Temporary relief to property developers allowing them to let residential property without incurring a VAT liability has further been extended for a period of three years, according to new tax legislation. Since 10 January 2012 property developers have enjoyed temporary tax relief under the provisions 18B of the Value-Added Tax Act. The current provisions of the Value-Added Tax Act (‘VAT Act’) have enabled property developers to let residential units for a period of 36 months while holding stock in trade from the date of conclusion of a lease agreement, without having to account for VAT.
“The temporary relief was intended to come to an end on 1 January 2015 when section 18B would cease to apply,” says Charles de Wet, PwC Head of Indirect Tax for Africa. The section was intended to provide relief to those developers who were unable to sell properties in the wake of the recent economic uncertainty and were compelled to let those properties to recoup the costs.
“The Taxation Laws Amendment Act, 2014 assists taxpayers in that it proposes that the relief afforded under section 18B be extended until 1 January 2018,” adds de Wet.
Generally residential properties are held by developers as stock in track and therefore liable for VAT at the rate of 14% on the sale of the units. The developer will also be allowed to claim input VAT credits for the land, building costs and respective fees that were incurred in the course of making taxable supplies.
For VAT purposes, the letting of a residential unit is considered an exempt supply. Accordingly, input VAT credits, such as the building costs, cannot be deducted. The South African Revenue Service (SARS) takes the view that the temporary letting of residential units amounts to a ’change in use’ and the property developer will need to account for output VAT on the full open market value of the unit from the date the lease agreement is entered into. When the unit is finally sold, the developer can then deduct the VAT that was paid over the period the unit was let.
In January 2012 temporary relief was given to developers in terms of section 18B of the VAT Act. “However, this relief only applies to property developers who intend to sell the properties, in other words the units form part of the property developer’s trading stock, and, to the extent that a property developer decides to rather let out the residential units on a permanent basis and to no longer sell the unit – they would be precluded from relying on section 18B of the VAT Act,” says de Wet.
“Furthermore, if the property developer rents a unit for period exceeding the 36 months provided for, the property developer will be deemed to have changed his use and will become liable for the VAT,” adds de Wet.
A property developer may elect to temporarily let out a unit to earn a rental income for the purpose of covering the cost of holding such a property until a sale can take place, while the developer’s intention is still ultimately to dispose of the property.
A property developer may also decide to retain the property and rent it out on a permanent basis. In such an event, the property developer’s activities will have changed to that of making exempt supplies only, and the developer is not making any more taxable supplies from the property. Any subsequent disposal of the property is no longer subject to VAT, because a taxable supply has not been made. Transfer duty will apply to such a transaction.
To qualify for the extended relief, the rental contract must be entered into after 1 January 2012, but before 1 January 2018. The special relief does not apply if a property developer changes their intention and decides to retain the unit to earn rental income for an indefinite period, and no longer wishes to dispose of the unit.
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