taxable supply charged at a 0% rate, which preserves the parties’ input-tax positions; an exempt supply (like residential letting, below) is outside the VAT net altogether and carries no input-tax entitlement. The zero-rating route is mainly relevant to a commercial or enterprise property, not to the typical family rental.
Why residential letting is exempt — and pays transfer duty
Letting a dwelling to tenants is an exempt supply for VAT. A residential rental is therefore generally not an enterprise for VAT purposes: no input tax can be claimed on it, and no 15% VAT is charged when it is sold. Instead, the acquisition attracts transfer duty on the sliding scale.
This is why the classic family structure — a residential rental like the Nkosi property — runs on the transfer-duty rails, not the VAT rails. The relevant section 42 exemption route for that residential transferor is section 9(1)(l)(i) of the Transfer Duty Act, not the VAT-vendor going-concern route under section 9(15A) and section 8(25) of the VAT Act (which only operates where both parties are VAT vendors).
Section 8(25) of the VAT Act is the VAT-vendor going-concern mechanism: for a qualifying section 42, 44, 45 or 47 transaction between two vendors that meets the going-concern conditions, it treats the supplier and the recipient as one and the same person for that supply. That deeming is what unlocks the matching transfer-duty exemption in section 9(15A). It is a vendor-to-vendor provision, which is exactly why it cannot reach a residential rental: a dwelling let to tenants is an exempt supply, so the landlord is generally not a vendor and section 8(25) has nothing to operate on. Confirm both parties’ VAT status before relying on it.
Securities transfer tax (0.25%)
The third entry tax bites at the second step — when Newco’s shares move to the trust. Securities transfer tax (STT) is a tax of 0.25% charged on the taxable amount of a security when it is transferred:
… at the rate of 0,25 per cent of the taxable amount of that security determined in terms of this Act.
The trigger is a transfer of an existing security. When Newco is first formed and issues new shares — whether to the founder under a section 42 transaction or to the trust on subscription — that is an issue, not a transfer, so no STT arises on formation. STT only becomes relevant once existing shares change hands.
STT roll-over exemptions and the issue point
Helpfully, transfers made under the Part III corporate roll-over rules are also exempt from STT — so a share move that itself qualifies as a section 42 (or section 45) transaction can escape the 0.25%:
(1) The tax is not payable in respect of a transfer of a security— (a) if the security is transferred to a person— (i) in terms of an asset-for-share transaction referred to in section 42 of the Income Tax Act; … (ii) in terms of an amalgamation transaction referred to in section 44 of the Income Tax Act; (iii) in terms of an intra-group transaction referred to in section 45 of the Income Tax Act; (iv) in terms of an unbundling transaction referred to in section 46 of the Income Tax Act; (v) in terms of a liquidation distribution referred to in section 47 of the Income Tax Act; … where the public officer of the relevant company has made a sworn affidavit or solemn declaration that the acquisition of that security complies with the provisions of this paragraph;
Two points on that exemption. First, it is not limited to section 42 — it also covers section 43, section 44 amalgamations, section 45 intra-group transfers, section 46 unbundlings and section 47 liquidation distributions, and the list above is not exhaustive of every STT relief. Second, it applies to a transfer; it is not needed for an issue, because an issue of new shares is not a transfer at all under the Act’s definitions — so subscribing for new Newco shares is outside STT from the start.
On the property leg, the parallel transfer-duty relief for the non-vendor residential transferor is the Transfer Duty Act’s own section 42 exemption. It exempts “any company” acquiring property under a section 42 asset-for-share transaction, provided the company’s public officer files a sworn affidavit or solemn declaration:
(1) No duty shall be payable in respect of the acquisition of property by— … (l) any company in terms of— (i) an asset-for-share transaction as defined in section 42 of the Income Tax Act, 1962 (Act 58 of 1962); … where the public officer of that company has made a sworn affidavit or solemn declaration that such acquisition of property complies with the provisions of this paragraph;
Note — The em-dash ellipses mark genuine omissions — the s 9(1) chapeau lists exemptions (a)–(z) and s 9(1)(l) lists limbs (i)–(iv); only the section 42 limb and the common closing public-officer words are kept. This is the non-VAT-vendor route; where both parties are VAT vendors deemed one person under VAT Act s 8(25), the parallel relief is s 9(15A).
Frequently asked questions
It depends on whether the seller is a VAT vendor and whether the property is enterprise (commercial) property. A vendor selling enterprise fixed property charges 15% VAT instead of transfer duty; a non-vendor seller or a residential rental (an exempt supply) attracts transfer duty instead. The two are generally mutually exclusive — usually one, not both.
Where an entire enterprise and all the assets needed to run it (including the fixed property) are sold by one VAT vendor to another as a going concern, the supply can be zero-rated — VAT at 0% instead of 15%. It is still a taxable supply (a 0% rate, not an exemption), which preserves input-tax positions. SARS VAT 409 sets out the conditions.
No. Letting a dwelling to tenants is an exempt supply, so a residential rental is generally not enterprise property. No input tax can be claimed and no 15% VAT is charged on its sale — instead the sale attracts transfer duty on the sliding scale. The classic family rental therefore pays transfer duty, not VAT.
STT is a tax of 0.25% of the taxable amount of a security, charged when a security such as a company share is transferred (Securities Transfer Tax Act 25 of 2007). An issue of new shares is not a transfer, so subscribing for newly issued Newco shares does not attract STT — only moving existing shares does.
Generally yes — moving existing shares to the trust is a transfer, so STT of 0.25% applies unless a roll-over exemption is available. The Act exempts transfers under the Part III roll-over rules — including a section 42 asset-for-share transaction and a section 45 intra-group transaction. If the move does not fit one of those, budget for the 0.25%.