The VAT increase from 14% to 15% as of 1 April 2018 has led some to question how it will affect fixed property sales that are in progress or under negotiation.
Specifically speaking, how the time of supply rule will be applied to the sale of fixed property.
For instance, a sales agreement was made before 1 April, but the actual payment for and transfer of the fixed property only takes place on 1 April 2018. In this case, will the old VAT rate or the new one be applied?
It mentions in the VAT Act that a fixed property is supplied under a sale which occured at the earlier date between the transfer of the property or when a payment for the sale price is made by the buyer.
Thus so long as one or the other takes place before 1 April 2018 then the old VAT rate will apply.
Let’s say that a property developer who is VAT-registered enters into a sales agreement on 1 January 2018 for a unit on his new development. The agreed to amount for the sale of the unit is R900,000 including VAT.
If the sales agreement is signed on 1 January 2018 yet the payment for the purchase price and the registration of transfer of the property at the Deeds Office only takes place after 1 April 2018 then, in terms of the fixed property time of supply rules, the transaction will be subject to the 15% VAT rate.
This would mean that the seller will receive less from the sale, or the purchaser would end up having to pay more on top of the purchase price.
It is obvious to see how this could become a problem for many involved in a sales agreement.
However, thanks to section section 67A(4) of the VAT Act buyers and sellers are provided with relief.
Being subject to certain conditions, the section states that the VAT rate which was in applicable on the date when a written sales agreement is entered into is the rate which will remain effective throughout the transaction.
In order for these conditions to be met, the sale needs to be for a residential property, and not a commercial property. The purchase price needs to have been determined and stated in the written agreement for the date when the VAT increase is to take place.
The agreement needs to have been signed all relevant parties before the date of increase. And the supply of the property should take place on or after the date of the VAT increase.
Using the above example as reference, since the sales agreement was entered into on 1 January 2018, the old VAT rate of 14% will apply.
Contact us for legal advice on your property transaction VAT obligations
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