By Francois Joubert and Maryke Ungerer
Recent changes in tax law have brought good news for value added tax (VAT) vendors who purchase fixed property from non-vendors: A greater benefit will now arise in their hands.
However, the extent of this benefit will depend on the immediate use to which the property is put.
This article explores this change in the VAT legislation in an attempt to clarify the position of purchasers of fixed property.
Normally, when a purchaser buys a property from a non-vendor he is required to pay transfer duty, that is, a tax that is levied on the value of property he acquired or which is ‘transferred’ to him. Prior to 10 January 2012, where a vendor purchased a fixed property from a non-vendor, such vendor was only allowed to claim a notional input tax deduction (VAT deduction) against any amount of VAT payable. A vendor was therefore allowed to reduce the amount of VAT payable to SARS with the relevant VAT deduction. However, the VAT deduction was limited to the amount of transfer duty paid by the vendor on the purchase price of the property. A vendor was, obviously, only allowed a VAT deduction if the property was purchased by him for the purpose of making taxable supplies (to generate vatable income), for example income from commercial accommodation.
As mentioned above, the Value-Added Tax Act 89 of 1991 (the VAT Act) was amended on 10 January 2012. Subsequent to this date, the VAT deduction is calculated by applying the tax fraction of 14/114 to the lesser of the purchase price or open market value of the property. It should be noted that a vendor would only be permitted to reduce the amount of VAT payable with the relevant VAT deduction if the vendor has paid the full amount of the purchase price, the property was registered in the deeds office and the property was purchased by the vendor to generate vatable income. It should further be noted that in all cases the non-vendor should be a resident of the Republic. If a property is purchased from a non-resident non-vendor, the vendor would not be able to claim a VAT deduction.
Based on this amendment to the legislation, a vendor is now allowed a much bigger VAT deduction. This is illustrated by the following example:
| Prior to 10 January 2012, where a vendor purchased a property from a non-vendor for R 10 million and paid transfer duty of R 717 000, he was allowed a VAT deduction limited to R 717 000. After 10 January 2012 the vendor would be allowed a VAT deduction amounting to R 1 228 070. Therefore, the current VAT deduction exceeds the VAT deduction prior to 10 January 2012 by R 511 070; a welcome change in the VAT sphere. |
A question that often arises is what will happen if a vendor purchased a property from a non-vendor but did not claim a VAT deduction at the time he purchased the property for one or other reason. These reasons could vary; for example the property could have been purchased by the vendor for the purpose of using it for private purposes or for the purposes of renting the property out for residential purposes (ie, for exempt purposes). However, at a later stage the vendor may change his intention and decide to use the property to generate vatable income. Another reason could be that the person acquiring the property was not registered for VAT at the time the property was acquired from the non-vendor. Will the vendor then be allowed a VAT deduction at a later stage?
In this regard, the VAT Act contains various adjustment provisions. One of these provisions deals specifically with the scenario where a vendor has acquired a property from a non-vendor but has not claimed a VAT deduction at the time that the property was purchased from the non-vendor. At that stage, the property was used by him, for example, for private purposes. In terms of the relevant provision, the vendor would be allowed to claim a VAT deduction at the time he changes his intention (eg to use the property to generate vatable income from guesthouse operations). Such VAT deduction will, however, be limited to the transfer duty paid at the time that the property was purchased from the non-vendor. The vendor would therefore be entitled to reduce the amount of VAT payable in respect of a later tax period with such relevant VAT deduction.
It should be noted that such VAT deduction may result in a VAT refund being payable by the South African Revenue Service (SARS) to the vendor. SARS will normally ask numerous questions before they will pay such a refund. However, should the vendor have all the relevant documentation on hand (ie, proof that the transfer duty was paid) and proof that he is going to use, or is already using, the property to make taxable supplies, SARS will pay the refund. It is important to note that should the vendor subsequently change his intention to use the property, for example, for private purposes, then the vendor would again be required to make an output VAT adjustment (ie, pay an amount of VAT over to SARS).
Although the VAT Act was amended to allow for an increased VAT deduction where the property was purchased from a non-vendor, a similar amendment was not made to the adjustment provisions. As discussed above, the VAT deduction is limited to the amount of transfer duty paid. This could be unfair to a vendor who purchased a property but did not claim a VAT deduction at the time of purchasing the property. This is illustrated by the following example:
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Mr X, registered as a VAT vendor, buys a house on 10 January 2012 in order to run it as a guesthouse. He bought the house for R 10 million from a non-VAT vendor and paid transfer duty of R 717 000. In terms of the new provisions, Mr X would be allowed a VAT deduction amounting to R 1 228 070. Mr Y, registered as a VAT vendor, buys a house on 10 January 2012 to use as a primary residence. He bought the house for R 10 million from a non-VAT vendor and paid transfer duty of R 717 000. A year later, Mr Y buys another house and decides to convert his primary residence into a guesthouse. As Mr Y is now going to earn vatable income from commercial accommodation, Mr Y will be allowed a VAT deduction in a later tax period in terms of the adjustment provisions. However, based on the current wording of the relevant adjustment provision, Mr Y will only be allowed a VAT deduction limited to the transfer duty paid, that is, R 717 000. |
Based on the above example, it is clear that Mr Y will not be in the same position as Mr X as the VAT Act allows a much bigger VAT deduction (R 511 070) where the property is purchased and immediately used to generate vatable income, as opposed to where a property is purchased for private purposes and only at a later stage a decision is made to use the property to generate vatable income. This seems somewhat unfair and we hope that in the near future the legislature will adjust this legislation to correct this anomaly.
Francois Joubert BA Industrial Psychology BCom H Dip Taxation Law (Stell) MPhil in Taxation Law (UCT) is a senior manager and Maryke Ungerer BAcc (Hons) (Stell) CA (SA) is a tax consultant at KPMG in Cape Town.
This article was first published in De Rebus in 2012 (July) DR 53.
