Section 18B of the Value Added Tax Act No. 89 of 1991 (the VAT Act) was introduced in 2011 to provide some relief for property developers who temporarily rent out residential property. This section however expired on 1 January 2018.
To recap the basics: the sale of fixed property, whether residential or commercial, is subject to VAT at the standard rate of 14% if the seller is registered for VAT. On the other hand, the letting of residential property is an exempt supply therefore no VAT is levied on the rental charge. Furthermore, input VAT paid may only be claimed insofar it relates to the making of taxable supplies by the vendor. As the letting of residential property is not a taxable supply, input VAT incurred by a vendor relating to such property may not be claimed back from SARS. This posed a particular problem for property developers, as they generally purchase or develop property with the intention to sell it once completed. The developer will therefore claim input VAT on the developing costs incurred. The problem arose when the developer then could not sell the property at a viable price to due market conditions, and therefore opted to temporarily rent it out in order to make ends meet. This change in intention (i.e. from selling to letting) would then, in the absence of section 18B, require the developer to make a change in use adjustment and account for output VAT. Such output VAT would be calculated as 14% of the open market value of the property on the date the change in use occurs. This placed the developer in an unenviable position of being forced to pay VAT on a deemed supply, with no corresponding cash inflow to fund such VAT.
Section 18B was therefore inserted in 2011 as a temporary relief measure. It provided relief for up to 36 months where a developer temporarily rents out a property that was originally intended for sale. The rationale was that the 36 month grace period provide the developer with enough time to find a suitable buyer, while not being forced to pay output VAT in the meantime. Section 18B was effective from 10 January 2012 and expired on 1 January 2018.
At the time of introducing section 18B, Treasury noted that it was only a short-term solution to the problem faced by developers, and that a permanent solution will be put in place once all issues have been fully evaluated.1 However we have not seen any proposals, nor has the Taxation Laws Amendment Bill of 2017 extended the application of section 18B.
Therefore currently property developers are once again facing the same problem it did prior to the insertion of section 18B – a property that was developed with the intention to sell, but is rented out after 1 January 2018 will lead to an immediate VAT liability in the month the property is first rented out.
1 Explanatory Memorandum on the Taxation Laws Amendment Bill, 2011