VAT on leasehold improvements

It is proposed that where a lessee effects leasehold improvements to the property of a lessor for no consideration, the lessee is deemed to have made a taxable supply of goods to the lessor in the course or furtherance of the lessee’s enterprise. The value of such a supply is deemed to be nil. The lessee is therefore entitled to deduct the VAT incurred on the cost of the leasehold improvements as input tax. However, if the property is not used by the lessee for making taxable supplies, there is no deemed supply and the lessee is not entitled to any input tax deduction.

There is further no VAT implication for the lessor with regard to the leasehold improvements effected by the lessee. However, if the leasehold improvements are not applied by the lessor for making taxable supplies, then the lessor will be required to account for output tax on the higher value of the open market value of the improvements, the actual cost to the lessee to effect the improvements or the amount agreed upon for the improvements by the lessor and the lessee. The output tax must then be accounted for in the tax period in which the leasehold improvements are completed.

These proposed amendments will become effective from 1 April 2018.

Temporary letting of residential property developed for sale

Where a property developer develops the residential property for sale and lets the properties which it is unable to sell on a temporary basis, the developer is required to account for output tax on the open market value of the property when it is first let. 

Section 18B of the Value Added Tax Act No, 89 of 1991 provides for relief of up to 36 months for a property developer that temporarily lets such property until a buyer is found, for the developer not to be required to account for output tax. This relief provision ceases to apply on 1 January 2018.  

The Draft Taxation Laws Amendment Bill, 2017 does not provide for an extension of this relief provision. It is not clear whether this is intentional or an oversight.