VAT relief for residential property developers after expiry of section 18B

Authors: Anne Jenkinson and Annelie Giles.

The South African Revenue Service (“SARS”) issued Binding General Ruling No. 48 (“BGR 48”)
on 25 July 2018, which provides much needed clarification for
residential property developers following the recent cessation of relief
under section 18B of the Value-Added Tax Act, 1991 (the “VAT Act”).

Background

The
development and sale of residential properties generally form part of a
vendor’s VAT enterprise and are subject to VAT at 15% (14% prior to 1
April 2018). In contrast, the letting of a residential property or unit
is exempt from VAT. 

In principle, VAT incurred by a vendor on the
cost of developing residential property for sale may be claimed as an
input tax deduction (subject to the normal rules governing input tax
deductions). However, where an asset that has been acquired for taxable
purposes is applied, albeit temporarily, for exempt or other non-taxable
purposes, the vendor is required to make a “change-in-use” adjustment
by accounting for output tax on the open market value of that asset on
the date the change in use occurred (section 18(1) read with section
9(6) of the VAT Act). The output adjustment is intended to offset the
input tax deductions the vendor was entitled to claim on the development
costs while the property was developed or held for taxable purposes.

Section
18B of the VAT Act was introduced with effect from 10 January 2012. The
provision provided relief to residential property developers by
allowing them to temporarily let their residential units (held for sale)
for a period of up to 36 months before the VAT under the change in use
provisions became payable. 

Initially, the relief was due to
expire on 1 January 2015, but was subsequently extended to 1 January
2018 when it ceased to apply (“the relief period”).

Practical implications

The
36-month period previously provided under section 18B ceased to exist
on 1 January 2018 and was considered by many to immediately trigger the
change in use provisions under section 18(1) of the VAT Act. No
transitional rules existed to indicate otherwise and SARS’ VAT 409 Guide for Fixed Property and Construction
(dated 27 September 2016) indicated that “the relief [under section
18B] may continue to apply in respect of dwellings that have been
temporarily let until … the relief period expires [on 1 January 2018]”.

This
meant that, in terms of the applicable time of supply rule in section
9(6) of the VAT Act, residential property developers had an immediate
VAT liability at (the then prevailing rate of) 14% on the open market
value of all unsold residential properties temporarily let out as
dwellings as at 1 January 2018. 

Residential property developers
were advised that the output tax adjustment must be declared in their
January 2018 or February 2018 VAT returns (depending on the developer’s
VAT return filing frequency). The related VAT payment was therefore due
to SARS on or before the end of February 2018 or March 2018, as
applicable. 

Given the mammoth cash flow impact on the residential
property industry, it is unclear how many developers acted on this
interpretation and, until now, SARS was unusually quiet on the topic.

SARS BGR 48 

BGR
48 provides a general dispensation to residential property developers
who temporarily let residential properties held for sale and provides
that: 

  • developers are only required to make the section 18(1)
    change in use adjustment in the tax period during which the 36-month
    period ends, even if this period only expires after 31 December 2017
    (thus notwithstanding section 9(6) of the VAT Act and the fact that
    section 18B no longer exists); and
  • the 36-month period is
    calculated from the date that the temporary letting agreement was
    entered into for the first time from 10 January 2012 to 31 December
    2017.

BGR 48 is effective from 25 July 2018 and does not apply to dwellings that are temporarily let on or after 1 January 2018. 
Notably,
BGR 48 does not provide any guidance on how the change in the VAT rate
on 1 April 2018 from 14% to 15% could affect developers’ change in use
calculations. In addition, BGR 48 appears to be contradictory in terms
of whether the relief applies on a property-by-property or a
lease-by-lease basis.

Better late than never

Although
it would have been preferable if this ruling was published around the
time section 18B expired, it provides much needed clarity and cash flow
relief to residential property developers who temporarily let out their
trading stock, particularly to those who awaited further guidance from
SARS.

Unfortunately for those developers who promptly accounted
for the change in use VAT liability in January 2018 when section 18B
expired, there may be no opportunity to benefit from the relief now
afforded by BGR 48, which may last until 31 December 2020.

Anne Jenkinson


tax | consultant

ajenkinson@ENSafrica.com
cell: +27 83 255 6291

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Annelie Giles


tax | tax manager

agiles@ENSafrica.com
cell: +27 82 337 5650

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