SA residential property developers who lease units before intended use can be pleased with legislation that provides temporary relief from VAT.
As an example to illustrate the effect of the current legislation, Honeyball says if the market value of the unit is R2 million and the developer rents the property out on a short term basis, he is required to pay VAT output tax of R280 000 to the South African Revenue Services (Sars) once the tenant occupies the property.
This change is communicated by section 18A of the VAT Act as inserted by the Taxation Laws Amendment Bill of 2011, which allows for residential property developers to lease their units without being liable for VAT payments.
According to David Honeyball, tax partner at Grant Thornton Cape, residential property developers are subject to VAT on the sale of their units.
He explains that where developers are unable to sell their units and decide to find a tenant to rent the property in order to defray costs, currently VAT legislation provides that they are required to account for VAT output tax on the market value of the property as there is a change in use of the property.
“This has happened increasingly recently as the current economic environment has hurt the property market severely and many residential property developers have been forced to rent out some of their units.”
As an example to illustrate the effect of the current legislation, Honeyball says if the market value of the unit is R2 million and the developer rents the property out on a short term basis, he is required to pay VAT output tax of R280 000 to the South African Revenue Services (Sars) once the tenant occupies the property.
This has adverse cash flow consequences for the developer who now finds himself in a situation where he has a VAT liability and no cash flow from the transaction to cover the liability, he says.
“In many cases residential developers have been adversely affected by the economy and are struggling to keep afloat and the VAT liability may well be the cause of their insolvency.”
Sars has acknowledged this as an issue and indicate in the Explanatory Memorandum to the Taxation Laws Amendment Bill of 2011 that the VAT system may force developers into insolvency.
“Sars have introduced temporary relief to developers that rent residential fixed properties before intended sale as per the example.”
Developers will gain a maximum grace period of 36 months to rent the property before sale. This 36 month period commences when the fixed property is rented for the first time.
If the developer rents the property for a period longer than 36 months then the deemed change in use will trigger the VAT output tax on the market value of the property as at the 36 month cut off date, he says.
“This relief is only applicable to property developers and is only available while they still have the intention of selling the property.”
If the developer decides to rent out the unit on a permanent basis (even within the 36 month period), then VAT output tax will apply as at the market value of the change of intention.
The amendment is effective from the promulgation date of the Act (estimated to be 25 October 2011) and ceases to apply on 1 January 2015.
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