VAT on commercial and residential accommodation: Lodging, leasing or renting?

VAT on commercial and residential accommodation: Lodging, leasing or renting?

• 25 September 2018
• VAT
• Gerhard Badenhorst

Important:

This article is based on tax law for the tax year ending 28 February 2019.

Author: Gerhard Badenhorst (Cliffe Dekker Hofmeyr)

The Value-Added Tax Act, No 89 of 1991 (VAT Act) contemplates the supply of two types of residential accommodation, ie the supply of “commercial accommodation” and “dwellings”. The distinction between commercial accommodation and a dwelling is essential, because the supply of commercial accommodation is subject to VAT at the standard rate, whereas the letting and hiring of a dwelling is exempt from VAT. In addition, where commercial accommodation is supplied together with domestic goods or services (furniture, water, electricity cleaning, maintenance, etc.) for periods longer than 28 days for an all-inclusive charge, VAT is only payable on 60% of such charge. It is unfortunately not always clear as to whether the accommodation provided comprises “commercial accommodation” or “dwellings”.

The definition of “commercial accommodation” in the VAT Act contemplates the supply of lodging, or board and lodging, together with domestic goods or services in any residential establishment which is regularly and systematically supplied, but excludes a “dwelling” supplied in terms of an agreement for the letting and hiring thereof.

A “dwelling” on the other hand is defined as any building or structure used predominantly as a place of residence or abode of a natural person, including fixtures and fittings, but it excludes the supply of “commercial accommodation”.

It is not always clear as to whether the supply of accommodation in a residential establishment comprises “commercial accommodation”, and the South African Revenue Service (SARS) also refuses to issue rulings to confirm whether or not a supply of accommodation comprises “commercial accommodation”. The difficulty in determining what comprises “commercial accommodation” has been highlighted in the case of Respublica (Pty) Ltd (Respublica). Respublica owned a residential property which comprised of a number of furnished units specifically developed for student accommodation. Respublica entered into a five-year lease with a university for the sole purpose of accommodating the university’s students. Respublica also supplied domestic goods and services, ie water, electricity, maintenance, cleaning and laundry services. The university paid an all-inclusive rental per bed per month. The students were required to vacate the units during university holiday periods.

Respublica approached the High Court for a declaratory order after it could not reach consensus with SARS as to whether the accommodation provided under these terms comprised “commercial accommodation”, subject to VAT at 60% of the all-inclusive rental. It was accepted that the accommodation provided did not comprise “dwellings”, and it was common cause that Respublica provided domestic goods and services.

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This article first appeared on cliffedekkerhofmeyr.com.

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