When a person is involved in the fixed property market, whether as a prospective purchaser, seller, lessor, lessee, developer or consultant, there is likely to be a VAT consequence. Usually, the VAT consequences of a fixed property transaction are complex and the penalties for not observing the requirements of the VAT Act can be costly. VAT is levied on the supply of goods or services. For a “supply of goods or services” to attract VAT there should be a supply of goods or services by a vendor in the course or furtherance of an enterprise. The term “fixed property” is defined to include land and improvements, any unit as well as any share in a share block company and, in relation to a property time-sharing scheme, any time-sharing interest, and any real right in such land, unit, share or time-sharing interest. In relation to fixed property transactions the definitions of “supply”, “goods”, “services” and “fixed property” are extremely wide and include almost every conceivable transaction involving fixed property. There are three main categories within which a fixed property transaction may fall:
When the supply of fixed property is subject to VAT;
When the supply of fixed property is subject to VAT at the zero rate; and
When the supply of fixed property is not subject to VAT.
Where the supply of fixed property is subject to VAT, whether at the standard or the zero rate, such supply is in terms of section 9(15) of the Transfer Duty Act exempt from transfer duty.
The general time of supply rule (which also applies to the supply of fixed property) is the earlier of the date of registration of transfer of the property; or the date on which any payment is made in respect of the consideration for the supply.
WHEN THE SUPPLY OF FIXED PROPERTY IS NOT SUBJECT TO VAT:The definition of enterprise implies an on-going business activity. Therefore, the once-off sale of a private individual’s home, time-share or sectional title flat would not normally result in the carrying on of an enterprise (therefore not be subject to VAT).In terms of section 12(c) of the VAT Act, the supply of, inter alia, a dwelling under an agreement for the letting and hiring thereof is exempt from VAT.
VARIOUS TYPES OF TRANSACTIONS REGARDING FIXED PROPERTY: If two parties (both registered VAT vendors) enter into a contract of exchange and each supply a property in the course or furtherance of an enterprise, each will be accountable for VAT on the respective property supplied. Should any one of the parties not be a vendor that party will not have to charge VAT.
A vendor may donate fixed property in the course or furtherance of his enterprise. The value of the supply may in terms of section 10(23) be deemed to be nil and therefore no VAT will be payable. If the sheriff sells the property of a vendor at a sale in execution, the property is deemed to be supplied in the course or furtherance of the vendor’s enterprise, unless the vendor has advised the sheriff in writing why the sale is not a taxable supply. In terms of section 29 of the VAT Act, the sheriff is liable to account for VAT on the sale. In terms of section 8(21) of the VAT Act the expropriation of land that forms part of the enterprise assets of a vendor is deemed to be made in the course or furtherance of an enterprise. A vendor will therefore be accountable for VAT on the proceeds of the expropriation. However, the sale of land in terms of the Land and Assistance Act of 1993 will be zero-rated in terms of section 11(1)(s) of the VAT Act. As can be seen from the definition of “person” the estate of any deceased or insolvent person will also be a vendor if prior to the date of death or insolvency, the deceased or insolvent was a vendor. In such circumstances, any disposal by the executor or trustee of fixed property will give rise to an output tax liability. Banks and other institutions are entitled to a deduction in respect of fixed properties sold by them (so-called “properties-in-possession”). This deduction is allowed under the provisions of the VAT Act to ensure that only the value added by them is subject to VAT. There are in effect two supplies, the supply by the defaulting debtor to the bank (when the property is repossessed by the bank) and the supply by the bank on the eventual resale of the property in possession. The bank may claim a notional input tax credit on the purchase price of the property in possession at the time the property is taken into possession. The bank may also claim the input tax credit (usually transfer duty because the defaulter is not registered as a vendor) as soon as the purchase price has been paid. When the property is sold, VAT must be included in the selling price and output tax accounted for (it is a taxable transaction and the sale constitutes carrying on of an enterprise). At the same time, an input tax deduction may be claimed, equal to the tax fraction of the lesser of the amount received for the sale (excluding VAT), less any amount paid on acquisition; and the amount of the unrecoverable loan balance, less any amount paid on acquisition.
As can be seen, the VAT consequences of a fixed property transaction are complex and the penalties for not observing the requirements of the VAT Act can be costly. Therefore, care should be taken in accounting for this type of transaction.