Generally, VAT is charged at the standard rate on the supply of residential properties (the sales of apartments, flats, or houses intended for sale) by property developers. The property developer can claim input tax deductions on goods and services used for development, construction of the building, and improvement of the fixed property.
In contrast, the leasing of residential property is an exempt supply according to the VAT Act, which means that VAT cannot be claimed on any expenses relating to these developments.
As market conditions for the disposal of fixed property vary from time to time, property developers will often try to cover their costs by temporarily leasing such properties. The property is then utilized to make exempt supplies (letting and hiring), resulting in the developer needing to make output tax adjustments.
Previously, SARS provided temporary relief during periods where market conditions were adversely affected by the sales of residential properties. This relief allowed for output tax adjustments to be delayed to a later date.
The 2021 draft of the Tax Laws Amendments Bill proposes further amendments to deal with the adjustment when a residential property is leased temporarily for the first time. These amendments are to come into operation on the 1st of April 2022.
Property Developers should take note of the amendments as it may have a positive impact on the cashflow of their businesses. The amendment will also make provisions for dealing with deemed supplies when the residential property gets sold at later stage.
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Article by: Nico Grobler, Senior Tax Manager.