Property developers appear to find themselves in somewhat of a pickle since the expiry of the temporary VAT relief, formerly contained in section 18B of the VAT Act. The latter temporarily suspended the requirement to account for output tax on the market value of the property where, in need of cash-flow while waiting for the property to sell, the developer found a temporary tenant, without abandoning the intention to sell.
One may rightfully ask why such an adjustment might be called for, as the intention to sell and thus, to make a taxable supply, never changes. This adjustment is, in fact, often referred to as a so-called “change-in-use adjustment”. Section 18(1) requires this adjustment if the relevant asset is “subsequently applied by him (…) wholly for a purpose other than “the said purpose” (of having been “acquired, manufactured, assembled, constructed or produced by such vendor wholly or partly for the purpose of consumption, use or supply in the course of making taxable supplies or such goods were held or applied for that purpose…”)
Section 18(1) itself seems to acknowledge that one would be entitled to an input tax credit where an asset is held for the purposes of making a taxable supply (being part of the “said purpose” referred to above). If, subsequently applied “wholly for a purpose other than the said purpose”, section 18(1) requires the vendor to account for output tax on the market value of the asset.
Seeing that even the relief contained in section 18B contemplated that the letting of the property would only be temporary, it is rather perplexing how the asset was no longer “held” for the purpose of making a taxable supply, albeit temporarily applied to make exempt supplies. It would appear eminently arguable that a temporary lease can never amount to an application “wholly for a purpose other than the said purpose”, as the initial purpose to hold the property for sale remains very much alive. An acknowledgement by SARS that the “application” had changed “wholly” from the original purpose, seems to suggest that it is assumed that it is no longer held for the said purpose – that any subsequent supply would be a non-enterprise supply and therefore, not be subject to VAT. To require output tax on the deemed supply under section 18(1) and then again under section 7(1)a) upon sale, seems to be an exemplary example of having one’s cake and eating it…
Other VAT jurisdictions recognise this and require taxpayers to account for VAT on a fictional supply equal in value to the temporary rental received. In this way, the landlord is “input taxed“ only to the extent of the making of exempt supplies. The dual purpose of the application of the asset is, therefore, recognised. In New Zealand the court has held (C of IR v Lundy Family Trust and Behemoth Corporation Ltd (2006) 22 NZTC 19,738 (CA)) that when the properties are returned to a taxable supply purpose, there must be a recovery by the taxpayer of the GST paid on the fictional supply.
The presumption against double taxation also suggests that here is something amiss. If one assumed that it were correct to make an adjustment in terms of section 18(1), based on the open market value of the asset as a result of the application wholly for a purpose, other than the said purpose, a corresponding section 18(4) adjustment would be expected upon the reversal of the application to the “said purpose” upon subsequent sale of the property. Section 18(4) allows an adjustment based on the lower of the “adjusted cost” or market value of the property. “Adjusted cost” only includes costs in respect of which VAT was paid. Developers would normally have a large labour cost, which results in no or a relatively small section 18(4) adjustment. Should section 18(4) apply, only a fraction of the output tax accounted for under section 18(1) would be recoverable. When output tax is accounted for again upon sale under section 7(1)(a), double tax ensues. Whereas the property developer could have let the property for as little as one month, a substantial portion of its potential profit margin will end up at SARS without anyone having a corresponding input tax credit.
The previous SARS Guide for Fixed Property and Construction (2008), which has since been updated, stated that when the vendor later sells the fixed property, which he previously let, he had to levy VAT on the sale, but could “deduct the VAT he declared and paid back” at the time the fixed property was let. A call to the SARS call center also suggests a pragmatic approach as we were advised to process an adjustment in our next VAT return. This does not accord with the provisions of the Act, though and fails to address the apparent technical deficiencies in the legislation.
Vendors should think twice about reading SARS Guides and Interpretation Notes as the law. Since the Supreme Court of Appeal’s decision in 2017 it is now settled law that courts should not have regard to SARS interpretation notes when interpreting legislation, since “it is difficult to see what advantage evidence of the unilateral practice will have for the objective and independent interpretation by the courts of the meaning of legislation, in accordance with constitutionally compliant precepts. It is best avoided.” Seeing that VAT is a self-assessment tax, this prudent approach to legal interpretation would be advisable to taxpayers’ own application and interpretation of the law, too.
The New Zealand courts have already thrashed out the application of the rules we have effectively adopted from there. It is difficult to see why we would not also adopt the conclusions reached, mutatis mutandis.
Marshall NO and Others v Commissioner for SARS (CCT208/17)  ZACC 11 (25 April 2018)
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