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Exercise caution when drafting VAT clauses

Parties to sale agreements of immovable property should exercise caution when drafting the VAT clauses.

In the case of Lezmin 2358 CC v Tomeridian Properties CC and others [2015] JOL 33210 [GJ], the seller sold commercial immovable property to the buyer. The sale agreement that was concluded between the parties underwent a few changes. 

The sale agreement stipulated that the purchase price of the immovable property was R25 million excluding VAT.

According to the agreement, it was the responsibility of the buyer to “pay all costs of transfer, transfer duty and/or VAT and bond registration costs". 

However, VAT payment did not come into consideration at first as the property in question was subject to a lease and was sold as a going concern (a business which is generating a profit). 

As a result, the transaction attracted VAT at a zero percent rate in terms of section 11 of the Value-Added Tax Act, No 89 of 1991. 

However, this agreement was subject to the condition that if SARS ruled that VAT was payable, then the buyer would be required to pay it.

Due to circumstances, the lease was cancelled before the transfer was completed. But the sale had already been processed, thus the transaction became liable for VAT. 

SARS ruled VAT payable

SARS indicated that VAT had to be paid at the standard rate of 14%.

The dispute was settled between the parties in agreement, and so the property was to be transferred to the buyer and the newly reduced purchase price had to be paid (excluding VAT) within the specified period of time by way of bank assurances of the payment being made.

The seller agreed that VAT was payable by the buyer when the transfer of the property is registered into the buyer's name, as per the terms of the contract agreement.

Was the VAT part of the purchase price?

Was the VAT part of the purchase price, and was the buyer required to provide assurance for both the purchase price and VAT?

In light of the case it was held that the buyer was only required to provide assurance for the purchase price portion, and not the VAT portion.

It is not always possible for the parties to be aware of all factors concerning the agreements, however parties can reduce complications in a sale agreement if they are prepared.

Registered VAT vendors 

They can do this by ensuring that both parties are registered VAT vendors. As is often the case, the buyer is not a vendor at the time of the sale. 

If such a situation were to arise, then the parties should set a time frame for the buyer to be registered for VAT and specify what is to happen if the buyer is not registered for VAT as per the specified time.

In order for the immovable property to be considered a going concern, an enterprise needs to be carried on in relation to the property. 

This could mean that any assets necessary for carrying on the enterprise are disposed of to the purchaser. This will ensure that the transaction has a zero percent rating for VAT. 

Zero percent rating for VAT

If sold as a going concern, then it needs to include in the prescribed statements in the sales agreement specifying this fact. This needs to also show that the business will be a profit generating entity upon the transfer of the property. 

If the specified purchase price does not state whether or not it includes VAT then it will be deemed that this is included.

The agreement should specify the procedure to follow if SARS decides that the transaction is not, in fact, zero rated. In such a case, it should state that it is the buyer responsibility to pay both the purchase price and the VAT at the standard rate (14%). 

When is VAT payable?

It is also important to specify the time in which this payment should occur. For example, when immovable property forms part of the supply of a going concern, then the time of supply for VAT purposes would be earlier. 

This is based on the date that an invoice is issued or the date that any payment of the consideration is made. 

Usually, when immovable property is included in a going concern, the invoice will be issued and the payment will be made upon the registration of transfer of the property in the name of the buyer. But the parties should make it clear when the VAT will need to be paid.

The agreement should also state that whether or not the buyer must provide a guarantee for both the purchase price and the amount of VAT.

Van Deventer & Van Deventer Incorporated - Attorneys Sandton

It is alwys wise to check with your attorney regarding sales agreements.