If you conduct your business from home then a provision in the VAT Act could prove to be important for you.
The provision relates to the situation where you bought your home before September 30 1991, you have used it for business purposes, and you wish to sell it. Even if you are not planning to sell your home in the immediate future, the provision may interest you because it may influence your input tax claims in respect of your home.
Before going into the detail of this provision it is important to appreciate the general VAT provisions in relation to homes.
In the majority of instances when homes are bought and sold VAT is not an issue because the purchase and sale take place between private individuals who are not registered for VAT, or whose homes are not in any way related to their business.
Consequently, VAT is not an issue and transfer duty would normally be payable.
But if you did use your home partially for business purposes and if you bought it after the introduction of VAT, in terms of the the general rule you would have been entitled to claim a deemed input tax credit in respect of the property when you bought it.
This would have been based on the tax fraction (currently 14/114) applied to the cost of the home, apportioned for the proportion of the property used for business.
After November 1994 this claim would have been limited to the transfer duty paid in respect of the purchase.
On sale of the property, the VAT Act requires that the entire property is sold with output VAT charged on the selling price (there would be no transfer duty in this instance), and you would be able to claim a deemed input tax credit representing the balance of the VAT not claimed when you bought the property (ie based on the purchase price when you bought it) as a deduction against the output tax you have to pay to the South African Revenue Services (SARS) as a consequence of the sale.
The exception to this arises, however, as I said above, if you bought the property before VAT was introduced in September 1991. In this instance, you would not have claimed an input tax credit when you bought the property.
Thus, provided the property has been used mainly as your residence, and you have never made any claim for input VAT in respect of the property, you may sell the property without any VAT implications.
No output VAT would therefore be chargeable on the sale of the house and no deemed input tax would be claimable - the normal transfer duty rules would apply.
The type of input tax claim the Act envisages which might remove this concession would be a claim on the cost of the property (for example if you changed its use to that of business after the introduction of VAT), or a claim in respect of the cost of improvements and major repairs. However, a claim in the VAT on a portion of maintenance (cleaning), electricity and water would probably not remove the concession.
So, if your home falls into this category and you run your business from it you would be well advised to think twice before claiming an input tax on improvements related to the business portion of the property, or on the change in use of the portion of the property to business purposes, unless an analysis of the effect this will have on the sale of the property shows that it will still be worthwhile.