Property developers acquire and develop fixed property for the purposes of making taxable supplies and are subject to value-added tax (VAT) on the sale of their properties. It sometimes occurs that due to market conditions or various other factors, developers are forced to temporarily let newly constructed units to earn rental income, whilst the properties are still held for purposes of sale in the future.
Where developers are unable to sell their units and decide to find a tenant to temporarily let the property in order to earn rental income, they were previously required to account for VAT on the market value of the property, as the change in use of the property from making taxable supplies to exempt supplies, resulted in a deemed supply. Specifically, when a developer temporarily changed the use of properties held for resale (taxable supplies) by letting them as dwellings to tenants (exempt supplies), s18(1) of the Value-Added Tax Act, No 89 of 1991 (VAT Act) provided for a change in use adjustment and the developer was obliged to pay VAT on the deemed supply of the property as at the date that it was applied for exempt purposes.
However, due to the fact that many developers found themselves in situations where they had a VAT liability and no income from an actual sale to cover the liability, s18B of the VAT Act was introduced with effect from 10 January 2012 to provide relief to developers who had temporarily let newly constructed units. The relief was in the form of a suspension of the liability to declare output tax in respect of the change in use adjustment. Developers that experienced difficulties in selling residential properties developed as trading stock were therefore allowed to temporarily rent those properties during the relief period without having to declare output tax on the adjustment relating to the change in use from the taxable to exempt supplies.
More specifically, in terms of s18B(3) of the VAT Act, residential property would be deemed to be supplied by the developer for its open market value at the earlier of the following dates:
- a period of 36 months after the conclusion of the agreement for the letting and hiring of the accommodation in the dwelling; or
- the date that the developer applies that fixed property permanently for a purpose other than that of making taxable supplies.
The relief period commenced when the property was rented for the first time after 10 January 2012 and was only available as long as the developer continued to have the intention of selling the property. Output tax would be payable on the open market value of the property as at the earlier of the cut-off date or the date that there was a permanent change of use or intention from taxable supply to non-taxable supply relating to the properties concerned (whichever date occurs first).
Section 139 of the Taxation Laws Amendment Act, No 24 of 2011 provided that the cut-off date for this relief would be 1 January 2015.
It is important to note that s111 of the Taxation Laws Amendment Act, No 43 of 2014, which was promulgated this week, has extended the cut-off date for the relief period from 1 January 2015 to 1 January 2018.
Written by Gigi Nyanin, Associate, Tax, Cliffe Dekker Hofmeyr