Tax FAQ: VAT Implications on the Sale of Property by a Liquidated Entity
Background on the Member Query
A tax practitioner sought guidance on the value added tax (VAT) treatment of immovable property sales from a Close Corporation (CC) in liquidation. The CC, a VAT vendor, was developing sectional title units, though the schemes were not yet registered. The liquidator intends to sell all developments to one of the CC’s bondholders, a private company (Pty Ltd), which is in the process of registering for VAT.
The key issue:
The liquidator believes VAT is not applicable and suggests that transfer duty be paid instead. However, the tax practitioner questions whether the transaction qualifies for zero-rating under the Value Added Tax Act, 89 of 1991 (VAT Act) or if VAT must be levied on the sale price.
Question 1: Should the Sale Be Subject to VAT?
Yes, the sale is subject to VAT.
Under Section 1 of the VAT Act, an “enterprise” includes any activities related to the commencement or termination of an enterprise. This means that even though the CC is being liquidated, any sale of its assets (such as immovable property) is still considered part of its business operations and, therefore, subject to VAT.
“Any action taken in connection with the commencement or termination of an enterprise or activity shall be considered as being conducted in the course or furtherance of that enterprise or activity.”
This means that the liquidator must charge VAT on the sale of the property as it forms part of the winding-up process.
Question 2: When Can the Sale Be Zero-Rated under Section 11(1)(e) of the VAT Act?
For a sale to qualify for zero-rating under Section 11(1)(e) of the VAT Act, ALL the following conditions must be met:
When applying these requirements the following is noted:
Both the Seller and Purchaser must be VAT vendors.
In this case, the purchaser is still in the process of registering for VAT, meaning this requirement has not yet been met.
The business being sold must be a going concern.
The CC is in liquidation and is not actively generating income at the time of sale. This suggests it does not meet the definition of a going concern.
The sale must include all the assets necessary for carrying on the business.
The liquidator has not confirmed whether all essential business assets are included in the sale.
A written agreement must confirm that the sale is a going concern and zero-rated for VAT.
There is no indication that such an agreement exists.
In conclusion, the sale cannot be zero-rated because one or more of these conditions are not met.
Question 3: Is the Sale Exempt from VAT?
Exempt supplies under section 12 of the VAT Act include certain financial services, residential rentals, and the sale of unimproved land. However, in this case, the property sold includes developments (i.e., sectional title units under construction), meaning it does not qualify for exemption. Therefore, the sale is not exempt from VAT.
Question 4: Is the Sale Price Inclusive of VAT?
Since the sale is subject to VAT and not zero-rated or exempt, the selling price must include VAT. If the contract states that the purchase price excludes VAT, VAT must be added to the agreed price (e.g., R5 million + 15% VAT = R5.75 million). If the contract does not specify whether VAT is included, then SARS will consider the stated price to include VAT.
Clarification on the term "deemed":
The tax practitioner asked whether VAT would be “deemed” to be included in the price. The term "deemed" in VAT law generally applies when SARS treats a transaction as occurring for tax purposes, even when no actual sale occurs (e.g., deemed supplies when deregistering from VAT).
However, in this case, the sale is an actual transaction, so VAT is not "deemed"—it is applicable. The contract should clarify whether VAT is included or must be added separately.
In Summary
The property sale is subject to VAT under the VAT Act.
It does not qualify for zero-rating because the purchaser is not yet a VAT vendor, and it is unclear if the business meets the going concern test.
The sale is not VAT-exempt because it involves developed property.
If the contract does not specify whether VAT is included, SARS will consider the stated price to be VAT-inclusive.
Key Takeaways for Tax Practitioners
Always verify the VAT registration status of the seller and purchaser before assuming zero-rating applies.
Ensure that a transaction meets all the conditions of a going concern sale before treating it as zero-rated.
If a liquidator believes VAT is not applicable, request a detailed analysis of why.
When drafting contracts, clearly specify whether the purchase price is VAT-inclusive or exclusive to avoid disputes with SARS.
