The letting of a residential property as a dwelling (generally referred to as the supply of residential accommodation) is an exempt supply in terms of section 12(c)(i) which means that no output VAT is levied on any rental charged. The vendor making the supply cannot however claim any input VAT on any expenditure relating to that residential property.
A “dwelling” is defined in the VAT Act and means (except where it is used in the supply of commercial accommodation) “any building, premises, structure, or any other place, or any part thereof, used predominantly as a place of residence or abode of a natural person or which is intended for use predominantly as a place of residence or abode of any natural person, including fixtures and fittings belonging thereto and enjoyed therewith”.
Property developers construct or acquire residential properties with the intention to sell them i.e. the properties constitute trading stock in their hands. From a VAT perspective, the developer (being a registered VAT vendor) will claim input VAT on all expenditure incurred relating to that property (of which the biggest would be the construction or acquisition costs) and would then levy output VAT on the subsequent sale thereof.
In some instances, a developer may temporarily let out the residential unit as a dwelling due to unfavourable economic circumstances which might be preventing the sale of the property. These could include various circumstances of which the current Covid19 pandemic could be a potential one.
Even though this decision is temporary, a change in use adjustment is triggered for VAT purposes as the supply of a dwelling for rental is an exempt supply. This means that an output tax adjustment equal to the tax fraction (15/115) multiplied by the open market value of the property is required to be made (in terms of section 18(1) of the VAT Act). This leaves property developers in a precarious position as they are required to account for output VAT on a property that hasn’t even been sold, resulting in severe cash flow implications for the relevant vendor.
Section 18B of the VAT Act was brought in from the 10th of January 2012 to the 31st of December 2017 and provided temporary respite for property developers by relieving them of the requirement to account for the change in use adjustment until a later stage (there was generally a 36-month window period of relief). Section 18B however expired and property developers were once again required to account for the change in use adjustment at the time of the change. Though Binding General Ruling 55 (BGR55) provides that the subsequent sale of the property does not trigger VAT for the property developer where a change in use adjustment was made, there has been no alternative to replace section 18B.
Per the 2021 Budget review, Treasury has suggested that it would “...investigate and determine an equitable value and rate of claw-back for developers as the current treatment is disproportionate to the exempt temporary rental income...”, meaning that rental income generated was usually considerably less than the VAT that was required to be paid to SARS for the change in use.
The 2021 Budget review proposes that the VAT Act be amended to take into account the disproportionate treatment of income earned from the rental of the dwelling compared to the VAT required to be paid on the change in use adjustment. No guidance was provided as to the manner in which the VAT Act was to be amended and to what extent which leaves the question...
Is section 18B making a comeback?
Hopefully, vendors will obtain clarity on the matter sooner rather than later.
Other noteworthy changes relate to the fuel levy and Road Accident Fund. There was an inflation-linked general fuel levy increase of 15c/litre for petrol and diesel, with the Road Accident Fund increasing above inflation by 11c/litre. The carbon tax component of the levy has increased by 1c/litre for both petrol and diesel. These increases will be implemented with effect from 7 April 2021.