By Grant Thornton E-taxline
Many residential property developers have been forced to let units they have been unable to sell due to current economic conditions. Developers who decide to let the properties in order to defray costs are required to account for VAT output tax based on the market value of the property, as there is a change in use of the property. This clearly has adverse cash flow consequences for the developer.
SARS acknowledged this as an issue and introduced temporary relief to developers who are now allowed a maximum grace period of 36 months to rent the property before sale, without incurring the VAT liability. This grace period commences when the property is rented for the first time.
If the developer lets the property for a period longer than 36 months, then the deemed change in use will trigger the VAT output tax on the market value of the property as at the 36 month cut off date. In other words, if the market value of the unit is R2 million at the end of the 36 month period, the developer will be liable for the R280 000 VAT output tax.
This relief is only applicable to property developers and only if they intend selling the property. If they decide to let the unit on a permanent basis (even within the 36 month period), then VAT output tax will apply based on the market value as at the date of the change of intention.
But you must comply to qualify
This amendment is covered by section 18A of the VAT Act as inserted by the Taxation Laws Amendment Bill of 2011, and will apply until 1 January 2015. The VAT Act also provides that where a developer elects to make use of such relief, the developer must furnish SARS with a declaration for each unit let, within 30 days of concluding the rental agreement. A copy of these declarations, submitted in the form or manner as the Commissioner prescribes and containing the required information, should also be retained for a period of five years.
The relief will not apply in respect of residential properties temporarily let before 10 January 2012, or if the developer did not submit the required declaration to SARS within the prescribed 30-day period. Property developers should therefore ensure they are compliant in terms of the declarations, to receive the expected relief.