SA Property Tax - VAT Relief Interim for Property Developers
The VAT rules for developers temporarily renting residential properties are challenging from a practical and a legal perspective.
The issue in question revolves around the intention of the developer to sell the property or to now rent it. In the past if the developer rented the developed property instead of selling it, it was seen as a change in intention and the input VAT that was previously claimed by the developer is then payable to the Receiver of Revenue. This charge would then undermine the feasibility of the project.
With the impact of the ongoing economic global uncertainty to local residential property it was proposed that developers that rent residential fixed properties be granted temporary relief. Developers will be given a 36-month grace period before selling fixed properties. The 36-month period will commence when the fixed property is rented for the first time. If the vendor rents the residential fixed property beyond the permissible 36-month period, the deemed change-in-use charge will apply. This deemed charge will trigger a deemed supply at market value of the property as of the 36 month cut-off date.
Property developers will be covered by this proposed interim relief provision for as long as the intention to sell the fixed property remains intact. With the proposed interim relief provision the developer will be adjudged in accordance to the following situations. If a vendor (property developer) buys a property then restores the property to a good condition and after a few months is not able to sell and therefore rents the property to cover the interest costs for financing the property. The Vendor will be granted relief if after the renting period the vendor is still committed to selling the property if the opportunity arises. If the vendor decides that the renting of the property is ultimately preferred the interim relief will fall away and the vendor will not qualify.
With VAT Act Section 17(1) with the section 1 definition of ‘input tax’, specifying that input tax can only be deducted if the intention or purpose is to make taxable supplies. VAT, unlike the income tax, does not hinge solely on an ‘intention’, as ‘application’ seems to be an interdependent but intervening variable. Stated differently, although intention is important for VAT purposes, intention goes hand-in-hand with application or use. As a result, a change in application, brings about a supply by the vendor (refer to section 18(1) of the VAT Act).
What impact this will have on developers is yet to be seen.
Source: Jacques Erasmus Engel & Volkers
Courtesy: The EAAB - Estate Agency Affairs Board
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