Proposed amendment to the change in use adjustment from the temporary letting of residential property
The sale (supply) of a dwelling in the normal course or furtherance of a property developer’s business (VAT enterprise) usually attracts VAT at the standard rate of 15%. Due to economic circumstances a dwelling may not be sold but rather temporarily let out until it is sold. The letting of a dwelling is however, an exempt supply in terms of section 12(c)(i) of the Value-Added Tax Act, 1991 (“the VAT Act”). This means that a change in use adjustment is required to be made by the property developer when the dwelling is used to make exempt supplies (even if it’s temporarily). As a consequence, the property developer is required to make an output tax adjustment in terms of section 18 of the VAT Act.
From the 10th of January 2012 until it expired on the 31st of December 2017, section 18B of the VAT Act provided temporary relief for property developers. Section 18B provided that where a property developer “… constructed, extended or improved… [a dwelling]… for the purpose of sale and..” the dwelling was used for exempt purposes, such as for generating rental income, the ‘change’ would not be taxable and the dwelling would have been deemed to have been supplied at a later stage, within the time frame stipulated in the legislation.
As section 18B of the VAT Act is no longer in existence, where a property developer subsequently enters into an agreement to temporarily let out a dwelling “…for the first time, on or after 1 January 2018…” output tax is required to be accounted for on the change in use in accordance with section 18 of the VAT Act. The property developer must account for the output tax adjustment based on the open market value of the dwelling.
It however appears that there is concern on the value placed on the change in use adjustment amount as well as some confusion as to whether the change in use adjustment results in the subsequent supply (sale) of the dwelling being permanently or only temporarily removed from the scope of VAT.
It is proposed that changes be made to the VAT Act by the insertion of a new section, namely section 18D (per paragraph 54 of the Taxation Laws Amendment Bill) which will deal with the deemed change in use adjustment required when a dwelling is let for the first time if the dwelling remains permanently in the scope of VAT and the deemed supply made when the dwelling is subsequently sold. It is proposed that section 18D of the VAT Act will come into effect on 1 April 2022.
It is proposed that section 18D will state the following:
” …(1) For the purposes of this section 'developer' means a vendor who continuously or regularly constructs, extends or substantially improves fixed property consisting of any dwelling or continuously or regularly constructs, extends or substantially improves parts of that fixed property for the purpose of disposing of that fixed property after the construction, extension or improvement
(2) Notwithstanding the provisions of section 18(1), where goods being fixed property consisting of any dwelling—
(a) is developed by a vendor who is a developer wholly for the purpose of making taxable supplies or is held or applied for that purpose; and
(b) such fixed property is subsequently temporarily applied by that vendor for supplying accommodation in a dwelling under an agreement for the letting and hiring thereof,
the supply of such fixed property shall be deemed to have been supplied by that vendor by way of a taxable supply for a consideration as contemplated in section 10(29) and shall take place in accordance with section 9(6).
(3) In relation to the supply contemplated in subsection (2), where the vendor who is a developer subsequently supplies such fixed property by way of a sale, such supply shall, subject to subsection (4), be deemed to be a taxable supply in the course or furtherance of the vendor’s enterprise and shall take place in accordance with section 9(3)(d).
(4) Where fixed property contemplated in subsection (3) is deemed to have been supplied by that vendor, the supply shall be deemed to be made for a consideration as contemplated in section 10(2) less so much of such amount as contemplated in section 10(29).”
Section 10(29) of the VAT Act will also be inserted into the VAT Act with effect from 1 April 2022 and provides that where a dwelling is supplied in accordance with section 18D(2) above, the supply will be deemed to be made for a consideration equal to the adjusted cost to the vendor of the construction, extension or improvement of the dwelling as opposed to the lesser of adjusted cost or open market value. The adjusted cost is the cost that the property developer would have incurred to acquire the dwelling or alternatively the amount the property developer would have been entitled to claim as an input tax deduction whereas the open market value, at a high level, is the amount the dwelling could be sold at in an arm’s length transaction.
Subsequently, when the dwelling is sold (as initially intended), the property developer will be required to declare output tax on the amount of the consideration (selling price) less the adjusted cost.
See paragraph 54 of the Taxation Laws Amendment Bill, 2021 here.
Authors: Kabelo Sehlapelo, Leila Wright & Leonard Willemse
10/09/2021