Binding General Ruling No. 64: Clarity on the temporary letting of residential property
Chenay Carelse
by Chenay Carelse
Binding General Ruling No. 64 (“BGR 64”) was issued on 21 June 2023 to clarify the VAT treatment for property developers who built new residential dwellings that are intended to be sold as taxable supplies but, due to economic difficulties, are temporarily let as exempt supplies. Under normal circumstances this type of undertaking would result in a deemed taxable supply under s18(1) of the VAT Act and output tax would need to be declared on the open market value (“OMV”) of the property at the time of such change in use (albeit temporarily). Developers have submitted to experiencing difficulties in complying with the VAT law as they are faced with numerous costs prior to the actual sale of the properties. To address these challenges, s18D of the VAT Act together with the associated provisions, s9(13), 10(29) and 16(3)(o) was introduced to offer relief to developers contending with such adverse economic conditions.
Under S18D the developers can let out the property for a short period in certain circumstances without changing the nature of the supply for VAT purposes. The BGR provides clarity on this VAT treatment and the key points are summarised as follows:
Adjustment for dwellings temporarily applied for exempt supplies: A developer that applies s18D should make an output tax adjustment. The adjustment should be accounted for in the period that the agreement for the letting of the dwelling comes into effect (the date on which the lease term commences) or in which the dwelling is occupied, whichever comes first. The consideration is deemed to be equal to the adjusted cost to the vendor of the construction, extension or improvement of such fixed property or portion of such fixed property so supplied.
Sale of dwellings whilst being temporarily applied for exempt supplies: The sale of the dwelling within 12 months in which it was temporarily applied for exempt supplies will be deemed to be a taxable supply in the ordinary course and the developer must account for output tax on the consideration charged for the property or the OMV at the earlier of the date of any payment of consideration or registration of the property in the Deeds Registry.
Adjustment after expiry of the prescribed 12 months period: A developer will be required to make an output tax adjustment based on the OMV of the property if any dwelling is let for a period in aggregate of more than 12 months. The time of supply will be immediately after the 12 months period of letting the property as an exempt supply. The subsequent sale of such a property will not be a taxable supply and the purchaser will be required to pay transfer duty.
Claw-back deduction undern s16(3)(o): The deduction will only apply if the developer has previously been required to declare output tax (as described in the two aforementioned points). The deduction is calculated by applying the tax fraction to the adjusted cost of the construction, extension or improvement to the fixed property and may be made in the same tax period within which the time of supply of the sale of the fixed property falls or the adjustment under s18(1).
Effective date and scope of application: S18D applies only to any newly developed units of fixed property that are temporarily applied for exempt supplies as contemplated in s12(c) of the VAT Act for the first time on/after 1 April 2022. It does not apply to any property which is leased for a fixed period exceeding 12 months or any temporary letting of dwellings that were previously subject to the other temporarily relief mechanism under s18B; or any temporary letting of dwellings by developers between 01 January 2018 and 31 March 2022.
This BGR applies from the date of issue until it is withdrawn, amended or the relevant legislation is amended.
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Chenay Carelse is a Senior Tax Consultant at Nolands Tax. She is a qualified Tax Advisor (SA) with the South African Institute of Tax Professionals, with her highest qualification being an Honours degree in Tax. Her interests include all aspects of South African tax, and she is currently completing her Masters in South Africa Tax at the University of Cape Town. Contact Chenay
Nolands SA is an international auditing firm located in eleven offices in all major centres in Africa. Nolands employs almost 200 people and is focused on providing the best possible solutions for its clients. The company prides itself on being ‘not ordinary’ and on its ability to integrate services and respond rapidly to clients’ needs.
