On the 20th of October 2021, the South African Revenue Service (SARS) issued BGR 57 to clarify the position on whether, for tax purposes and the calculation of notional input tax deduction, the term ‘consideration’ includes an amount paid or payable as transfer duty when a second-hand fixed property is purchased by a VAT vendor from a non-vendor.
Before we delve much into Binding General Rule (VAT) 57 and its effect, let us give this scenario a bit of context.
In a situation where a second-hand fixed property is purchased by a VAT vendor from a non-vendor, transfer duty is payable by the purchaser unless there are any applicable exemptions under the Transfer Duty Act 40 of 1949, and where the property is to be applied in the taxable enterprise of the purchaser, they are entitled to a notional input tax deduction. The deduction is regulated as per section 16 (3)(a)(ii) of the Value Added Tax Act 89 of 1991 (VAT Act).
With the above understanding in place, let us discuss the purpose that BGR 57 sought to clarify. There has been some level of uncertainty as to whether there is any entitlement to input tax deduction on the acquisition costs of the property, where a VAT vendor purchases a second-hand fixed property from a non-vendor. Prior to 10 January 2012, the entitlement to a notional input tax deduction by a VAT vendor where a second-hand fixed property was purchased from a non-vendor, was limited to the transfer duty actually paid. However, this changed when the limitation was removed by an amendment to the VAT Act. Despite this cure, it then came to the fore on whether “the transfer duty on the transaction is included in the meaning of the term “consideration” as defined in section 1 of the VAT Act, for the purposes of claiming a notional input tax deduction.”
In the event that a VAT vendor includes transfer duty costs in the calculation, one would end up with a higher notional input tax deduction. SARS, in practice, would exclude transfer duty from the amount of ‘consideration’ whenever a determination for notional input tax deduction was made. However, this was challenged and ruled against in case no. VAT 1857 where it was held that it should be included, but upon appeal by SARS and the subsequent withdrawal of opposition by the tax payer who had challenged the method and practice that SARS used, the principle still stands.
BGR 57 therefore, affirms that any transfer duty as per the Transfer Duty Act is not included under the term “consideration.” The aggregate of this is that where a second-hand fixed property is acquired by a vendor from a non-vendor, the transfer duty paid will not be included in the determination or calculation of notional input tax deduction otherwise available to the vendor under the VAT Act.
It remains to be seen whether this will be challenged and overturned in future.
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