Problems with Zero-Rating
SARS has reviewed its approach to the payment of transfer duty or VAT on property sales. It has tightened many of its requirements, and it is important for all role-players in the industry to know what these are. All of these new restrictions apply to VAT-related sales, whether they are zero-rated or normal VAT payment transactions. SARS has issued a directive in terms of Section 9(15) of the Transfer Duty Act covering some new obligations, but many of its other requirements are being discovered purely by experience as SARS responds to applications for VAT-exemption certificates.
- Zero-Rated Transactions: SARS is Now Checking More Carefully
Until recently, SARS seemed to take the attitude that it would rely on the taxpayer to be honest in seeking a zero-rated VAT exemption certificate and would only intervene if evidence to the contrary subsequently surfaced. SARS has probably had a few cases in recent times where it has realised after a transfer has been concluded that the parties did not qualify for zero-rating, and in consequence, it has become more thorough in checking the status of each matter before approving zero-rating.
Zero-rating (avoidance of both the payment of transfer duty and VAT on a property sale) is allowed where both the seller and the buyer are VAT vendors and where the property is being sold as part of an ongoing concern, meaning that the seller has been conducting an income-producing activity from the property and that the buyer will continue to do so after transfer.
This is now being determined by checking whether the seller has been filing the required bi-monthly VAT returns together with VAT payments each second month and whether the buyer continues to do so after transfer.
Normal zero-rating seems to be functioning smoothly enough, but serious problems are being experienced with applications for zero-rating when the properties are being leased to third parties. Only when the seller is occupying the property and the buyer intends to do likewise when they take possession of it will SARS probably be content not to ask further questions.
- Property Leases: Ongoing Problems and Delays
VAT is never payable on rentals received on leases of residential properties, but it is often payable on business or industrial leases.
If the landlord’s annual business income exceeds the prescribed minimum exemption limit (currently R1 million), the landlord has to register for VAT. Most companies operating businesses fall into this category and pay VAT on the rentals they receive each month. When the landlord decides to sell the property and both the seller and the buyer are VAT vendors, zero-rating can be applied, but if either party is leasing the business property, SARS intervenes and requires more than just proof of the right to zero-rate the transaction.
When applying for zero-rating and leases are operating, a conveyancer cannot submit supplementary documents. They have to wait for SARS to tell them what it needs. Since SARS became stickier with its requirements, conveyancers have been having nightmares trying to deal with what, at times, have seemed like idiosyncratic requirements. Firstly, SARS has been calling for extra property valuations and other similar documents which, to all intents and purposes, are irrelevant to zero-rated transactions. The result has been to delay the transfer unnecessarily. Then there are repeated requests to ‘upload lease agreement’ even though this may have been done already. In a recent case, when receiving this request three times, we had to phone the SARS call centre to find out exactly what SARS wanted.
- SARS Wants Existing Lease Agreements Amended
SARS’s transfer duty and VAT department (for property sales) has been relocated to Cape Town and is soundproof (you are not allowed to contact anyone there to discuss any problem you may have with them). You have to phone the call centre and be prepared for a lengthy waiting period after a voicemail welcomes you to the centre and tells you that you are somewhere around number 125 in the queue. The call centre staff try to be as helpful as they can be, but can only call up the matter on their screens. They usually don’t know much about zero-rating and will try to explain what’s on the screen. Often the answers are baffling and confusing.
Experience has taught us to get the representative to actually read out the requirement on the screen (it rarely coincides with the stock requirement given to you, such as ‘upload lease agreement’).
Even then, the requirement may still be confusing. SARS seems to think that, for sales of leased properties to qualify for zero-rating, the existing lease must lapse on the actual date of sale and the new lease must start on the same date. It doesn’t matter what the actual dates are on the agreements the parties have concluded; SARS will want an agreement varying the termination date of the seller’s lease and a revised agreement changing the commencement date of the buyer’s lease! One can only hope that this is a temporary idiosyncrasy resulting from staff not being properly informed about the meaning of an ‘ongoing concern’ and that it will be ironed out in the near future, but that’s what SARS required recently before finally issuing an exemption certificate (both parties had to amend their agreements).
There is no need for the termination and commencement dates of new leases to coincide exactly. As long as the payment of VAT on the monthly rentals continues on a regular bi-monthly basis, SARS should have no further queries on the validity of zero-rating for the transaction.
- SARS New Requirement for VAT Payments
The directive SARS recently issued, unfortunately, did not cover zero-rated matters, but it does give clarity on transfers subject to VAT. In the future, SARS will issue a VAT certificate to a conveyancer on receipt of the prescribed undertaking by the conveyancer to pay the VAT due to SARS within five days of the transfer of the related property. The conveyancer can only withdraw the undertaking if their mandate to finalise the transfer is withdrawn or if a court order (insolvency or attachment of the proceeds of the sale) overrules SARS.
SARS now checks all the seller’s tax obligations, and if it finds that the seller is in arrears with their tax payments, SARS can call for a payment of the VAT amount on the sale to be paid as security if the seller cannot clear their tax obligations immediately. The VAT will still have to be paid separately on transfer, and an application will have to be made for a refund of the security; alternatively, the vendor can apply for the security to be set off against the vendor’s current VAT liability for other payments due.
- Transfer Duty and VAT Refunds: Beware!
SARS has a note on its e-filing website saying that, as all transfer duty (and presumably VAT) refunds are now being done electronically, this has simplified and expedited the process, which in the past was too tedious. Indeed, what used to take up to ten days in the past now only takes a year to process! Previously, if you needed a transfer duty refund, you could go to your local SARS branch and deliver a letter requesting the refund which had to be accompanied by declarations of cancellation of sale by both the seller and the buyer. You could usually pick up a cheque about a week later.
Now you have to file all sorts of documents and apply for a refund through electronic channels. If SARS doesn’t come back with more requirements, you should receive a note from SARS (usually a very vague one without the transaction being actually identified) confirming that your application has been approved. But you’re likely to have to wait three months for the confirmation. After that, only a succession of calls to SARS’ call centre may assist you in getting the refund within less than a year from the date when you applied for it.
SARS has become increasingly officious and remote, and taxpayers can expect to endure many problems in the future, especially those who want to be exempted from tax payments on property transactions!
