VAT for fixed property can be a minefield

Confusion continues to reign when it comes to fixed (immoveable) property (which I shall simply refer to ‘property’ here) and VAT.

The key is to be aware of the use to which you are putting the property, and to make sure you are treating the VAT correctly (I won’t look at the documentary requirements here but be aware that they are critical in all the scenarios):

• If you are a property trader (e.g. you develop and sell) you may claim the VAT you are charged on purchase as an input VAT refund. Equally so, any goods and services you might buy to develop and improve the property. If, however, the seller does not charge VAT to you (as it is their home- see below), you will pay transfer duty and may claim a deemed VAT refund (15/115 of the purchase price) to the extent that the consideration has been paid and/or once transfer has taken place.

• Similarly, if you are buying the property to lease it out to third parties who will use it for commercial purposes you will, again, be able to claim an input VAT refund (or claim a deemed VAT amount if you paid transfer duty- see above) when you buy the property. In turn, you will be have to add VAT to the rent you charge to your tenant(s). If in the future you sell the property, you will also have to charge VAT to the purchaser and to pay it to SARS.  The person who buys the property from you will not then have to pay transfer duty. If you sell the property together with the leases i.e. as a ‘going concern’ it is possible that the VAT rate will be 0%, but this can’t apply if you sell the property to the tenant.

• The position is, however, very different if you buy the property to lease it to people to live in or to provide to your employee(s) to live in. Because the property is then to be used as a “dwelling” (“a place residence or abode of any natural person”), which is an exempt supply, you will not be allowed to claim a VAT refund for any VAT charged to you (or claim a deemed VAT refund if you paid transfer duty) when you buy the property.  Equally so, you will not need to charge VAT on the rentals you charge to your tenants or on any accommodation fringe benefit provided to your employees. When you sell the property only transfer duty will apply.

• Similarly, if you are buying a property to live in it yourself, you might pay VAT if you buy from a developer or you’ll pay transfer duty but you won’t be able to claim any VAT refund. Similarly, when you sell the property, the buyer will pay transfer duty. VAT won’t come into the picture.

This scenario may, however, change if you, for example, use portion of your home as an office. In this case you may claim the VAT charged to you (or a deemed input tax if you paid transfer duty) to the extent of the portion of the property you use for business purposes (assuming the business makes VATable supplies). You may also claim the VAT charged to you on any improvements you make to the portion of the property that you use as your office.

BEWARE though, if you have done this, when you sell the property you will have to charge VAT on the full selling price. You may at that point claim a refund of the balance of the VAT you weren’t able to claim on the original purchase price (or the current market value of the property if it is now lower), but this scenario can be particularly detrimental because you will, potentially, be selling your home to someone who will use the full property as their home and not be able to claim the VAT which you must charge as a refund. This will add 15% to your selling price, quite a lot more than the transfer duty would be, and the marketability of your home may be affected

• If you are buying a property which will be rented out partially to commercial businesses and partially for residential (“dwelling”) accommodation purposes (assuming both parts are more than 10% of the total) you will need to apportion the amount of VAT you claim as a refund when you buy the property.  This type of situation might arise where you buy a block of flats with shops on the ground floor, for example. 

Again, when you sell the property, you will have to charge VAT on the full selling price and may claim the balance of the VAT you weren’t able to claim on the original purchase price you paid (or the market value if it is lower). 

In addition, if during the time that you own a mixed-use property, the proportions of commercial and residential usage change, you must make an adjustment to the amount of the VAT originally claimed.

• On a separate note, there are very specific VAT rules where you use the property as “commercial accommodation”, which is a defined set of circumstances, but this needs an article all of its own- watch this space!