The VAT Act makes provision for the supply of residential fixed property by a VAT vendor (being a property developer) to be subject to VAT at the standard rate of 15%. The property developer has to charge VAT on the sale of the residential fixed property. Depending on market conditions, residential fixed property developers are at times unable to dispose of newly built residential fixed properties for extended periods of time. In order to maintain expenses incurred in developing such fixed property, such as bank loan repayments, property developers often enter into short term temporary leases for such fixed property until a buyer can be found.

While the VAT Act recognises the sale of residential fixed property by a property developer as a taxable supply, the leasing of residential fixed property is an exempt supply that would generally result in the VAT incurred being denied. The VAT Act requires a change in use adjustment when property developers temporary lease residential fixed property.

Property developers are entitled to deduct input tax on the VAT costs incurred to build residential fixed property (dwellings) for sale. However, where the property developer is unable to sell the residential fixed property and enters into a lease agreement until a buyer is found, the property developer is required to make an output tax adjustment based on the open market value of the residential fixed property when the residential fixed property is leased for the first time.

In 2010, an announcement was made in Chapter 4 of the 2010 Budget Review (“VAT and residential property developers”, page 79) to investigate and determine an equitable value and rate of claw-back for property developers as the current treatment is disproportionate to the temporary rental income. As a result, changes were made in the VAT Act by temporarily inserting section 18B, from 10 January 2012 to 1 January 2018.

Concerns have been raised with regard to the inequitable value attributed to this change in use adjustment. Further, it has come to Government’s attention that there seems to be confusion amongst taxpayers relating to whether the change in use adjustment results in the subsequent supply of the residential fixed property being permanently or temporarily removed from the VAT net. As such, some taxpayers interpret the legislation to imply that output tax is still payable when the residential fixed property is subsequently sold while others interpret it otherwise.

In order to address these concerns, it is proposed that changes be made in the VAT Act by inserting a new section that will deal with the deemed change in use adjustment when the residential fixed property is leased for the first time, including whether the deemed change in use adjustment results in the residential fixed property exiting the VAT net or not, and the subsequent deemed supply where the residential fixed property is sold. This approach is considered equitable and will serve as an anti-avoidance measure. National Treasury is of the view that the changes will not prejudice property developers whose intention with regard to the residential fixed property was always that the residential fixed property is trading stock, intended for the making of taxable supplies in the course of such property developer’s enterprise activities.

We do not believe that the proposal, set to be effective from 1 April 2022, will be promulgated in the current form and further amendments are expected.

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