VAT on Letting of residential property


vat 1If an asset is acquired for the purpose of making vatable supplies in a VAT registered enterprise, the VAT input tax paid should be able to be claimed back from SARS. When the asset is sold, a portion of the selling price must be paid to SARS as output VAT.

On the other hand, if an asset is acquired for the purpose of making VAT exempt supplies, the input tax cannot be claimed and the subsequent sale of such asset will not give rise to output VAT.

The question then arises as to what happens when there is a change of intention. If an asset is acquired to make vatable supplies in the VAT registered enterprise, one claims the input tax but, if thereafter, the asset is used for the purpose of making VAT exempt supplies, that fact has to be disclosed to SARS and output tax paid to SARS based on the open market value of such asset.

Many property developers and property dealers acquired property for the purpose of resale. The property could have been land on which a residential dwelling or block of flats was to be erected and thereafter sold. On the other hand, it could have been a straight purchase of a residence or block of flats for the purpose of resale. In both cases, input tax would be able to be claimed back from SARS. If, however, those same assets had been acquired for the purpose of letting out such residences on a long term basis, such letting would be exempt supplies and therefore the input tax paid on the acquisition of the property would not be able to be claimed back from SARS.

Many people in such positions were caught when there was a downturn in the economy. Property acquired for the purpose of resale was not able to be sold and the property owners decided to let out the residential properties on leases ranging from 1 to 3 years but with the clear intention that, as soon as the market improved, they would sell the property. If there was a permanent change in use from selling to long term letting, output tax was payable on the open market value at the time of the change of intention.

Approaches were made to Government because many such property owners did not have the cash flow to pay back the input tax they had previously claimed.

SARS therefore introduced a concession and said that, in such circumstances where a residential property which was available for sale was temporarily let for residential purposes, the VAT did not have to be paid back to SARS for a period of relief of 36 months but not later than 1 January 2015. The idea was that, within that period, the property would be sold as was the original intention.

Representations have more recently been made to Government to explain that, because the economy is still in a downturn, it is still not possible to sell the properties in question and SARS has extended the concession by a further
3 year relief period which expires on 1 January 2018.

It is essential to realise that, whether intended or not, the 36 month rule is still applicable. In other words, although the period of relief has been extended for 3 years, in respect of each property, if the property has not been sold within 36 months from the time when the residential letting commenced, VAT would have to be paid to SARS on the open market value.

Horwath Taxation (Cape) (Pty) Limited
VAT: Section 18B