A property developer usually holds residential properties as trading stock and therefore accounts for VAT at a rate of 14% on the sale of the developed units. The developer would also be allowed to claim input VAT credits for the land, building costs and other expenses incurred making taxable supplies. However when economic conditions get tough, the developer may be unable to sell the properties and be forced to lease them to cover his costs.
Letting of a residential unit is an exempt supply for VAT purposes. This means that the input VAT credits, such as the building costs, cannot be deducted. SARS has always taken the position that the temporary letting of residential units by a developer constitutes a “change of use” and VAT then becomes payable on the open market value of the unit at the date the property is let. When the unit is eventually sold the developer can then deduct the VAT he paid over at the time the unit was let. But in the meantime payment of the VAT adversely affects the developer’s cash flow, as the output VAT payable is likely to be more than the input VAT credits claimed when constructing the unit.
In January 2012 temporary relief was given to developers in Section 18B of the Value Added Tax Act, 1991 (“the Act”). This allowed developers to let residential units for a period of 36 months from the date of concluding a lease agreement, without incurring a VAT liability. However, this relief only applies to developers who intend to sell the properties and a developer cannot rely on Section 18B if it is his intention to let the unit on a permanent basis. Furthermore, if the developer rents a unit for longer than 36 months he will be deemed to have changed his use and will become liable for the VAT.
The temporary relief provided to developers will come to an end on the 1st January 2015 when Section 18B will cease to apply. Presumably the legislators took the view that the economy would have recovered sufficiently by 2015 so that the relief would no longer be required by developers. It is possible that this date could be extend by legislation but there is nothing in the first batch of the 2014 draft taxation laws that suggests that this will happen.
Garlicke & Bousfield Inc
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