Confusion continues to reign when it comes to how VAT should be treated in relation to property.
Before I explain the problem it is important to understand some principles relating to VAT as far as property is concerned:
* If the property is part of your trading stock and you buy it to develop and to sell it, you may claim an input VAT credit or refund (depending on the level of your output VAT) in respect of the purchase price and any goods and services you might acquire to develop and improve it.
If you are charged VAT when you buy the property you may claim the full VAT you are charged.
If, however, the seller does not charge you VAT you will pay transfer duty and may claim a VAT input tax credit equal to the transfer duty;
* If you are buying the property to lease it out to third parties who will use it for commercial purposes, you will be entitled to claim an input tax credit or refund when you buy the property, and will be required to add VAT to the rent you charge to the lessees.
If, at some point you sell the property, you will be required to charge VAT to the purchaser and to pay it to the South African Revenue Services (SARS). The purchaser will not have to pay transfer duty;
* If you are buying a property to live in it, or to provide to your employee(s) to live in, or to lease it out to other people to live in, because it is to be used for the purposes of accommodation in a dwelling, which is an exempt supply, you will not be entitled to claim an input tax credit or refund when you buy the property.
Equally, you will not be required to charge VAT on the rentals you charge to the occupants, or charge VAT when you sell the property. The purchaser will pay transfer duty on the purchase; and
* If you are buying a property which will be rented out partially to commercial businesses and partially for accommodation purposes (assuming both parts are more than 10 percent of the total) you will need to apportion the amount of VAT you claim as a refund when you buy the property. This type of situation might arise where you buy a block of flats with shops on the ground floor, for example.
When you sell the property, you will charge VAT on the full selling price and may claim the balance of the VAT on the original purchase price you paid (or the market value if it is lower).
If during the time that you own the property the proportions of commercial to residential leasing change, you must make an adjustment to the amount of the VAT originally claimed.
What happens, though, if you buy a property with the intention of developing it for resale, but in the interim you decide to rent it out for commercial or residential purposes?
If you rent it for commercial purposes, there is no problem, you will simply charge VAT on the rentals. No adjustment will be needed in respect of the input tax you claimed when you bought the property originally.
But if you rent out more than 10 percent of it for residential purposes you will need to make an adjustment on your VAT return to take account of the fact that you are now using the property as a dwelling.
So, if you use 30 percent of the property for residential leasing you will need to calculate the VAT for 30 percent of the purchase price and pay it to SARS.
When you later stop using the property for residential letting, and sell it, or you reduce the amount of the property used for dwelling purposes, you may make a further adjustment to the input tax you have claimed.
The key is to be aware of the use to which you are putting the property, and to make sure you are treating the VAT correctly.