I have a client, a registered VAT Vendor, who is interested in purchasing a block of flats that is currently being rented out as university accommodation. The seller is also a registered VAT Vendor. If the seller sells the block of flats and includes VAT
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
The VAT Act
Sections dealing with “enterprise”
“Enterprise” is defined in section 1(1) of the VAT Act as any enterprise or activity which is carried on continuously or regularly in or partly in South Africa and in the course or furtherance of which goods or services are supplied to any other person for a consideration.
Proviso (v) to the definition of “enterprise” in section 1(1) of the VAT Act determines that any activity is, to the extent that it involves making exempt supplies, deemed not to be the carrying on of an "enterprise" as defined.
Section 12(c) of the VAT Act exempts from VAT the supply of a dwelling under an agreement for the letting and hiring thereof.
A “dwelling” is defined in section 1(1) of the VAT Act as any building, premises, structure, or any other place, or any part thereof, used predominantly as a place of residence or abode of any natural person or which is intended for use predominantly as a place of residence or abode of any natural person. A dwelling includes fixtures and fittings belonging thereto and enjoyed therewith. The definition of a dwelling specifically excludes property used in the supply of commercial accommodation.
Sections dealing with input tax
Section 16(3)(a)(i) of the VAT Act allows a vendor to make a deduction of input tax in respect of supplies of goods and services made to the vendor during a tax period.
“Input tax” is defined in section 1(1) of the VAT Act as, amongst others, VAT charged under section 7 of the VAT Act and payable in terms of that section by a supplier on the supply of goods or services made by the supplier to the vendor, to the extent that the vendor has acquired the goods or services for the purpose of consumption, use or supply in the course of making taxable supplies.
Application of the principles
The seller of the property probably uses the property to supply commercial accommodation to the students; hence the VAT charged on the sale of the building.
If the new purchaser continues to use the building to supply commercial accommodation or intends using it for some other taxable purpose, the new purchaser will be entitled to an input tax deduction in respect of the acquisition of the property.
If the new owner, however, intends to use the property to supply accommodation in a dwelling in terms of agreements for the letting or hiring of the property (i.e. supply the property in terms of residential rental agreements), the activities conducted in relation to the property would constitute exempt activities for VAT purposes. These activities would not form part of the VAT enterprise carried on by the purchaser and no input tax would accordingly be deductible in respect of the acquisition of the property. The fact that the purchaser is registered as a VAT vendor or is in possession of a tax invoice does not change the above conclusion.