Fin 24 – A question raised about the 1% value-added tax (VAT) increase to 15% as from April 1 2018, as announced in Budget 2018, is how it will affect fixed property sales currently in progress or under negotiation.
Leonard Willemse, senior tax consultant at Mazars, explains this question stems specifically from the application of the time of supply rules regarding the sale of fixed property.
If a VAT vendor – for example a property developer – has signed a sales agreement on January 1 2018, but both the payment of the sale price and the transfer of the fixed property is done on or after April 1 2018, it raises the question of which VAT rate applies to the transaction: 14% or 15%?
The VAT Act states that fixed property is supplied under a sale at the earlier of the dates on which registration of the transfer of the fixed property at the Deeds Office takes place or when any payment in respect of the sale price for such “supply” is made by the purch
He gives as an example a situation where a VAT-registered property developer enters into a sales agreement with a purchaser on January 1 2018 for the sale of a unit with a price of R10m (inclusive of VAT). Both parties sign the agreement on January 1 2018, construction starts before April 1 2018, is completed after that date and the registration of the transfer of the property in the Deeds Office is after April 1 2018. Payment is made on the transfer date.
In terms of the fixed property time of supply rules, the time of the supply takes place after April 1 2018, effectively resulting in the transaction being subject to VAT at 15%. The seller ends up receiving less from the sale or, conversely, the purchaser ends up paying more.
Knight in shining armour
“Luckily, there is a knight in shining armour, namely section 67A(4) of the VAT Act. Almost hidden away at the end of the act, the section has not often been looked to for relief considering that the VAT rate has remained at 14% since 1993,” explains Willemse.
“In short, the section provides that, subject to certain conditions, the VAT rate that is effective on the date that a written sales agreement is entered into will apply.”
In terms of this interpretation, the 14% VAT rate would apply to the supply of fixed property where, before the date on which an increase in the VAT rate becomes effective (April 1 2018), a written agreement is concluded subject to certain conditions.
These conditions would be that it is a sale of a residential property (not a commercial property); that the price paid was determined and stated in the written agreement before the VAT increase date; that the agreement was signed by the parties before the increase date; and that the supply of the property is deemed to take place on or after the increase date.