ARTICLE
25 December 2007

Tax Relief Planned For Purchasers Of Rental Pool Units

A useful and convenient way of maximising one’s returns on a property purchased for temporary or holiday use is to enter it in a rental pool scheme. An operator manages the rental pool scheme, which entails renting out units which are not in use and "pooling" the rental income for distribution to the owners in the scheme, after deduction of certain expenses.
South Africa Tax

A useful and convenient way of maximising one’s returns on a property purchased for temporary or holiday use is to enter it in a rental pool scheme. An operator manages the rental pool scheme, which entails renting out units which are not in use and "pooling" the rental income for distribution to the owners in the scheme, after deduction of certain expenses. An example would be the purchase of a unit in a hotel, where the unit will be occupied by the owner for only a few days a year and will be made available for use by the hotel for the remainder of the year.

Should the owners of units elect in writing that the operator may use their units as part of the rental pool, the rental pool will be regarded as an enterprise carried on by its operator separately from the owners and may be registered for VAT.

What happens when the owner of a unit which forms part of the rental pool sells the unit? Will this disposal attract VAT?

The general principle is that when one acquires property which constitutes a taxable supply of goods under the VAT Act, the transaction is subject to VAT and exempt from transfer duty. An anomaly however exists in that, although the unit in the rental pool forms part of a VAT vendor’s (the operator’s) enterprise, the unit owner is not registered for VAT and the transaction accordingly attracts transfer duty.

The recently published Revenue Laws Amendment Bill provides a measure of relief. If the unit remains in the rental pool, the seller and purchaser are deemed to be VAT vendors for purposes of the disposal and the transaction will be VAT neutral. In order to qualify for the exemption, the purchaser must elect in writing that the unit will remain in the rental pool.

The rationale behind the suggested amendment is that, while ownership of the unit changes hands, the rental pool continues to use the unit for purposes of making taxable supplies in the course and furtherance of its enterprise, and as such the sale is subject to VAT.

While the Bill is not clear on this aspect, it would follow that when a unit is sold to a purchaser who elects to withdraw from the rental pool, the seller will be required to account for output VAT at that stage and subsequent purchasers will be liable for transfer duty.

Our advice to the seller and purchaser of a unit which forms part of a rental pool scheme, is to state specifically whether the unit does or does not form part of such a scheme at the time of the sale, and also whether the new owner intends to leave it in the rental pool after transfer.

It is not known at this stage when or in what final form the Bill will become law, but not a moment too soon for purchasers of rental pool units!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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