The recent end of the value-added tax (“VAT”) relief period for property developers in South Africa, who temporarily let their residential units, may have a significant impact on their cash flow.


Ordinarily, property developers acquire or develop fixed property (including residential properties) for the purpose of resale. In South Africa, the sale of developed units is a taxable supply and is subject to VAT at 14%, which the property developer must account for to the South African Revenue Service (“SARS”) as each unit is sold. The property developer is entitled to claim an input tax deduction in respect of VAT on development costs (such as land, building costs and related expenses) as they are incurred and does not have to wait until the unit is sold to claim the input tax.

In contrast, the letting of a residential unit is an exempt supply for VAT purposes and therefore, a developer of residential property for letting is not entitled to claim any of the VAT incurred on the related construction costs.

However, a problem arises where a property developer temporarily lets a newly constructed unit to earn rental income, such as during adverse market conditions. The Value-Added Tax Act, 1991 (the "VAT Act") provides that where there is a “change in use” (from a taxable to non-taxable or exempt purpose), the property developer is required to account and pay VAT of 14% on the full open market of the unit as at the date on which the property is let. This position adversely affects the property developer’s cash flow, as the VAT payable as a result of the change in use is likely to significantly exceed the temporary rental income.

To address this issue, former Finance Minister Pravin Gordhan stated in his 2010 budget review that “the current value of the adjustment is disproportionate to the exempt temporary rental income. Options will be investigated to determine an equitable value and rate of claw-back for developers.” As such, with effect from 10 January 2012, section 18B of the Value-Added Tax Act, 1991 provided relief to property developers by allowing the temporary letting of residential units that were intended to be sold, for a period of 36 months, without invoking the VAT liability under the change in use provisions. Initially, the relief was due to expire on 1 January 2015, but was subsequently extended to 1 January 2018.

However, the temporary relief provided under section 18B has not been extended as part of the Taxation Laws Amendment Act, 2017 (the "TAA") promulgated on 18 December 2017, and therefore, has ceased to apply from 1 January 2018.

Practical implications

The 36-months relief period previously provided under section 18B of the Value-Added Tax Act no longer exists and residential property developers are required to account and pay VAT at 14% on the open market value of all unsold residential properties temporarily let out as dwellings as at 1 January 2018.

The output tax adjustment must be declared in property developers’ January 2018 or February 2018 tax period (depending on the developer’s VAT return filing frequency) and the related VAT payment is due to SARS on or before 28 February 2018 or 30 March 2018, as applicable.

A vendor (property developer) may approach SARS under section 167 of the TAA to pay the VAT due to SARS in instalments over an agreed period, in practice usually ranging between four to six months. To qualify, a property developer’s circumstances must fall within one or more of the criteria listed in section 168 of the TAA, which are mostly premised on financial hardship that is reasonably certain to be remedied in the short term. In addition, SARS could request that the property developer provides suitable security before agreeing to enter into a payment arrangement.

Subsequent sale of units

SARS holds the view that a change in use occurs when a residential unit held for sale is temporarily let, and that any subsequent sale of that residential unit will be subject to transfer duty rather than VAT. In our view, however, the subsequent sale of the property is arguably a taxable supply for VAT purposes and VAT will be payable on the total sales consideration. In terms of section 18(4), the property developer will be allowed to claim an input tax deduction in lieu of VAT previously incurred, based on the lesser of the adjusted cost (including VAT) and the open market value of the unit at the date of sale.

It is therefore clear that property developers need to carefully consider and assess the VAT consequences if they have temporary rentals of residential property that they still intend to sell when the opportunity arises. It is important to ensure that the adjustment is brought to account in the correct period and, if needed, an application for a payment arrangement submitted to SARS as soon as possible.