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Residential property developers face cash flow crunch due to VAT on temporary letting of units
- 06 May 2020
- VAT
- Gerhard Badenhorst
Monday, 22 January 2018
Important:
This article is based on tax law for the tax year ending 28 February 2018.
Author: Gerhard Badenhorst
Many residential property developers will kick off 2018 with a major cash flow challenge as a result of a substantial value added tax (VAT) liability which they may face in respect of the temporary letting of residential units which have been developed for resale.
When a property developer develops residential properties for resale, the developer is entitled to deduct the VAT incurred on the development cost as input tax. The developer is then obliged to levy VAT on the sales consideration when the residential units are sold. If the developer experiences difficulty in finding buyers for the units due to adverse market or economic conditions, the developer may instead let them until the property market improves. However, the moment the developer lets the unit, VAT becomes payable on the open market value of the unit at that time. This is because the South African Revenue Service (SARS) is of the view that the temporary letting of residential units developed for resale comprises a ‘change in use’ from making taxable supplies to exempt supplies, since the letting of residential accommodation is exempt from VAT.
The Minister of Finance at the time, Mr Pravin Gordhan, stated in his budget review on 17 February 2010 that this situation is disproportionate to the exempt income received by the owners of the properties and that options will have to be investigated to determine a more reasonable method in dealing with the temporary letting of residential properties developed for resale.
Section 18B of the Value-Added Tax Act, No 89 of 1991 (VAT Act) was introduced with effect from 10 January 2012 under which residential property developers enjoyed temporary relief from the payment of VAT. Section 18B allowed developers to temporarily let the residential units for a period of up to 36 months before the VAT thereon became payable. The temporary relief was initially provided until 1 January 2015 but was subsequently extended to 1 January 2018. The relief did not apply where the property was let beyond a 36-month period, or when the property was applied permanently for letting as a dwelling or for purposes other than making taxable supplies.
The temporary relief provided for under s18B has not been extended any further and ceased to apply on 1 January 2018.
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This article first appeared on cliffedekkerhofmeyr.com.