Relevant Act and Sections: VALUE-ADDED TAX ACT 89 OF 1991 and Sections 18D, 18(1), 16(3)(o), 10(29), and 9(13)
SARS published a new general binding ruling in June 2023 discussing the VAT treatment of newly built residential dwellings that have been developed and held for sale under a taxable supply by developers but are simultaneously temporarily applied to invoke exempt supplies of residential accommodation in a dwelling.
Property developers have submitted over the years that they experience certain difficulties in complying with the VAT law when they develop residential properties for sale in difficult economic times. The difficulty arises in that there are high holding costs associated with the development, marketing, and sale of properties. As a result, developers often let newly developed dwellings out as residential accommodations to cover some of the holding costs whilst the properties are marketed for sale. When this occurs, section 18(1) will be triggered at the time that any property is applied to make exempt supplies as contemplated in section 12(c) (albeit temporarily). As a result, the developer will be required to declare output tax on the open market value of the property at the time of such a change in application.
2012 status
In order to provide some relief in this regard, the VAT Act was amended with effect from 10 January 2012 by the insertion of a relief provision in the form of section 18B.
Under section 18B, the liability of the developer to declare output tax on the change in use adjustment that would have otherwise been required under section 18(1) was suspended for a maximum period of 36 months. Under section 18B(3), the developer would only have to declare output tax at a later date, being the earlier of the date that the temporary letting period had been exceeded, or the property was permanently applied for a non-taxable purpose. Developers that experienced such difficulties were previously allowed to temporarily let the affected properties for a period of up to 36 months during the relief period that commenced on 10 January 2012 and ceased to apply on 1 January 2018.
2022 status
Section 18B was a temporary measure with a limited lifespan, but a more permanent relief mechanism in the form of section 18D (together with associated provisions, being sections 9(13), 10(29), and 16(3)(o)) has now been introduced with effect from 1 April 2022 to deal with temporary letting by developers. Whilst there are some similarities between section 18B and section 18D, there are also some important differences to note:
- the term “developer” was defined in both sections 18B and 18D, but “temporarily applied” has only been defined in section 18D;
- the temporary letting period has been reduced from a maximum of 36 months in section 18B, to a maximum of 12 months under section 18D;
- section 18D requires that the adjustment is made at the time the property is temporarily applied for letting, instead of only at the end of the relief period as was the case under section 18B; and
- the consideration used for calculating the required output tax adjustment under section 18D is an amount equal to the adjusted cost to the vendor of the construction, extension, or improvement to the fixed property rather than the open market value of the entire fixed property concerned as would have been the case under section 18B.
Section 18D applies to any newly developed units of fixed property that is “temporarily applied” for exempt supplies as contemplated in section 12(c) for the first time on or after 1 April 2022. Section 18D(1) defines the terms “developer” and “temporarily applied” for the purposes of section 18D. The definition of “developer” as defined in section 18D(1)(a) is a replication of the definition that was previously in section 18B(1) and refers to a person who develops fixed property for sale in the course or furtherance of an enterprise.
The term “temporarily applied” as defined in section 18D(1)(b) refers, in short, to any leasing of newly developed dwelling units by the developer for use as residential accommodation for a period of 12 months or less whilst the property continues to be marketed for sale. The term “temporarily applied” is interpreted to mean a fixed period of 12 months or less or shorter periods that, in the aggregate, do not exceed 12 months in respect of each unit of property concerned. It is also considered that a monthly lease for an unspecified period also falls within the meaning of “temporarily applied” but only for a maximum period of 12 months. Should that monthly lease continue beyond 12 months, it means that the developer would have exhausted the relief under section 18D for that particular property and must accordingly make an output tax adjustment on the open market value of that property as required under section 18(1). In the case of a fixed-period lease exceeding 12 months from the beginning, section 18D will not apply at all. Instead, the relevant adjustment under section 18(1) must be made on the open market value of the property at the time the property is applied for exempt supplies.
It follows that, only when the supplier is a “developer” and the property concerned is “temporarily applied” as defined in section 18(1)(b) for residential accommodation for a period of 12 months or less, can the dispensation under section 18D apply. In all other cases, the change in application from taxable supplies (sale of dwellings by a developer) to exempt supplies (supply of residential accommodation in a dwelling), section 18(1) will apply. The output tax adjustment based on the open market value under section 18(1) will also apply for any temporary letting of dwellings by developers that occurs between 1 January 2018 and 31 March 2022, which is the period between the date that section 18B ceased to apply and the date that section 18D came into effect.
Section 18D(2) requires that, as soon as the property has been temporarily applied for exempt supplies, the developer must make an output tax adjustment based on the “adjusted cost” of the construction, extension, or improvement to the fixed property. No output tax will be payable on the rentals as they constitute consideration paid or payable in respect of exempt supplies.
If a property is sold during the 12-month period that it is temporarily applied for exempt supplies, that supply will remain a taxable supply under section 7(1)(a). The developer will be able to claw back as an input tax adjustment under section 16(3)(o), the same amount that was previously declared as output tax under section 18D(2) on the adjusted cost of the construction, extension or improvement to the fixed property when the unit was first temporarily applied for exempt supplies. The adjustment may be made in the same tax period as the time of supply for the property under section 9(3)(d). Similarly, an input tax adjustment under section 16(3)(o) will become available to a developer if there is any permanent change in intention or application of a dwelling that requires an adjustment to be made on the open market value of the property under section 18(1) during the 12-month period that the property is being temporarily applied.
for exempt supplies. The adjustment may be made in the same tax period as the time of supply for the change in use under section 18(1). When the temporary letting ceases altogether within the 12-month period allowed under section 18D, the developer will also be entitled at that time to claw back under section 16(3)(o), the output tax that was previously declared under section 18D(2). However, the developer must, in that case, have proper and convincing documentary proof that the temporary letting has in fact ceased completely during the 12-month period allowed under section 18D. Any subsequent sale of the dwelling will be a taxable supply under section 7(1)(a) read with section 9(3)(d).
A developer must declare output tax under section 18(1) on the OMV of any dwelling units that remain unsold if the property continues to be let for a period exceeding 12 months in aggregate after it was first temporarily applied for exempt supplies. The adjustment must be made in the tax period covering the first day of the 13th month of letting.8 However, in this case, the developer will also be able to claw back an input tax deduction under section 16(3)(o) as explained above. Any subsequent sale of the affected properties after the tax period in which the section 18(1) adjustment was required to be made, will not be regarded as taxable supplies. Instead, the purchasers will be liable to pay transfer duty on the transactions concerned.
Effective date and scope of application
Section 18D applies only to any newly developed units of fixed property that is “temporarily applied” for exempt supplies as contemplated in section 12(c) for the first time on or after 1 April 2022.
Section 18D does not apply to:
- any property which is the subject of a fixed period lease exceeding 12 months as contemplated in the proviso to the definition of “temporarily applied” in section 18D(1)(b);
- any temporary letting of dwellings by developers that were previously subject to the provisions of section 18B; or
- any temporary letting of dwellings by developers between 1 January 2018 and 31 March 2022.