This article is based on tax law for the year ending 28 February 2021.
Six residential units were developed by a property developer. All units were marketed but none sold. Input tax was claimed on the development costs.
The developer paid output tax to SARS as a change in use adjustment as the property was not disposed of within 18 months. A unit has now been sold.
Is VAT or transfer duty payable on the sale of the unit?
If VAT is payable, will it be the difference between the VAT on the current selling price of the unit and the VAT already paid on the change in use adjustment?
The charging section
Section 7(1)(a) of the VAT Act imposes VAT on the supply of goods or services made by a vendor in the course or furtherance of the VAT enterprise carried on by the vendor. VAT is imposed at the standard rate of (currently 15%), unless the supply qualifies to be supplied at the zero-rate in terms of section 11 of the VAT Act or is exempt from VAT in terms of section 12 of the VAT Act.
Deemed supply of goods or services Section 18(1) of the VAT Act determines that where any goods or services have been acquired by a vendor for VAT enterprise purposes and such goods or services are subsequently applied wholly for a purpose other than in the course of making taxable supplies, the vendor is deemed to have supplied such goods or services at their market in the tax period when they are first applied wholly for non-enterprise activities.
Deemed deduction when goods or services re-enter enterprise
Section 16(3)(f) of the VAT Act allows a vendor a deduction of amounts calculated in accordance with, amongst others, section 8(4) of the VAT Act.
Section 18(4)(b)(iii) of the VAT Act determines that where goods or services have been deemed to have been supplied by section 18(1) of the VAT Act (i.e. output tax became payable as a result of a change in use from fully or partially taxable to fully non-taxable use – see above) and such goods are subsequently applied in any tax period by that person wholly or partly for consumption, use or supply in the course of making taxable supplies, the goods or services are deemed to be supplied to the person in the tax period that the goods are subsequently so applied in the course of making taxable supplies.
The formula to compute the quantum of the deduction is: A x B x C x D, where
“A” represents the tax fraction (currently 15/115),
"B" represents the lesser of the adjusted cost of the goods or services or the open market value thereof at the time that the supply is deemed to be made,
“C” represents the percentage taxable use to which the goods or services will be put, and
“D” represents the extent to which the purchase price of second-hand goods has been settled.
We assume that the property that you are referring to is residential property. Kindly note that there is no 18 month rule within which developed property must be sold before a change in use adjustment is triggered.
If the property had not been used for non-taxable purposes prior to the sale
A section 18(1) change in use adjustment is triggered by the actual use of the property for non-taxable purpose (in practice normally the renting out of residential property on a temporary basis pending finding a purchaser for the property). If the property under review had never been rented out to tenants and was marketed to purchasers, no output tax adjustment should have been made in terms of section 18(1) of the VAT Act (or any other section of the VAT Act) as the VAT enterprise activity had never been interrupted.
Under the above circumstances the sale/supply of the property will be subject to VAT on the full purchase consideration. The amount of the historic adjustment must be corrected via the refund mechanism contained in the Tax Administration Act, i.e. an amount paid to SARS in error. It cannot be claimed as an input tax deduction or as a credit note incidence as envisaged in section 21 of the VAT Act.
If the property had been used for non-taxable purposes prior to the sale
If the property had been rented out in the interim before the sale thereof, the section 18(1) adjustment should have been made in the tax period that the property was first rented out. If the intention had always been to sell the property as part carrying on a VAT enterprise of supplying properties (i.e. the interim rental was simply to recover holding costs pending the sale), the sale of the property will be subject to VAT on the full consideration charged for the property.
Under the above circumstances the seller will be entitled to a deduction in respect of the output tax previously paid (the change in use adjustment). The deduction would be allowed in terms of section 16(3)(f) of the VAT Act read with section 18(4) thereof. The current wording of the VAT Act does not link the allowable deduction to the original value on which the section 18(1) deemed output tax supply was made.
In practice SARS seems to apply the principle that the deduction is the amount equal to the previous amount of output tax paid (limited to the amount of output tax payable on the ultimate sale of the property).
Further webinar commentary on VAT adjustments: Change in use can be accessed here.