Budget 2021/22 – Proposed changes to Value Added Tax

Owing to the detrimental effect of the COVID-19 pandemic on business and individuals alike, it has been decided that Government will not introduce measures to increase tax revenue in the Budget. In keeping with this approach, no significant VAT amendments have been announced. We nevertheless highlight some of the more technical and minor policy amendments in this article.

Zero-rating of super fine maize meal

Section 11(1)(j) of the VAT Act provides for the zero-rating of certain foodstuffs as set out in Part B of Schedule 2 of the VAT Act.

Included in the list of zero-rated food items are certain grades of maize meal including super maize meal, special maize meal, sifted maize meal or unsifted maize meal. The grading of maize products is regulated by Agricultural Products Standards Act 119 of 1990. To align the VAT Act with the Agricultural Products Standards Act, it is proposed that Part B of Schedule 2 of the VAT Act be amended to include super fine maize meal in the list of grades of maize meal that qualify for zero rating.

Measures to address undue VAT refunds on gold

Fraudulent VAT refunds relating to gold exports have been on the increase. These malpractices generally involve the import of coins, the purchasing of zero-rated Krugerrands and illicit gold. In last years 2020 Budget Review it was noted that these schemes and malpractices had been detected and that measures would be taken to address the problem.

It has therefore been proposed that regulations providing for a domestic reverse charge mechanism for the gold industry be introduced. Under the mechanism, a vendor that acquires gold from another vendor would be required to declare and pay to SARS the VAT charged on the acquisition. It is unclear at this stage as to how the regulations will operate.

Aligning the provisions of the VAT Act with the New Insurance Act

The VAT Act provides for the VAT treatment of long term and short- term insurance. The New Insurance Act 18 of 2017 (New Insurance Act) categorises insurance policies into life policies (i.e. long-term insurance) and non-life policies (i.e. short-term insurance) and also makes provision for micro-insurance.

In order to align the provisions of the VAT Act with the New Insurance Act, it has been proposed that the VAT Act be amended to make specific provision for the VAT treatment of micro-insurance.

VAT treatment of temporary letting of residential immovable property

Property developers who develop residential properties for the purpose of sale are conducting an enterprise and the sale of each property constitutes a taxable supply by the developer. The

developers are accordingly entitled to claim input tax deductions on the costs incurred to develop such properties. Where a developer is unable to find a buyer, the developer may opt to let the residential property unit temporarily to generate some cash flow until such time as a buyer can be found.

The letting of residential property as a dwelling is exempt from VAT. Consequently, the temporary letting of residential units developed for sale is regarded to be a change in use of the unit for VAT purposes. The developer is then required to make an adjustment in terms of section 18(1) of the VAT Act as a means of repaying the VAT previously claimed on the development cost.

It was recognised by the Minister of Finance in his 2010 Budget Review that the requirement that developers must account for VAT on the open market value of the units temporarily let, is disproportionate to the exempt income received by the owners of the properties and that options should be investigated to determine a more reasonable method in dealing with the temporary letting of residential properties developed for resale.

Residential property developers were then afforded temporary relief with the introduction of section 18B of the VAT Act on 10 January 2012. In terms of section 18B, no change in use adjustment was required to be performed until the expiry of a 36-month relief period which commenced from the time the property was first let, or at the time when the property was applied permanently for letting as a dwelling as contemplated

by section 18B(3). It was stated in the Explanatory Memorandum on the Taxation Laws Amendment Bill, 2011 that section 18B was introduced as a short-term measure to the cash flow problem faced by developers, whilst seeking a more permanent solution. Notwithstanding that no permanent solution was found to the problem faced by residential property developers, the temporary

relief provided under section 18B ceased to apply on 1 January 2018. Consequently, with effect from 1 January 2018, residential property developers are once again required to perform the change in use adjustment in terms of section 18(1) on the open market value when the unit is let as a dwelling.

It is proposed that the problem facing residential property developers be considered once again and that the VAT Act be amended to resolve this matter.

Authors: Varusha Moodaley and Gerhard Badenhorst