Proposed changes to VAT legislation for vendors purchasing fixed-property from non-vendors
25 November 2012
Posted by: SAIT Technical
By Nicole Paulsen and Andrew Seaber (DLA Cliffe Dekker Hofmeyr Tax Alert)
Where a vendor purchases fixed property from a non-vendor, the vendor pays transfer duty as opposed to VAT. The vendor may, however, claim a notional input tax if the property will be used to make taxable supplies. Previously, this notional input tax was limited to the amount of transfer duty paid. After 1 January 2012, this ceiling was removed as it was arguably unfair and the notional input is now calculated as 14/144 x lesser of consideration or open market value. As a result of an oversight, the change in use provisions were not amended accordingly. However, the TLAB 2012 addresses this anomaly.
Where a vendor purchases fixed property from a non-vendor, the vendor is required to pay transfer duty as opposed to value-added tax (VAT).
The transfer duty is calculated on the purchase price of the property, or the fair market value thereof, whichever is the higher. If the vendor purchases the fixed property for the purpose of making taxable supplies, such as the supply of commercial accommodation, the vendor is entitled to a notional input tax credit on the basis that the fixed property is viewed as second-hand goods.
Prior to 10 January 2012, the amount that a vendor could claim as a notional input tax credit was limited to the amount of transfer duty paid by the vendor on acquisition of the fixed property. For example, where a vendor purchased fixed property from a non-vendor for a purchase consideration of R5 million and paid transfer duty of R317,000, the vendor was allowed an input tax credit limited to R317,000.
According to Treasury, the input tax credit ceiling was arguably unfair as generally it meant that the notional input credits allowed did not fully compensate the vendor for most or all of the VAT paid by previous owners. As a result, on 10 January 2012, legislative amendments were introduced to delink VAT and transfer duty. The definition of 'input tax' in s1 of the Value-Added Tax Act, No 89 of 1991 (Act) was amended to eliminate the transfer duty ceiling and to subject the acquisition of fixed property from non-vendors to largely the same rules applicable for the claiming of notional input tax credits in respect of other second-hand goods.
Following the amendment, the notional input tax deduction is calculated with reference to the tax fraction (14/114) applied to the lesser of any consideration in money given by the vendor for the fixed property or its open market value. Applied to the above example, the amendment results in the vendor being entitled to an input tax credit of R614,035 (R5,000,000 x 14/114) as opposed to the amount of transfer duty paid (R317,000).
Where, however, a vendor purchases fixed property otherwise than for the purpose of making taxable supplies, no input tax credit is allowed under the Act. An example is where the vendor purchases the fixed property for private use, another where the fixed property is purchased for the supply of residential accommodation (an exempt supply). If the vendor subsequently changes the use to which the fixed property is put and applies the property in the course of making taxable supplies (eg by letting the property as commercial accommodation), the fixed property will be deemed to have been supplied to the vendor (s18(4) of the Act). As a consequence of the deemed supply, the vendor is entitled to a VAT input tax credit.
But, despite the amendment to the definition of 'input tax' in s1 of the Act, Treasury did not, ostensibly as a result of an oversight, make the corresponding amendments to the change in use adjustment provisions in s18 (read with s16) of the Act by removing the transfer duty ceiling. The unfortunate but clearly unintended result is that a vendor who subsequently applies the property in the course of making taxable supplies will only be entitled to an input tax credit of the amount of transfer duty paid. This inconsistency results in the prejudicial treatment of vendors who purchase fixed property from a non-vendor but are only subsequently entitled to an input tax deduction arising from a change in use of the property.
Fortunately, the Taxation Laws Amendment Bill of 2012 addresses this anomaly by removing the transfer duty ceiling in the context of a vendor who purchases fixed property and does not immediately use the property for the purpose of making taxable supplies but later has a change in intention. It is noted that the proposed amendment will have retrospective effect to 10 January 2012, thus ensuring that the said oversight does not operate to the prejudice of unsuspecting vendors.