Transfer duty ceiling to be eliminated

2011-06-30 00:00

THE purchase of fixed property by a vendor from a non-vendor is subject to transfer duty as opposed to value added tax (VAT). The vendor who acquires the property from the non-vendor can claim a notional input tax on the acquisition of the fixed property.

The notional input tax credits arise as the purchase of fixed property is viewed as the purchase of second-hand goods.

Anti-avoidance measures have been put into place to prevent abuse by artificially inflating the value of the property to claim a notional input tax credit,

The measures limit the notional input tax to be claimed to the lesser of the purchase price or the open market value of the property.

Both of the above are limited to the actual transfer duty payable in respect of the acquisition of the property.

The changes in the transfer duty that affect purchase agreements concluded on or after 23 February 2011 have an adverse impact on the notional input tax.

Before that date companies, close corporations and trusts were subject to transfer duty at a rate of eight percent on the value of the fixed property acquired.

The change to transfer duty rates applies now to natural persons and companies, close corporations and trusts.

On this basis when a vendor, for example, is a company and acquires a fixed property from a non-vendor for less than R600 000, no transfer duty is payable by the company.

Accordingly the vendor would not be entitled to a notional input tax credit as no transfer duty is paid on the acquisition of the property.

The draft Taxation Laws Amendment Bill, 2011, proposes to delink VAT from transfer duty. Under the proposed tax regime the transfer duty ceiling will be eliminated.

However, the limitation of the notional input tax credit to the lesser of the open market value of the assets and the actual purchase price paid will remain.

This anti-avoidance measure is to prevent the manipulation of the pricing of the property for the purposes of claiming a notional input tax credit.

Therefore a notional input tax credit can be claimed to the extent of the actual payment for the property. The notional input tax is determined by applying the VAT fraction (14/114) to the actual payments made for the property.

Further, the notional input tax credit must be deferred until the property acquired is registered in the deeds office in the vendor’s name.

The delinking of VAT from transfer duty is a welcome relief for vendors as they would not be prejudiced by the limitation of the transfer duty payable on the acquisition of fixed property.

For more information call KPMG at 033 347 7600.

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