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.
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 …)
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).
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%:
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) … section 44 …; (iii) … an intra-group transaction referred to in section 45 …; (iv) … an unbundling transaction referred to in section 46 …; (v) … a liquidation distribution referred to in section 47 of the Income Tax Act; …
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.
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%.