[FAQ] The VAT implication of commercial and residential property

[FAQ] The VAT implication of commercial and residential property

• 02 December 2020
• Christo Theron

Background

A company develops buildings with residential units as well as workspace, coffee shops etc. All in one building. This is called living spaces. Tenants do a subscription ranging from days to months for the term of the subscription. The subscription allows the subscribers to make use of these "spaces" all across the country as they travel for work or leisure. They can use the available flats, workspaces as well as all amenities available per block developed.

Is this residential or commercial accommodation? As the model is different from the traditional rental business it is unclear as to how the company should treat the VAT.

Answer

The VAT Act

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.

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 used 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.

Application of the principles

Careful consideration should be given to the nature of the “subscriptions” payable by users of the facilities.

From the information supplied it is unlikely to constitute the supply of a dwelling under an agreement for the letting or hiring thereof, and accordingly unlikely to constitute exempt supplies of accommodation in a dwelling.

Having concluded the above, the developments probably constitute the supply of partially commercial accommodation (as defined in the VAT Act) and partially normal rentals of other facilities (e.g. office space).

The final VAT treatment will depend on what is actually made available to the users. You should be able to establish this by having regard to the use agreements linked to the subscription agreements.

Webinar Commentary

Further webinar commentary on 2020 VAT Refresher can be accessed here.

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