Most Read Contributor in South Africa, December 2016
The Draft Taxation Laws Amendment Bill, 2011 ("the
TLAB") proposes Value-Added Tax ("VAT") relief for
developers renting properties prior to the sale thereof. As the law
currently stands, if a VAT registered developer's principal
intention has been to acquire, renovate or construct and sell fixed
property (and input tax incurred has been deducted) but
subsequently changes the use of the fixed property, the vendor is
obliged to make a so-called "change in use adjustment".
The change in use refers to the property being used for non-taxable
purposes (such as renting the residential property) and the
adjustment applies even if the rentals are only temporary. In terms
of this adjustment, the developer has to account for output tax on
the market value as the property originally acquired or constructed
for the making of taxable supplies (i.e. the sale thereof in the
course of his enterprise) is now used for a purpose other than
rendering a taxable supply (i.e. the exempt supply of a dwelling
under an agreement for the letting and hiring thereof).
It was acknowledged by the South African Revenue Service
("SARS") and National Treasury in the Explanatory
Memorandum on the Draft TLAB, 2011 that this change in use creates
a major problem for developers in economic distress because it
places the developer in the unenviable position of being forced to
pay VAT on a deemed supply. Due to current market conditions,
developers often rent properties prior to the sale thereof.
However, in terms of the TLAB, notwithstanding the change in use
adjustments, where fixed property is developed by a VAT vendor who
is a developer in the course of making taxable supplies and that
fixed property is subsequently temporarily applied by that VAT
vendor for supplying residential accommodation, the supply of such
fixed property shall be deemed not to be a taxable supply in the
course or furtherance of that vendor's enterprise. There is,
accordingly, no need for a change in use adjustment under these
circumstances. However, if the vendor rents the residential fixed
property beyond a 36-month period or applies that fixed property
permanently for a purpose other than that of making taxable
supplies, the change in use adjustment will apply.
It is proposed that a "developer" for these purposes
means a person who constructs, extends or improves a building or
part of a building for the sole purpose of disposing of that
building or part of a building after the construction, extension or
improvement. Accordingly, a "developer" will not include
a person acquiring a property to resell should this person not
"construct, extend or improve a building or part of a
building". Public comments on the TLAB proposed that the
relief should also be extended to cover speculators and financiers
of fixed property as speculators are also in the situation of being
forced to rent unsold property. However, this comment was not
accepted by National Treasury and SARS as the relief was designed
to specifically aid developers from going into bankruptcy based on
the VAT rules pertaining to the renting of residential fixed
property. These developers are being caught with a large-scale set
of properties built simultaneously. On the other hand, speculators
acquire and sell fixed property speculatively over time, thereby
having much more control over their cash flows. According to
National Treasury and SARS, speculators have also been a common
subject of VAT compliance concern and a special exemption will
undoubtedly add to these concerns.
The proposed amendment will apply to all supplies of fixed
property (i.e. change in use) made by fixed property developers on
or after the date of promulgation of the TLAB, but before 1 January
2015. Public comments proposed that the relief for developers
should apply retrospectively as the problem for developers began in
2008 at the inception of the economic crisis and the amendment
should recognise this reality. The response from National Treasury
and SARS to such public comments was, however, that the legislation
will only cater for prospective relief. It was submitted that
taxpayers must accept that their actions will be subject to the law
in existence at the time of their actions. However, SARS submitted
that it will deal with each issue administratively (on a developer
by developer basis), recognising the issues of economic hardship.
It is not known exactly what this undertaking means and it will,
furthermore, not be enforceable against SARS.
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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