HOW THE VAT INCREASE AFFECTS YOUR BUSINESS

B4Consumers and suppliers have by now had an opportunity to familiarise themselves with the increased Value-Added Tax (VAT) rate of 15% since 1 April 2018. There are however many technical considerations related to the increase that remain unclear. One such an uncertainty is with regards to deposits paid prior to the effective date of the increase, while goods and services are only rendered thereafter.

VAT vendors often require that consumers pay a deposit to secure the future delivery of goods or services (for example, an advance payment for the manufacture of goods, bookings in advance for holidays or accommodation etc.). The deposit paid by the consumer is then off-set against the full purchase price once they eventually receive the goods or services. The question arises what VAT rate the consumer will finally be subject to, where they paid a deposit before 1 April 2018, but the actual delivery of goods or services only takes place thereafter.

The answer to this question is found in the time of supply rules contained in section 9 of the Value-Added Tax Act.[1] In terms thereof, the “time of supply” of goods and services is at the time an invoice is issued by a supplier, or the time any payment of consideration is received by the supplier, whichever is the earlier. Two important concepts stem from this rule.

Firstly, an “invoice” needs to be issued by a supplier. In terms of section 1 of the VAT Act, an “invoice” is a document notifying someone of an obligation to make payment. It is therefore not necessary that a “tax invoice” – which has very specific requirements – needs to be issued. If consumers received only a “booking confirmation”, “acknowledgment of receipt” or similar document prior to 1 April 2018 that did not demand payment (such as tax invoice or pro-forma invoice), the time of supply was not triggered, and consumers will be subject to the 15% VAT rate once the goods or services are finally delivered after 1 April 2018.

Secondly, any deposit that was paid by the consumer, would have had to be applied as “consideration” for the supply of the goods or services to constitute “payment”. In this regard, consumers are largely dependent on how VAT vendors account for deposits in their financial systems. If deposits are accounted for separately (which is often the case with refundable deposits or where there are conditions attached to the supply) and only recognised as a supply when goods or services are received by the consumer, the deposit (although a transfer of money has occurred), would not constitute “payment”. For example, the time of supply may only be triggered once a guest has completed their stay at a guest house after 1 April 2018, resulting in VAT being levied at 15%.

The take away from the time of supply rules is therefore that payment of a deposit prior to 1 April 2018 does not necessarily result in a supply at 14% VAT and the rate to be applied is dependent on the specific facts of each case. Both consumers and VAT vendors should also take note that there are a number of rate specific rules that apply during the transition phase, and are encouraged to seek advice from a tax professional when they are in doubt about the rate to be applied.

[1] 89 of 1991 (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)

WITHDRAWAL OF VAT RELIEF FOR RESIDENTIAL PROPERTY DEVELOPERS

B2Section 18B of the Value-Added Tax Act[1] was introduced effective 10 January 2012 in a bid to grant relief for residential property developers caused by the slump in the property market at that time. Many property developers, registered for VAT, would develop residential properties with a view to dispose of these properties in the short-term as trading stock and as part of its VAT enterprise. However, following the global financial crisis of little less than a decade ago, many property developers found themselves in a position where they were increasingly forced to rent out residential properties once a development was completed due to the slower rate at which properties could be disposed of compared to earlier.

The letting of residential property is typically exempt from VAT. Due to a change in use of the properties therefore (albeit temporarily) from being held for sale as trading stock to now being put up to be let in the interim while being on market constituted a change in use of the properties. Due to the change in use of the properties, from being used to make taxable VAT supplies in the ordinary course of business and being sold as trading stock by the developer, to now being used to make VAT exempt supplies in the form of being used to generate residential rental income, the provisions of section 18(1) of the VAT Act would ordinarily have applied. In terms of section 18(1), where goods have been acquired previously for purposes of making VATable supplies, and these goods are subsequently used to make exempt supplies, the VAT vendor must be deemed to have disposed of all those assets for VAT purposes. In other words, even though no actual disposal of assets has taken place, such a disposal is deemed to take place for VAT purposes and which gives rise to output VAT having to be accounted and paid for by the developer based on the open market value of the property at that stage.[2]

As one could quite easily imagine, having to account for output VAT in these circumstances may be prohibitive, especially considering that the value of a property will likely have been enhanced due to the development and that VAT inputs thus far claimed by the developer would be overshadowed by the output VAT amount that is now required to be claimed.

It is in acknowledgement hereof that section 18B was introduced to the VAT Act in 2012. In terms of that provision, property developers were granted a 36-month grace period within which to sell properties, and during which time these residential properties could be rented out without a deemed supply being triggered for VAT purposes.

When introduced originally, it was made clear at that stage that the relief for temporary letting as explained above will only be in effect until 1 January 2018. However, it is arguable that the property market has not recovered sufficiently yet for the relief to be withdrawn at this stage.

[1] 89 of 1991

[2] Section 10(7) 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)

VAT AND TRANSFER DUTY

B1We are often asked whether the sale or purchase of immovable property is subject to VAT or to transfer duty. Confusion appears to creep in especially in those cases where only either the seller or purchaser is a registered VAT vendor.

The answer to the question lies in the Transfer Duty Act,[1] and specifically in sections 2 and 3 of that Act which determine that the transfer duty is payable on the value of immovable property acquired by any person, and that the duty is payable by the acquirer. In other words, the transfer duty is a tax on the purchaser.

Section 8 of the Transfer Duty Act provides for instances where the purchaser of the property will be exempt from transfer duty being levied against it. The list of potential exemption includes instances where the sale is a “VATable” transaction.[2] In other words, where the sale of the immovable property concerned is therefore a taxable supply for VAT purposes, no transfer duty will be leviable. (This is however subject to certain compliance related requirements being met, including that the prescribed declarations are submitted, that security is tendered for the tax to the extent necessary and that the Commissioner issues a certificate that this transfer duty exemption’s requirements have all been met.[3])

By implication therefore, since the sale will have to be a taxable supply for VAT purposes for the transfer duty exemption to be met, the implication is that the sale must be made by a VAT vendor, and therefore subject to VAT. The status of the seller (i.e. whether it is VAT registered or not) determines whether the purchaser is liable for either VAT or the transfer duty.

To summarise therefore, whether transfer duty or VAT is payable by a purchaser of immovable property is determined with reference to the status of the seller: if VAT registered, VAT is levied and not transfer duty. If the seller is not VAT registered, transfer duty is payable as the default position (and unless any of the other exemptions in section 8 of the Transfer Duty Act applies). Therefore, the purchaser of immovable property will always as a default be required to pay transfer duty, unless the seller is a VAT vendor (and the property is sold as part of its enterprise). In such an instance, the sale will be subject to VAT at 14% and payable by the purchaser, rather than transfer duty which would otherwise have been payable and according to the applicable sliding scales.

[1] 40 of 1949

[2] Section 8(15) of the VAT Act

[3] Section 8(15)(a) to (c) of the Transfer Duty 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)

CLAIMING INPUT TAX FOR VAT PURPOSES ON IMMOVABLE PROPERTY

B4When a registered VAT vendor sells a property, that transaction is subject to VAT and not to transfer duty.[1] Where the purchaser of the property is itself a VAT vendor, input tax may be claimed against the acquisition price paid for the property, and which will in most instances effectively equate to the VAT charged by the seller-VAT vendor, therefore leaving the purchaser eventually in a VAT neutral position subsequently once the input tax is paid back to it.

Where the purchaser-vender however buys immovable property from a non-VAT registered seller, the transaction is not subject to VAT, but rather to transfer duty being levied on the purchaser and which transfer duty is payable over to SARS. The question which then often arises in practice is whether the purchaser-vendor is entitled to claim input tax on the acquisition of the property, and whether that input tax claim should be limited to the transfer duty charge levied against the purchaser-VAT vendor.

In terms of section 16(3) of the VAT Act,[2] VAT vendors are entitled to claim an amount of input tax against amounts incurred to acquire “second-hand goods” from non-VAT vendors. In the case of immovable property, this rule similarly applies, and immovable property too may amount to “second-hand goods”, it being defined as “… goods which were previously owned and used”.[3]

Paragraph (b) of the definition of “input tax” is the relevant provision governing the relevant VAT treatment. Assuming that a sale of immovable property entered into between a non-VAT vendor seller and a VAT vendor purchaser is undertaken at open market value, the “input tax” definition then determines that the input tax to be claimed by the VAT vendor on the acquisition would equate to an amount equal to the “tax fraction” (also a defined term, being 14 / 114) as applied to the price paid for the property. Assume for example that a property is purchased for R1.14m by a VAT vendor from a person not registered for VAT. Applying the transfer duty rates to this transaction, an amount of transfer duty of R7,200 would be payable by the purchaser to SARS. This notwithstanding though, the purchaser-vendor may also claim a deemed VAT input tax amount of R140,000 (being 14 / 114 x R1.14m) during that relevant VAT period.

This position was not always the case. Previously, in terms of a proviso to paragraph (b) of the definition of “input tax”, an input tax claim would have been limited to the amount of transfer duty payable by the VAT vendor when it acquired the property. This is however now no longer the case, and the applicable proviso has since been deleted.

[1] Section 8(15) of the Transfer Duty Act, 40 of 1949

[2] 89 of 1991

[3] See the definition of “second-hand goods” in section 1 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)

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)