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Property developers will face cash flow pressure due to VAT on temporary rental of residential units
- 06 May 2020
- VAT
- Chetan Vanmali, Des Kruger & Andile Miya
Friday, 26 January 2018
Important:
This article is based on tax law for the tax year ending 28 February 2018.
Authors: Chetan Vanmali, Des Kruger & Andile Miya
The curtains have come down on section 18B of the Value-Added Tax Act, No. 89 of 1991 (VAT Act) and the resultant impact may catch a few residential property developers off-guard. The VAT relief afforded to such developers in section 18B of the VAT Act was introduced in 2011 and provided that where fixed property consisting of a "dwelling" (essentially a property used predominantly as a place of residence) was developed by a "developer" (as defined in the VAT Act) wholly for the purpose of making taxable supplies or was held or applied for that purpose, and such dwelling (eg flat/house) was subsequently temporarily applied by that developer for supplying exempt accommodation in a dwelling under an agreement for the letting and hiring thereof (ie in terms of an agreement of lease), such supply of the fixed property was deemed not to be a taxable supply in the course or furtherance of the developer's enterprise. In other words, while the developer in these circumstances would have been deemed to have made a taxable supply of the property in terms of section 18(1) because of the change in use of the property from a taxable use (for sale) to an exempt use (residential letting), the application of section 18(1) was in effect suspended (i) for a period of 36 months from the date that the property was let, (ii) until the developer applied the property for a taxable purpose (ie sale), or (iii) 1 January 2018, whichever was the earlier.
The developer would have been able to claim input tax relief on all the goods and services acquired by it to develop the property and need not have clawed back such input tax notwithstanding its wholly exempt temporary use until the happening of one of the events referred to above. The relief measure was subject to a sunset clause in section 139(2) of the Taxation Laws Amendment Act 24, 2011, ending on 1 January 2015. An amendment to the sunset clause was later introduced by section 111(1) of the Taxation Laws Amendment Act 43 of 2014, which extended the application of section 18B for an additional three years up to 1 January 2018.
The relief measure accordingly no longer applies, and in the absence of section 18B developers who previously relied on this provision not to have to make a change of use adjustment under section 18(1) will now need to make the requisite adjustment. In essence, the developer will be required to account for output tax on the market value of the property (section 10(7) of the VAT Act) that is now being used wholly for an exempt purpose (residential letting). The developer will have to account for output tax on the market value of the properties notwithstanding that the developer has not sold the units and generated the income necessary to meet its VAT liability that arises in consequence of the application of the change in use adjustment in section 18(1) of the VAT Act.
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This article first appeared on webberwentzel.com.