Property Developers Temporarily Letting out Residential Fixed Property

Property developers who let out residential units have been dealt a blow, as relief provided for in the VAT Act has come to an end.
In terms of current legislation where a VAT vendor acquires assets for the purpose of making taxable supplies and this application changes, whether it be a periodic or permanent change, they are required to make a change of use adjustment and effectively repay to SARS the input tax they would have previously claimed.
This has a particular impact where property developers acquire and develop residential fixed property for the purpose of making taxable supplies but who temporarily let the property. An example is where there has been an economic downturn and they are unable to sell the properties. In these circumstances, the holding costs are significant and the temporary letting of these properties assists somewhat in alleviating the cash flow burden.
Since 2012 special relief has been provided for in the Vat Act. Property developers who temporarily let out residential properties which continued to be held for resale, did not have to account for the change in use adjustment, effectively suspending the time period within which the output tax had to be paid.  Relief was initially provided up to 31 December 2014 and this was subsequently extended to 31 December 2017.
There has, however, been no further extension of this time period and property developers currently letting out residential properties, initially developed for the purposes of making taxable supplies not yet sold, are now faced with a significant cash flow problem. They now need to account for the deemed output tax as a result of this change in use, by applying the tax fraction to the open market value of the property.
Impact of the above:

  • 5 residential units developed at a cost of R100 000 each
  • 4 were sold and 1 was let out
  • Open market value of the 1 remaining unit is now R150 000
  • Developer must now pay VAT on [R150 000 x14/114]
  • Output tax now due to SARS R18 421