Cape Town – Unprepared property developers are in for a nasty shock when VAT relief designed to assist with cash flow comes to an end on the first day of 2015.
BDO SA head of Tax Ferdie Schneider warned property developers that this will have a negative impact on their cash flow and are advised to prepare accordingly.
“This VAT relief was implemented during a time of economic challenge in 2012 and applied to the temporary letting of residential property by property developers,” said Schneider.
“In terms of the VAT relief, the temporary letting of residential property by a property developer was not subject to the normal change in use adjustments required by the VAT Act where goods or services on which a VAT credit was claimed are later applied for non-taxable purposes,” said Schneider.
“The VAT relief comes to an end on 1 January 2015 and may result in significant cash flow disadvantages for property developers.”
He said a property developer may claim input VAT on qualifying expenditure incurred to develop residential property. “The subsequent sale of the property by the property developer is subject to output VAT,” he said.
“Property used for residential purposes (as a dwelling or for residential rental), is exempt for VAT purposes and prohibits the purchaser from claiming a VAT credit.
What happened before
“Prior to the introduction of the temporary relief, where a property developer opted to let unsold residential property, the VAT Act deemed a disposal to take place on commencement of such letting and output VAT had to be accounted for on the market value of the property on that date.
The temporary VAT relief was introduced in the VAT Act to counter the undesirable cash flow consequences for property developers who were already struggling in a depressed market. The VAT relief relieved property developers from the requirement to account for output VAT in these circumstances.
“However, this relief only applies until 31 December 2014, a maximum period of 36 months after the conclusion of the rental agreement or until the decision is made to permanently use the residential property for rental purposes,” he said.
Change from January 1
The change in use provisions will again start applying to all residential property that is let by property developers with effect from 1 January 2015, irrespective of whether the letting is of a temporary or permanent nature.
“This will have negative cash flow consequences for property developers who will be required to account for output VAT based on the market value of the residential property on 1 January 2015,” he said.
“Non-adherence will be subject to penalties, understatement penalties and interest.
“Property developers who are currently letting unsold residential property and who continue the letting of such residential property on or after 1 January 2015 will experience the adverse cash flow consequences on 1 January 2015.”