THE VAT CONSEQUENCES OF CHANGE IN INTENDED USE OF GOODS

A1_bIt happens ever so often that a business would purchase goods, and subsequently apply those goods in a different manner than it had initially intended to at the time that those goods were acquired. For example, a sole proprietor dealing in motor vehicles may decide to take one of those vehicles and apply it towards personal use. So too a property developer may decide to rather use one of its properties, up for sale, as new office premises for itself.

It is often said in tax circles that Newton’s law (that every action has a reaction) should be extended: every action also has a tax consequence. This is certainly also true where asset continue to be held by taxpayers, albeit with a different intention of how the asset is to be applied.

Where an asset is applied differently from what it has been applied towards in the past, certain tax consequences arises, both on a VAT and income tax account. This article deals specifically with the VAT consequences of such a change in use.

From a VAT perspective, where goods are no longer applied for purposes of the furtherance of a VAT enterprise, those goods are deemed to have been supplied by that VAT enterprise. As a result, output tax is required to be accounted for by the taxpayer on the open market value[1] of those goods deemed to have been supplied.[2] There is some logic to this from a theoretical perspective: the VAT vendor would have claimed input tax when it acquired the goods in question originally. Section 18 is therefore the statutory mechanism whereby the input tax claimed (on the basis that the goods would have been applied towards generating taxable supplies) is effectively reversed.

Where the goods are only partly used for purposes other than in the furtherance of the VAT enterprise, the input tax adjustment will also only be partly required to be accounted for.

An interesting exception to the above is where property developers let their properties temporarily for a period of less than 3 years. In practice, it quite often happens that property developers may decide to let property on a temporary basis due to the slow turnover of stock associated with the industry. Even though technically trading stock of the VAT registered developer would then be used for purposes not forming part of its property selling enterprise, the VAT Act[3] allows for a temporary reprieve from having to account for output tax, and does so based on practical considerations. This pragmatic approach presents an alternative to what would otherwise have only amounted to a cash flow issue: property developers may be required to account for output VAT once the property stock-in-trade is used to supply residential rental income, only to be reutilised as trading stock once sold in a year or two later (and when input tax may then be claimed again). Although therefore of little consequence to SARS (which remains neutral after the rental period in the example), many property developers are heavily dependent on cash flows and would be severely prejudiced, and many would be forced to close shop, had it not been for this practical concession granted in this limited instance.

[1] Section 10(7) of the VAT Act, 89 of 1991

[2] Section 18(1) of the VAT Act

[3] Section 18B of the VAT Act

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)