VAT when a business sells property or the whole business
When a South African vendor's property sale carries VAT, when transfer duty applies, and when selling the whole business is a zero-rated going concern.
By Achekam · · 5 min read · For Running a business businesses in South Africa
An owner decides to sell the building the business trades from. Another is retiring and selling the whole business, premises, equipment, customers and all, to a buyer who will carry on running it. In both cases the price is large, and the VAT question is not a footnote: at the standard rate, getting it wrong can swing the deal by a serious amount.
South African VAT treats these sales very differently depending on what is sold and how. This article explains when a vendor's sale of fixed property carries VAT, when transfer duty applies instead, when the sale of a whole business can be zero-rated as a going concern, and how to record the sale in your books.
Property sold by a vendor: the standard rate as a rule
SARS's VAT page says VAT is charged on taxable supplies at either the standard rate, currently 15%, or the zero rate.
SARS's VAT 409 guide for fixed property and construction applies that to property: fixed property sold by a vendor usually attracts VAT at the standard rate. If your business is a VAT vendor and it sells a building it used in the business, the starting assumption is that VAT is charged on the price.
That has a practical consequence for the sale agreement. The price should say clearly whether it includes or excludes VAT. A price agreed without that clarity is an argument waiting to happen.
The guide quoted is VAT 409 issue 7, up to date as at 5 October 2023.
A private residence: transfer duty instead
Not everything a vendor owns is part of its enterprise. The VAT 409 guide says that where fixed property was not used in an enterprise, such as a vendor's private residence, its sale is not subject to VAT, and the purchaser pays transfer duty instead, subject to the exemptions in the Transfer Duty Act.
So an owner who is a VAT vendor as a sole proprietor, and who sells the family home, does not charge VAT on it simply because they are registered. The question is whether the property was used in the enterprise, not who owns it.
Selling the whole business as a going concern
The most valuable rule in this area is for the sale of an entire business. The VAT 409 guide says that where an entire enterprise and its necessary assets, including the property, are sold, the supply may qualify as a zero-rated going concern.
Zero-rated means VAT is charged at 0%. For the buyer, that removes the need to fund a large amount of VAT on top of the purchase price.
The word "may" matters. Not every sale of a business qualifies, and the conditions are specific. SARS's guide refers readers to its Interpretation Note 57 for the detail. Questions your attorney and accountant will want answered before the agreement is signed include:
- Is the entire enterprise being sold, or only some of its assets?
- Are all the necessary assets, including the property, part of the sale?
- What do SARS's guide and Interpretation Note 57 require beyond that, and does the written agreement deal with each point?
If the answers are uncertain, the sale may be standard-rated instead, and VAT will be due on the price. SARS's VAT 409 guide for fixed property and construction explains how VAT applies to property transactions and when VAT or transfer duty applies.
Recording the disposal in the fixed-asset register
Whatever the VAT treatment, the property and equipment have to leave your books properly.
In Achekam, a fixed-asset register lets a business add assets at cost, depreciate them monthly by straight line or reducing balance with a journal each month, and dispose of them with the profit or loss posted. Dispose of each asset sold through the register, so that the profit or loss on each is posted rather than worked out by hand. Note that tax wear-and-tear is not worked out by the register, and that the register is not included in Business Essentials.
Invoicing the sale, and a caution
A sale this size needs a proper document.
In Achekam, a business creates customer invoices as drafts, and issuing one takes the next number in its sequence and posts it to the ledger as debtors, sales and output VAT. A South African business sets each invoice line's VAT to 15% or 0%. For a going-concern sale, the line goes on at 0%; because the invoice screen does not tell zero-rated and exempt apart, note on the invoice that the 0% is a zero-rated going-concern supply.
There is a caution, though. All invoice revenue in Achekam posts to one account, Professional Services Revenue (4100), and a line cannot name another sales account. An invoice for the sale of the business would therefore post the price as revenue, while the asset register's disposal is also posting the profit or loss. Agree with your accountant how to record the sale so the proceeds are counted once, whether through the invoice and a correcting journal or another route, before you issue anything.
Keeping the agreement and the evidence
SARS says a VAT vendor must keep tax invoices, bills of entry and accounting records for a period of 5 years. For a going-concern sale, the most important record is the sale agreement itself, because it is the evidence that the zero rate applied. Keep it with the tax invoice, the asset register's disposal entries and the correspondence that shows the business was a going concern on the day it changed hands. A company has wider record-keeping duties too, covered in records a company must keep under the Companies Act.
If the business also owns residential property, that part of the portfolio follows different VAT rules; see VAT and residential rent.
Before you sign
Decide early whether the deal is a sale of assets or of a going concern, and get your attorney and accountant to test it against SARS's conditions. Make sure the agreement states the VAT position, plan how the sale will be recorded in your books, and keep the whole file for at least five years.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
