Legal Articles

VAT Regulations for the Rental of Residential Units Intended for Resale

Property developers are now faced with additional VAT on residential property rentals which were initially developed for resale.

Input VAT on Residential Property

The value added tax charged on the cost of development is recognised as input tax. This applies to cases where the developer builds properties for the initial purpose of resale.

In such a case, the developer is required to charge VAT on the sale of the newly developed residential units.

However, due to the poor economic status of South Africa over the past 6 years, developers have discovered that sourcing profitable purchasers for their units has become increasingly challenging.

Therefore, in the hope for an eventual market turn around, developers are left with no other choice but to rent their units out.

Should there be a turn around in the market, they will then be able to sell their units in an attempt to recover their investment and make a profit on each sale.

VAT on Residential Property Rentals

VAT becomes payable on the open market value of the unit as soon as a developer begins to let a residential property or unit that was originally intended for resale.

Yet, according to SARS, the temporary letting of resale properties changes such properties from being defined as “income generating” to “tax exempt supplies” due to rental units being exempt from VAT in normal circumstances.

The former Minister of Finance, Pravin Gordhan suggested in 2010 that more reasonable methods of taxation be discussed.

Consequently, in January 2012, Section 18B of the Value Added Tax Act, No 89 of 1991 was put into effect and provided the following:

• Developers to temporarily rent their residential units for a period of 36 months. After 36 months have passed, the developer will then be required to pay VAT on such properties.
• This temporary relief was applicable until 1 January 2018
• The temporary relief did not apply to any property rented for a period longer than 36 months, or if the property was intended for permanent letting as a dwelling or for any other purpose other than making taxable supplies

Unfortunately, this temporary relief was not extended beyond 1 January 2018 and no longer applies.

VAT on Renting Residential Properties

In 2011, it was recognised in the Explanatory Memorandum on the Taxation Laws Amendment Bill that the VAT charges incurred on the temporary rental of residential units had major financial implications for the developers and could potentially lead some developers into bankruptcy.

Section 18B of the VAT Act was introduced as a temporary solution to address the cash flow challenge faced by developers.

Additionally, the idea was that a permanent and more reasonable solution be developed during the 6-year period when section 18B was still applicable.

However, there were no further developments during this time which means that VAT laws that were applicable before the temporary relief was provided by section 18B were automatically placed back into effect.

Payment of VAT in Instalments

Should property developers find themselves in a tight cash flow situation as a result of section 18B no longer applying, the Tax Administration Act (TAA), No 28 of 2011 allows them to request permission from SARS to pay the outstanding VAT in instalments over an agreed period.

According to section 168 of the TAA, developers must be able to provide adequate evidence which proves that they do in fact have a cash flow problem and that they will be unable to pay the VAT amount in one single payment.

Furthermore, the developer must also be able to prove that there is no chance that their financial situation will improve substantially in the near future.

Lastly, SARS may request that the developer provides suitable security before agreeing to receiving the payment of VAT in instalments.

VAT on Sale of Property South Africa

In the case where a developer has paid VAT while a unit intended for resale was temporarily let and the developer manages to sell the unit, then the amount of VAT payable is on the total sales consideration.

In such a situation, developers may then deduct the total amount of VAT which has already been paid.

Similar VAT related issues were addressed and successfully resolved by Australian as well as New Zealand tax authorities.

These solutions can provide South African Authorities with the guidance they need to address the VAT issues faced by property developers in the country.

Van Deventers & Van Deventers Incorporated – Property Attorneys in Johannesburg and Cape Town

For further information regarding VAT on residential property rentals in South Africa or to learn more about our legal services, contact our attorneys.

We are experts in property law and are ready to provide property developers of South Africa with expert legal guidance around VAT law in SA.