While most sectors of the South African economy celebrated the expectations of stable growth under a more business-friendly regime in 2018, these celebrations would have been somewhat subdued around the boardroom tables of property developers in the residential property markets.
This due to the severe cash flow constraints that will be experienced as a result of the termination of the temporary VAT relief granted for developers of residential property under Section 18B of the Value Added Tax Act 89 of 1991.
The provisions of this section enabled property developers to let unsold residential units for a period of 36 months since conclusion of a lease agreement, while holding these units in stock, without having to account for VAT. The letting of these units would therefore not be considered a change of original intent, which would under normal circumstances trigger output VAT on the market value of such unsold units.
Property developers will be forgiven for using the old cliché “time flies when you are having fun…”
The Taxation Laws Amendment Act, 2014 did indeed extend the original relief that was intended to come to end on 01 January 2015, for a further 3 years, thus allowing developers some room to breathe until 01 January 2018.
With the economy growing at around the same pace as a 100km snail race and unemployment figures on the other hand keeping up with the pace at which cabinet ministers were shuffled in the last 2 years, it made perfect sense to grant (and further extend) such relief to property developers. It is hard to believe that property developers’ will construct residential units with the intention NOT to sell these and rather recover their front-end investment over a long period of lease.
The fact is, these units are most likely not sold due to the pressures felt in the property market because of economic uncertainty – something property developers, like most South African citizens have no control over.
Another fact however, is that there is no indication of a possible extension of this temporary relief at this stage, and that developers now have to come to terms with the fact that output VAT will be levied on the open market value of the unsold units as from 01 January 2018.
This means that the first hit to the cash flow statements of property developers can be expected by the end of February 2018, when the January 2018 VAT returns are due for submission.
Property developers who foresee a significant cash flow constraint as a result of this (poorly timed) termination of relief, are advised to approach SARS in terms of Section 167 of the Tax Administration Act to apply for a possible payment arrangement over a period.
There might however be 2 slight glimmers of hope:
- National Treasury are still engaged in discussions with SARS to gain clarity on exactly how the relief provisions of Section 18B should be interpreted for lease contracts that were still in force on 01 January 2018. At this stage however, it seems that SARS’ interpretation is that the 36-month relief period simply terminated on 01 January 2018
- National Treasury has furthermore indicated that there might be reference to this issue in the upcoming budget speech
Whether National Treasury and SARS will acknowledge the possible catastrophic impact on the cash flow of developers in the absence of a properly planned phasing out of the relief provisions, remains to be seen.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
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