CLARITY ON VAT FOR RESIDENTIAL PROPERTY DEVELOPERS
A VENDOR that changes the use of goods from a wholly or partly taxable purpose to a wholly non-taxable purpose is deemed to make a taxable supply in the course or furtherance of that vendor’s enterprise.
In this regard, developers that applied their residential property inventory for residential letting purposes due to economic factors (where the properties could not be sold) became liable to make an output tax adjustment under section 18(1) of the Value-Added Tax Act, 1991 (the VAT Act).
Section 18B of the VAT Act came into operation on January 10, 2012, to provide relief to residential property developers by allowing them to temporarily let their residential units (held for sale) for a period of up to 36 months before the VAT under the change in use provisions became payable. The relief was due to expire on January 1, 2015, but was subsequently extended to January 1, 2018, when it ceased to apply.
The South African Revenue Service (Sars) issued Binding General Ruling No. 48 (BGR 48) on July 25, 2018, which provides clarity on the VAT treatment of residential properties consisting of dwellings which were developed for the purposes of sale, but were subsequently temporarily let by residential property developers.
The BGR 48 further provides clarification for residential property developers following the cessation of relief under section 18B of the VAT Act.
BGR 48 provides a general dispensation to residential property developers who temporarily let residential properties held for sale and provides that:
Developers are only required to make the section 18(1) change in use adjustment in the tax period during which the 36-month period ends, even if this period only expires after December 31, 2017, and The 36-month period is calculated from the date that the temporary letting agreement was entered into for the first time from January 10, 2012, to December 31, 2017.
For example if the developer applied a property for temporarily letting purposes on November 1, 2017, for the first time, the vendor must account for the output tax adjustment in the tax period within which November 2020 falls.
As section 18B expired on December 31, 2017, any dwelling that is temporarily let from January 1, 2018, no longer qualifies for the relief .
Although this BGR provides much needed clarity, it would have been ideal if the ruling was issued at the time that section 18B expired.
For those residential property developers who accounted for the change of use adjustment in January 2018 when section 18B expired, this would in all likelihood have affected their cash flow in that period as the residential property would still be on hand but there would have been a VAT liability due to Sars.
Another concern not addressed in BGR is the change in VAT rate from 14% to 15% and how that would impact the change of use calculation.
This article has been written by Khadija Ally, who is a tax consultant. She can be contacted at 060 976 8436 and email@example.com