The VAT increase that takes effect this month will affect some property transactions. Here’s what you need to know.
As we all know, VAT was increased by 1%. Notifications from service providers are flooding in, informing us that we will now be charged the extra percentage from 1 April. But what about property?
Is VAT chargeable on residential property rental (as referred to as a “dwelling” in the Tax Act)?
No, says Natasha Kapp, accountant to Just Property franchisee Pieter Janse van Rensburg. “VAT on residential property rental income is an exempt supply. In other words, landlords may not charge their tenants VAT on top of the monthly rental.” And you may not charge VAT when you sell your property either (unless you are a developer selling new units); instead transfer duty is paid by the buyer.
What happens to offers received by developers before 1 April that only go through after 1 April? Do they attract 14% or 15%?
Pieter Janse van Rensburg notes that Section 67A(4) of the VAT Act stipulates that the VAT rate that is effective on the date that a written sales agreement is entered into will apply if it is residential property, if the price is included in the document, if the agreement was signed before the increase date, and if transfer of the property takes place on or after 1 April 2018. Kapp adds that in the case of commercial property, the date of registration will determine the VAT %.
When is VAT chargeable on rentals?
“VAT on commercial property rental is a standard supply and VAT will be charged at 15% from 1 April 2018. But VAT can only be charged if the owner is registered for VAT purposes,” says Kapp. According to SARS, “it is mandatory for a business to register for VAT if the total value of taxable supplies made in any consecutive 12 month period exceeded or is likely to exceed R1 million. A business may also choose to register voluntarily for VAT if the value of taxable supplies made or to be made is less than R1 million, but has exceeded R50 000 in the past period of 12 months.”
Kapp also notes that VAT is payable by rental pools (where owners of sectional title, share block, or time-share units pool these units in order to conduct an income accruing business together). Effectively this transforms what might have been residential accommodation into commercial accommodation business. And if the unit is rented out at a discount to the owner or, say, someone close to them, VAT is chargeable at the open market rental value.
What about developers temporarily letting units till they're sold?
In January 2012, temporary relief was given to property developers, allowing them to rent residential units for three years without having to include VAT. This “relief” has not been extended any further and ceased to apply on 1 January 2018, says Just Property franchisee Pieter Janse van Rensburg. Developers who have temporarily let residential units will have to account for VAT to SARS in the January 2018 tax period, even if the units have not be let for the full three years.
What about Homeowners Associations levies - do they attract VAT?
These are exempt from VAT, says Kapp.
Is VAT chargeable on letting agents' or property management fees?
“Yes, if the letting agency or the property management company, or the agent themselves is registered for VAT, then the fees charged each month to owners and tenants should include VAT at the standard rate,” Kapp confirms.
Can a landlord claim VAT on anything they spend on their property?
“If the property is a commercial property, the landlord is VAT registered and has a valid tax invoice, then they can claim the input VAT.”
What is the implication for existing commercial-property lease agreements?
VAT vendors will have to increase the VAT component on rentals from 1 April 2018, unless there is a specific agreement that the price cannot be increased due to a VAT hike, in which case 14% VAT will be paid, but the owner will have to account for output tax of 15%. All new agreements signed after 31 March 2018 must reflect the new rate of 15%.
Can I get a tax break for improvements made to my property?
All property owners have to include rental income in their taxable income declared to SARS, says Just Property CEO Paul Stevens. “But costs such as property management fees, repairs and maintenance, insurance premiums and municipal service costs paid by the owner may be deducted.”
Kapp notes that if your property falls within an Urban Development Zone, an incentive applies. According to SARS, the UDZ incentive/deduction is calculated as follows: “An amount equal to 20% of the cost pertaining to the improvement of the building in the year of assessment during which the part of the building so improved is brought into use by the taxpayer solely for the purposes of trade. No apportionment is required in case the building is brought into use during the year of assessment. An amount equal to 20% of the cost in each of the four succeeding years of assessment.”
“Tax and property can be confusing,” says Stevens. “SARS has done a great job on their website to make the language used user-friendly. But some of us still struggle. Contact your nearest Just Property franchisee and we are happy to explain the ins and outs.”