The effects of VAT increase for fixed property transactions
- How will the rate increase work for fixed property transactions?
If a VAT vendor for instance a property developer has signed a sales agreement on 01 January 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%?
According to the VAT Act 89 of 1991 (“the Act”), it states that fixed property is supplied under a sale at the prior 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 value for such "supply" is made by the purchaser.
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 deal or conversely the purchaser ends up paying more.
- Is there a rate specific rule which is applicable to me if I signed the contract to buy residential property before the VAT increased but payment of the purchase price and registration will only take place after 01 April 2018?
According to section 67A(4) of the VAT Act, the section provides that, subject to certain conditions the VAT rate that is operative 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. However, the same rule cannot be applied to the sale of commercial real estate. In the case of these sales, the general rule of supply applies, which means that the applicable VAT rate will be 15% if the payment and conclusion of the transaction only occurs after 1 April
- How will the VAT increase affect the seller of the property and estate agent commission?
This calculation is a peculiar topic which should be discussed between the seller and their agent based upon the business relationship they’ve formed. Because an ongoing supply of services is supplied by the agent, it is difficult to put a time limit on when the transaction comes to its official end. In stringent legal terms, you may calculate VAT at 14% if you receive the invoice for commission before 1 April, and at 15% if you receive the invoice for commission after 1 April.
However, questionably a more practical way to go about the calculation is to apply a time allocation to it. This would mean that if the agent began marketing your property on 2 March and the sale of your property was concluded on 2 April, then a 14% VAT charge can be applied to 50% of the commission, and the other 50% will carry a 15% VAT charge.
- Conclusion:
The increase in VAT has seen most South Africans bracing themselves for the worst. While the increase does mean slightly constricted purse strings for most of us, it is by no means a cause for alarm for those who keep themselves up-to-date with the change. The implications of the VAT increase can be confusing to fully understand. But, as long as you keep yourself up-to-date throughout the process and speak to knowledgeable sources that you can rely on, you can avoid any financial slipups that can transpire as a consequence of this change.
This article should not be construed as legal advice and has been produced for marketing purposes
24 Apr 2018
Author M Van Heerden Attorneys & Newpoint Property Group