Tax and cancellations

You may be liable for transfer duty if you are paid a cancellation fee writes Deborah Tickle in Personal Finance. She asks "How does the legislation affect the following scenario?"
You purchase a property from a property developer (who is registered for VAT) for R456 000 (that is, R400 000 plus 14 percent VAT of R56 000).

However, before taking transfer, you find another purchaser who is willing to pay R570 000 (R500 000 plus VAT). The purchaser approaches the developer to cancel the sale to you and to rather sell the property to him/her.

In terms of the arrangement, the developer agrees to give you R100 000 as a cancellation fee. This scenario raises the following questions:

  • Is this legal?
  • Would the cancellation fee you receive be subject to income tax or capital gains tax (CGT)?
In answering it, one notes that she does not believe such an arrangement is illegal and that if one makes a strong enough case that your initial intention was not to enter into the arrangement for a quick profit but as a long term investment, you could avoid paying income tax on the cancellation fee and pay CGT instead. This is lower than income tax.

Article on Personal Finance

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