Value-Added Tax Alert

For South African Value-Added Tax (VAT) purposes, property developers that develop residential property units are entitled to input tax deductions in respect of the costs of such property development, on the basis that the sale of the property will eventually be a taxable supply. Circumstances arise however, where the developer is not able to find immediate buyers to whom to sell the units on completion of the development. In this scenario, developers may make the decision to temporarily let the units as residential dwellings until such time that a buyer is found.  

The letting of a residential property constitutes an exempt (i.e. non-taxable) supply for VAT purposes. When the developer changes the use of the property from one which is held to be sold (i.e. a taxable purpose) to one which is being let as a residential dwelling (i.e. an exempt, non-taxable purpose), the property developer would no longer be entitled to the input tax deductions previously claimed in respect of the development. The property developer would consequently be required to reverse the input tax previously claimed by having to declare a deemed output tax, resulting in a large immediate cash outflow to pay the resultant VAT liability. 

Section 18B relief 

To address this burden, the VAT Act1 was amended with effect from 10 January 2012 by the insertion of section 18B, which provided for temporary relief from this immediate VAT liability. Section 18B provided that developers who only temporarily let the units as residential dwellings, would not need to make the previously mentioned input tax adjustment until the earlier of such time that –  

• 36 months had passed from the date that the unit was first temporarily let as a residential dwelling; or 
• the property developer decided to permanently let the unit as a residential dwelling. 

The relief period afforded under section 18B was, from its inception, only to be a temporary relief mechanism while a permanent solution was identified, with an effective end date for the relief period of 31 December 2017. No further extensions have been granted and the relief afforded under section 18B came to an end from 1 January 2018. 

Treatment of ongoing contracts at 1 January 2018 

Given that the relief period has come to an end, a question arises as to how to treat temporary letting contracts that have been entered into before 1 January 2018 and are still ongoing after this date as the 36 month period referred to in section 18B has not expired. In this regard, we look to the guidance provided by SARS in the recently released Binding General Ruling 48 (BGR 48).  

BGR 48 stipulates that where the 36 month period referred to in section 18B ends after 31 December 2017 and the property had not been applied permanently for non-taxable purposes, the section 18B relief will still be available until the end of the 36 month period, even though this period will end after 1 January 2018. BGR 48 provides welcome clarity in this regard. 

Treatment of new contracts commencing after 1 January 2018 

The unfortunate situation arising with the termination of section 18B that developers seeking to mitigate their losses in this manner after 1 January 2018, will be forced into an immediate cash burden to settle the VAT liability arising from the aforementioned input tax adjustment. While the Tax Administration Act2 does allow for the developer to enter into instalment agreements to make payment of the VAT liability, the requirements to qualify for this option are stringent and this does not provide the same relief as afforded under section 18B of the VAT Act. 

Given that the section 18B relief was inserted as a temporary measure to address the VAT burden on developers while a permanent solution was sought, we are hopeful that it will not be long before a permanent solution is found to address this situation for the developer.

28/02/2022