[FAQ] Deemed input VAT on the purchase of property

[FAQ] Deemed input VAT on the purchase of property

• 14 January 2021
• Christo Theron

Background

A vendor purchased a property from a related party for R5million. Two valuations were obtained on the property of which the higher was R8.5million. Transfer Duty was paid on the R8.5million.

Should the notional input tax be based on the actual amount as per the contract of R5million or on the amount of R8.5 million at which the property was valued and on which Transfer Duty was calculated?

Answer

The VAT Act

Section 16(3)(a) of the VAT Act determines that a VAT vendor may deduct/claim “input tax” in respect of goods or services supplied to the vendor during a tax period.

Paragraph (b) of the definition of “input tax” in section 1(1) of the VAT Act defines as input tax an amount equal to the tax fraction of the lesser of any consideration in money given by the vendor for or the open market value of the supply (not being a taxable supply) to him by way of a sale by a resident of South Africa of any second-hand goods situated in South Africa. The deduction is limited to the extent that the vendor acquires the second-hand goods for the purposes of consumption, use or supply in the course of making taxable supplies.

Application of the principles

The amount constituting input tax in respect of second-hand goods acquired by a vendor is specifically limited to the lower of the actual purchase price of the goods or the open market value thereof. This rule applies irrespective of whether or not the supply is made between connected persons.

A notional input tax deduction, in this case, would be based on the actual price charged, i.e. R5million.

Webinar Commentary

For further webinar commentary, view our webinar 2020 VAT Refresher.

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