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Windfall For VAT Vendor Property Purchasers

28 September 2012   (0 Comments)
Posted by: Author: Graeme Palmer
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Windfall For VAT Vendor Property Purchasers

Changes to the VAT Act will mean they can claim a greater input tax deduction

VAT Vendors who purchase fixed property from a non-vendor are to receive a greater input tax deduction (VAT deduction) due to recent changes to the Value-Added Tax Act, effective from 10 January 2012.

Previously, when a vendor purchased a property from a non vendor, the VAT deduction was limited to the amount of transfer duty payable by the vendor on the purchase price of the property. This deduction was only allowed if the vendor purchased the property for the purpose of generating taxable supplies (as defined in the VAT Act), for example a vendor acquiring a commercial property which is leased to generate rental income.

Limiting the VAT deduction to the amount of the transfer duty payable no longer applies.A vendor purchasing a property from a non-vendor will now be entitled to claim a VAT deduction equal to the tax fraction of 14/114 applied to the lesser of the purchase price or open market value of the property.

Before being entitled to the deduction, the vendor must be a South African resident who has paid the full purchase price and the transfer of the property must have been registered in the Deeds Office. As in the past, the property must be purchased by the vendor to generate taxable supplies.

As an example of the increased benefit, consider the following: A vendor who purchased a property for R5 million from a non-vendor before 10 January 2012 would have paid transfer duty of R317 000, and their VAT deduction was limited to this amount. After 10 January 2012, if the vendor made the same purchase, they would be entitled to a VAT deduction of R614 035(R5 million x 14/114). This represents an increase of R297 035 in the vendor's VAT deduction.

However, if a vendor acquires a property from a non-vendor for private use, the VAT deduction cannot be claimed. Should the vendor change their intention at a later stage and start generating taxable supplies from the property, the adjustment provisions in the VAT Act will apply. Regrettably, these provisions were not amended and the vendor's VAT deduction will in this case be limited to the amount paid in transfer duty.

Source: By Graeme Palmer (Taxbreaks)


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