LET'S TALK How will the VAT hike affect your fixed property transaction?
We all have a good understanding of how the VAT increase will affect the price we pay when purchasing our groceries but how will it affect the sale of our property is a question that not many of us think to ask.
The increase will affect you whether you are buying, selling or even the estate agent. Whenever there is a transition that needs to take place there will always be a grey area but we attempt to simplify this matter for you.
If you are buying or selling property:
There are very limited instances in which a buyer will pay VAT. VAT will only be payable if the Seller is VAT registered. This is often the case when purchasing from a Developer.
Section 9(3)(d) of the Vat Act clearly identifies the time of supply where fixed property or any real right therein is supplied under a sale as the earlier of:
- The date of registration of the transfer in the Deeds Registry; or
- The date on which payment of any portion of the consideration is made.
It is however trite that the payment of a deposit does not constitute payment of any part of the purchase price.
In situations where either payment or registration takes place after 1 April 2018; the supply of the residential fixed property could be subject to VAT at a rate of 14% provided that:
- The contract for the supply was concluded before 1 April 2018; and - both the payment of the purchase price and the registration of the property will occur on or after 1 April 2018; and
- The VAT-inclusive purchase price was determined and stated as such in the agreement.
The first mentioned proviso specifically refers to the word “concluded”, which means offer and acceptance must have taken place prior to 1 April 2018. This means that any conditions described in the agreement are not required to be fulfilled at that date.
The concession allowing the 14% VAT rate will only apply in respect of the sale of the following types of residential property:
- The sale of fixed property consisting of any dwelling together with the land on which it is erected;
- Any real right conferring a right of occupation of a dwelling or any unit in a sectional title scheme or of any share in a share block company which confers the right or an interest in the use of a dwelling;
- The sale of fixed property consisting of land, for the sole or principal purpose of the erection of a dwelling by or for the purchaser on the land, as confirmed by the purchaser in writing;
- The construction by a vendor carrying on a construction enterprise of any new dwelling.
In short, if you signed a contract with a buyer before 1 April, then 14% may be applied to the transaction even though the registration of transfer for the property and payment only takes place after 1 April 2018.
VAT on commercial property sales: You may note that Commercial property sales have been specifically excluded from the above. In the case of these sales, the general rule of supply applies, which means that the applicable VAT rate will be 15% if the payment and conclusion of the transaction only occurs after 1 April.
If you are the Estate Agent:
As we would see with many real estate transactions, the Estate Agent will market the property and perform various services prior to 1 April 2018 but the transaction may only be concluded after 1 April 2018. What VAT rate is applicable?
The general rule deems the relevant VAT period to be the earlier of either
- an invoice being rendered (what is actually required is payment obligation);
- or payment being made.
Therefore, if the services are performed prior to 1 April 2018, but the invoice is only rendered after 1 April 2018 with payment also being made after this date, the time of supply rules will deem VAT period to be after 1 April 2018 and accordingly that the VAT rate applicable will be 15%. In this scenario one could be faced with the situation where the VAT rate applied to the sale of the property is levied at 14% but the agent’s commission at 15%.
Another method of calculation would be to determine a reasonable apportionment of service rendered prior to and after the effective date of 1 April 2018 will have to be performed and the 14% and 15% rates will have to be applied accordingly.
However, it is best if the Estate Agent and the Seller decide on a VAT rate before concluding the Agreement. This would ensure that there is no uncertainty.