[FAQ] Deemed input VAT on the purchase of property

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[FAQ] Deemed input VAT on the purchase of property

• 14 January 2021
• Accounting
• 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.

 

FAQs

1. What is deemed input VAT when buying property in South Africa?

Deemed input VAT refers to the notional VAT credit a VAT-registered buyer may claim when purchasing second-hand fixed property from a non-VAT vendor. The property must qualify as a "second-hand good" under the VAT Act, and the transaction must meet specific criteria.

2. Can you claim input VAT on the purchase of second-hand property in South Africa?

Yes, you can claim deemed input VAT on second-hand property if:

• You're a VAT vendor,

• The seller is not a VAT vendor,

• The property is used for taxable purposes, and

• You meet the documentary and payment requirements under section 16(3)(a)(ii) of the VAT Act.

3. How do I calculate deemed input VAT on a property purchase?

Deemed input VAT is calculated by applying the VAT fraction (currently 15/115) to the lesser of:

• The purchase price, or

• The open market value at the time of acquisition.

4. Do I need a tax invoice to claim deemed input VAT on property?

No, a tax invoice is not required when claiming deemed input VAT on second-hand property. However, you must retain supporting documents such as the sale agreement, proof of payment, and records of ownership transfer.

5. Can I claim deemed input VAT if I haven’t paid for the property yet?

No. SARS requires that the amount must be actually paid (in full or in part) before you can claim deemed input VAT. The payment must be traceable and verifiable.

6. What qualifies as ‘second-hand goods’ for VAT purposes in South Africa?

Second-hand goods include previously owned fixed property not supplied by a VAT vendor. To qualify for deemed input VAT, the property must not be new, must not be subject to VAT on the seller’s side, and must be acquired for taxable enterprise use.

7. Can I claim deemed input VAT on residential property?

You can only claim deemed input VAT on residential property if it is used to make taxable supplies, such as renting it out for short-term stays (e.g., Airbnb) or converting it to commercial use. Purely residential use does not qualify.

8. What documents must I keep to claim deemed input VAT on property?

You must keep:

• A copy of the sale agreement,

• Proof of payment (bank statement or receipt),

• Declaration of use for taxable purposes, and

• Title deed or evidence of property transfer.

These are essential for SARS audits or VAT reviews.

9. Can a developer claim deemed input VAT on land purchases?

Yes, property developers may claim deemed input VAT on land bought from non-VAT vendors, provided the land will be used to make taxable supplies (e.g., sale of new residential units or commercial rental).

10. What happens if I claim deemed input VAT incorrectly?

Incorrect claims can lead to reassessments, interest, and penalties from SARS. Always ensure the property qualifies, documentation is in order, and payment has been made before claiming. It’s advisable to consult a tax professional when in doubt.

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