VAT On Leasehold Improvements – Light At The End Of The Tunnel
21 July 2017
By Seelan Muthayan
There has always been uncertainty surrounding the VAT implications of leasehold improvements. Unlike the Income Tax Act that provides clear guidance for income tax purposes, the VAT Act has been silent on the VAT treatment since inception. In 2012 SARS issued a Draft Interpretation Note (DIN) for comment to provide clarity on the VAT treatment of leasehold improvements, but the DIN was never finalised and has been removed from the SARS website.
On the 19th of July 2017 National Treasury released the Draft Taxation Laws Amendment Bill (Amendment Bill) and proposed amendments to the VAT Act. These proposed amendments will, amongst others, introduce specific legislation to deal with the VAT implications of leasehold improvements. The legislation will take effect on 1 April 2018 if promulgated. In terms of the proposals, the effects would be as follows.
Leasehold improvements effected by a Lessee will now be deemed to be a taxable supply made by the Lessee to the Lessor in the course and furtherance of the Lessee’s VAT enterprise to the extent that the leasehold improvements are made for no consideration. The deeming provision will not apply if the leasehold improvements will be used, consumed or supplied not to make taxable supplies. The deeming provision will therefore entitle the Lessee to claim an input tax deduction in respect of the expenses incurred to make the leasehold improvements. If the deeming provision applies, the supply of goods (leasehold improvements) will be deemed to take place when the leasehold improvements are completed at a value of nil.
If the deeming provision applies, the Lessor will be deemed to be making a taxable supply of goods to the extent that the Lessor uses the fixed property so improved not to make taxable supplies. The Lessor will be required to account for output tax in the tax period when the leasehold improvements are completed. The value of the supply of the goods will be deemed to be the higher of the open market value of the improvement; the actual cost to the Lessee to effect the improvements; or the total amount agreed between the Lessor and the Lessee. The objective of the adjustment is to equalise the Lessor’s VAT position to one where he had effected the leasehold improvement (i.e. the Lessor would not have been entitled to claim the VAT relating to the Leasehold improvements as an input tax deduction).
These amendments are welcomed as a first step to increased certainty with regard to the VAT treatment of leasehold improvements.
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