VAT's going on with property?
After my article on commercial property purchased as a going concern a couple of weeks ago, questions have been pouring in concerning the VAT aspects of fixed property. "What are the VAT implications of property?" goes the normal type of question.
The glib answer, however, is: "It depends." It depends on whether you are managing property as an agent, or dealing in property as a principal. Investing in property may, under certain circumstances, give rise to different VAT consequences than speculation activities. Also, the VAT treatment of rental income differs between residential and commercial property rentals.
Based on the assumption that you are registered with the South African Revenue Service (Sars) as a VAT vendor, here is a quick summary of the different types of property transaction, together with their respective VAT implications.
Renting out residential accommodation is what is known as an "exempt supply", which means that such rentals do not attract VAT. This applies whether or not you are a vendor for VAT purposes.
However, the commission charged by the agent managing the property is not part of the rent, even if such fee is deducted from any rent collected - it is a service rendered, and is therefore subject to VAT at the standard rate. This means that you must check your contract with your managing agent carefully, ensuring whether the percentage commission charged is inclusive of VAT or not.
In the case of commercial property (shops, factories, offices, etc), the supply thereof on a rental basis is not exempt, and accordingly VAT at 14% must be charged. If you are the lessee of such a commercial premises, and are registered as a vendor, the VAT paid can be claimed as an input credit, provided that you are not using the premises solely for the purposes of making exempt supplies.
Likewise, "commercial accommodation" (ie, hotels, holiday flats, bed-and-breakfasts, etc) will be subject to VAT at the standard rate, as will be the cost of any ancillary services such as cleaning, maintenance, use of telephones, television (including satellite services), meals, and laundry. In cases where the accommodation is to be for an unbroken period exceeding 28 days, the effective VAT rate is 8.4% (being 60% of the standard rate).
The requirement to levy VAT includes lodging in a hospice, home for the aged, and facilities caring for the mentally or physically handicapped, unless such lodgings are provided by a non-profit organisation.
Purchase of property
If you purchase a property from a developer that is registered for VAT, such developer is required to charge VAT on the purchase price. A registered vendor whose primary business is the purchase and sale of property will also be obliged to charge VAT on the purchase price. In practice, however, the price quoted on the developer's advertising material is usually inclusive of VAT (but read the fine print carefully, since this is not always the case!)
Furthermore, if you have purchased a property where the purchase price includes VAT, the transaction is not subject to transfer duty.
In cases where the purchaser of a second-hand property is a VAT vendor, the property is to be used for making taxable supplies (whether rental or resale), and the seller is not a VAT vendor, the purchaser may claim a deemed input tax based on 14/114 of the purchase price. However, such deemed input tax is limited to any transfer duty paid, or where the property in question comprises a share in a share block company, the deemed input tax is limited to any stamp duty paid.
Commissions charged for both rental and sale of properties, are subject to VAT irrespective of the nature of the property in question (residential, commercial, etc). This is because such commissions are earned for the rendering of a service, which is subject to VAT at the standard rate.
However, if the agent is buying and selling property as a principal (ie, for its own account and benefit), then any consideration for the sale of such property will be subject to VAT if the agent is a registered vendor. In such case, any VAT paid by the agent for such property will be claimable as an input credit, provided that such property is to be used for the making of taxable supplies (whether rental or resale).
Body corporate levies
The supply of services by a body corporate (which, for purposes of this paragraph, includes share block companies and housing development schemes for aged persons) to its members is an exempt service, and accordingly levies charged do not include VAT. However, in practice members are bearing the cost of VAT charged to the body corporate itself, since such VAT is not claimable and the cost thereof would be recovered as part of the levies.
Write to Steven Jones: firstname.lastname@example.org
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