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Does s11(e) of the VAT Act apply to the purchase of sectional title units from a developer?

Tuesday, 12 May 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: A client wants to purchase 27 unfurnished units in a sectional title block from a developer as the developer does not have sufficient funds to complete the work. Will this be classified as zero rated?

A: A transaction will attract VAT if the following four requirements are met per s7 VAT Act:

1.                   A supply – in terms of the definition of ‘supply’ in s 1 of the VAT Act, this term includes a sale, rental agreement, instalment credit agreement, as well as all other forms of supply, whether voluntary, compulsory or by operation of law, irrespective of where the supply is affected.

2.                   Should be a supply of goods or services – ‘services’ is very widely defined and includes the granting, cession or surrender of any right or the making available of any facility or advantage.

3.                   The supply of goods or services should be made by a vendor – a person who is required to be registered for VAT under the VAT Act must charge VAT on his taxable supplies.

4.                   The supply should be made in the course or furtherance of an enterprise.

The sale of the unfinished property by the developer to another developer will be a supply (s1). Whether it will be a taxable supply depends on the purpose of use per (4) above. If the old developer built to use in the supply of residential accommodation then no VAT would be claimable and no VAT output would be payable. However if the developer developed for sale as developer in the course of his enterprise as developer the sale would trigger output VAT.

The same principles apply to the purchaser, there is he going to us the unfinished building in the course of making taxable supplies in his enterprise? Note that where VAT applies to the sale (seller levies VAT) for the purchaser, no transfer duty will apply per s 9 (15) Transfer Duty Act subject to the provisions of the section being met.

The supply will only qualify for the rate of zero per cent if it is the supply of a going concern.  We don’t have enough information to provide guidance in this respect.  From the facts (unfinished) we accept that the section 11(1)(e) requirement (that it must "be an income-earning activity on the date of transfer thereof”) may not be met.

You mention that the supply is from one Pty Ltd to another Pty Ltd, but it doesn’t seem to be a supply contemplated in section 42 or 45 of the Income Tax Act.  The supply is therefore not in terms of section 8(25).   

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.



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