The recent end of the value-added tax (VAT) relief period for property developers in South Africa, who temporarily let their residential units, may have a significant impact on their cash flow. ENSafrica, Taxand South Africa, explains.
Ordinarily, property developers acquire or develop fixed property (including residential properties) for the purpose of resale. In South Africa, the sale of developed units is a taxable supply and is subject to VAT at 14%, which the property developer must account for to the South African Revenue Service (SARS) as each unit is sold. The property developer is entitled to claim an input tax deduction in respect of VAT on development costs (such as land, building costs and related expenses) as they are incurred and does not have to wait until the unit is sold to claim the input tax.
In contrast, the letting of a residential unit is an exempt supply for VAT purposes and therefore, a developer of residential property for letting is not entitled to claim any of the VAT incurred on the related construction costs.
It is clear that property developers need to carefully consider and assess the VAT consequences if they have temporary rentals of residential property that they still intend to sell when the opportunity arises. It is important to ensure that the adjustment is brought to account in the correct period and, if needed, an application for a payment arrangement submitted to SARS as soon as possible. The deadline to make VAT payments will be either 28 February or 30 March, as applicable.