The South African Revenue Service (SARS) issued a General Binding Ruling 55 (GBR55) on 10 September 2020, which may result in cash flow constraints for certain property developers in respect of the VAT costs incurred on the development of residential properties. SARS previously provided temporary relief where property developers were not required to make a change in use adjustment for a 36-month period where the property developers started to let out the properties. The temporary relief came into operation on 10 January 2012 to provide relief to developers. The temporary relief was initially intended to expire on 1 January 2015. However, the relief period was further extended to 31 December 2017. The temporary relief ceased to apply on 1 January 2018.
Why the initial relief?
It often happens that during adverse market conditions, property developers are unable to find buyers for the property at the required price. The property developers then elect to let the property units temporarily for purposes of generating cash flow. This usually continues until the market conditions improve and the developers can obtain the prices for the property they require.
The letting of residential property dwelling is exempt from VAT. Temporarily letting of residential units is regarded as a “change in use” of the units from a taxable supply to a non-taxable supply. The property developer will need to make an adjustment of the change in use at the open market value of the residential unit at the date on which the property is let
The “change in use” adjustments has serious cash flow consequences implications for the developers, in that the developer in essence has to pay back the input tax previously claimed on the construction of the units.
Since the economic situation deteriorated significantly in the last several years, SARS implemented this temporary measure to assist these developers to avoid the cash flow constraints.
What is surprising is that, during this Covid19 pandemic, SARS did not reinstate the relief to assist property developers in these financially trying times but continued with issuing the binding general ruling (BGR) and, in the process, worsened the financial outlook for property developers .
New BGR 55
Since the withdrawal of the previous relief measures, property developers had to once again make the required adjustment when letting out these residential units. BGR55 provides guidance regarding residential units where property developers permanently changed their intention and the units are held as capital assets and rented as residential accommodation in a dwelling.
However, what was never clear was the VAT implications if the property developer subsequently sells these units as per its original l intension. BGR55 now clarified this and SARS is of the view that
The subsequent sale of these units is not subject to VAT and the buyer of the dwelling is liable for transfer duty on the acquisition of such unit.
If the SARS’ view is correct, then this would mean that where a developer elects to temporarily rent the units, the developer would have to pay back more VAT than the input tax previously claimed on the construction of the units to SARS potentially increasing the selling price. Furthermore, the supply of the unit would be subject to transfer duty.
We do not agree with this view as the property developer’s intention was always to develop and sell these units. When the economic landscape improves in the future and the property developer then actively, renovates, markets and sells these units on a continuous basis, it will not be able to claim the input tax it will incur in this process as it is not in the course of making taxable supplies.
We would recommend that property developers seek professional advice when involved in the temporary letting of dwellings and the consequent change in use adjustments. We cannot see that BGR 55 can continue and will lobby that SARS consult all stakeholders before revising it in its current form.
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