One of the interesting proposed insertions in the Value-Added Tax Act 89 of 1991 relates to a new section 18B, which provides temporary relief when there is a change in use of residential property in the hands of a developer. Section 18B will come into operation on the date of promulgation of the Amendment Act and cease to apply on 1 January 2015.
The proposed insertion of section 18B has been triggered by the identified need to address current weaknesses in the property markets and the economic climate which has exacerbated these problems. It is recognised that there may be circumstances where a developer of residential property is unable to immediately dispose of the property concerned and as an interim measure rents the residential property. Such change in use of the property would ordinarily trigger an obligation to account for VAT on a deemed supply at open market value, which the Legislator recognises as creating a potential hardship on the developers concerned.
The proposed amendments therefore provide that where a fixed property:
- is developed by a vendor who is a developer solely for the purposes of consumption, use or supply in the course of making taxable supplies or is held or applied for that purpose; and
- that fixed property is subsequently temporarily applied by that vendor for supplying accommodation in a dwelling and in agreement for the letting and hiring thereof;
- the supply of such fixed property shall be deemed not to be a taxable supply.
A developer is defined in section 18B to mean a person who constructs, extends of improves a building or part of a building for the sole purpose of disposing of that building or part of the building after the construction, extension or improvements.
The relief afforded in terms of section 18B(2) is limited to a maximum period of 36 months where the fixed residential property may be rented before any sale. If the rental of the fixed property extends beyond the 36 month period, the deemed change in use VAT charge will apply.
It is important to note that there must be an intention that the relevant property be disposed of and the relief afforded in terms of section 18B is of limited duration. The Legislator recognises that there are theoretical issues raised in granting such temporary relief which have to be balanced against the practical need for giving relief to developers in the current economic climate. It is therefore noted in the Explanatory Memorandum that a permanent solution will be put in place once all of the issues have been considered.