Dear Reader

It’s well-known that the recent downturn in the economy has had a negative effect on the property industry, leaving many developers and speculators with surplus stock and costly overheads. In desperation, you may have opted to rent out your unit for a short term in the hope of at least recovering some of your costs. If you have, did you know this could be a very expensive option from a Vat point of view?

SARS allows a Vat claim if you charge Vat when you eventually sell your property

As a property developer or speculator, you would no doubt have claimed Vat back on the cost of the land and, wherever possible, the building costs of developing the property. If you bought a property with the goal of reselling it at a profit, you may have claimed input tax on the purchase.

SARS would’ve allowed the Vat claim on the basis that you’ll charge Vat when you eventually sell the property. However, you can’t charge Vat when you rent out a residential unit as this type of transaction falls is an exempt supply. Therefore, when you rent out one or more of these residential units, you’re regarded as having changed your intention with regard to the property. SARS is very clear that they want you to pay some or all of the Vat back in these circumstances, even though your ultimate intention is to still sell the property.

In the recently-released Guide for Fixed Property and Construction (VAT 409), SARS reiterates the position as stated in the March 2000 issue of VAT News:

“Where a vendor acquires a property for resale or development, he may claim an input tax deduction in respect of the Vat on his costs. If, however, he lets the property for residential purposes until he is able to sell it, he is then making an exempt supply and must declare output tax based on the open market value of the residence as at the date on which the property is let.

Example

Mr Profile builds 10 townhouses. He sells eight for R228 000 each, but as he hasn’t been able to sell two of the units, he lets them until he finds buyers. During the tax period in which he lets the townhouses he must declare R28 000 output tax on each of the units let. When he later sells the units he must levy Vat on the sale, but can deduct the Vat he declared and paid back at the time the units were let.

Concessions were made to property developers and certain other vendors where residences were let on short-term leases. These concessions are hereby withdrawn with effect from 1 July 2000 and these vendors must account for output tax on residential units let in these circumstances during the tax period into which this date falls.”

Warning! This isn’t a fail-safe way to recover costs

Clearly, there’s no mercy for the cash-strapped developer who’s merely trying to recover some of his expenses whilst he waits for the property market to pick up.

The Vat you must pay is based on the open market value of your property when you rent it out and you have to raise the Vat in the tax period in which you rent the property for the first time.

Until next time,

Nothando Hlatshwayo

Managing Editor
The Practical Vat Handbook