During the budget speech of 2018, South Africa’s then Minister of Finance, Malusi Gigaba, made a nationwide announcement of the national increase on value added tax (“VAT”) rate from 14% to 15%. This is the first national increase since 1993. The VAT increase will be effective from 1 April 2018. It goes without saying that the increase of taxes will always be unpopular regardless of the motivation behind it and such an action is never graciously welcomed amongst taxpayers.
The question now turns to the influence that such increases may have on corporate and commercial dealings that are in the process of being concluded or negotiated. In the event where a purchaser entered into a sale of the immovable property with a developer which becomes unconditional before 1 April 2018, the Value Added Tax Act No. 89 of 1991 (“VAT Act”) affords limited protection against higher VAT rates, subject to the prescribed conditions in the VAT Act.
When dealing with a sale of immovable property, regard has to be given to the time of supply rules in the VAT Act, specifically in the instance where a property developer concludes an agreement before 1 April 2018, and payment and transfer is only effected after such date – leading to uncertainty amongst contractual parties as to the VAT rate that needs to apply.
Section 9(3)(ii) and (iii) of the VAT Act stipulates that “property” is deemed to be supplied on the earliest of the date on which:
- the property in question is transferred and registered in the Deeds Office; or
- payment of the purchase price is made in respect of the sale.
In the event where Party A and Party B signs a written sale of immovable property agreement on 1 March 2018, wherein the purchase or construction price is clearly set out, however the payment and the subsequent transfer shall only take place on or after 1 April 2018, then the 14% VAT rate shall apply as the parties signed the written agreement prior to the date upon which the VAT increased.
Section 67A(4) of the VAT Act serves as a saving grace, however, it is often overlooked due to the fact that South Africa’s VAT rates have not been increased over the past 25 years. This section provides that the VAT rate that was in effect at the time of concluding the written agreement shall be the applicable VAT rate. Therefore, a written sale of immovable property agreement which becomes effective before 1 April 2018 shall be subject to 14% VAT.
The application of section 67A(4) is however subject to the following conditions:
- the protection in section 67A(4) against higher VAT rates shall only be applied in respect of an agreement in terms of a sale of immovable property of which the property is a residential dwelling and/or the primary function of such property is for the purposes of a residential dwelling. Therefore, agreements for the sale of commercial immovable property shall not enjoy the protection of section 67A(4), and such a transaction will be subject to the 15% VAT rate, irrespective of when the sale was concluded and/or negotiated by the parties;
- the purchase price should be expressly stipulated and determined in the agreement; and
- the sale of residential immovable property agreement should be signed by the relevant parties prior to the effective date of the VAT increase in order to be exempt from the applicable 15% VAT rate.
It is clear that the provisions of section 67A(4) of the VAT Act specifically refers to “sale of residential property”, and to eliminate any doubt herein, such a sale includes the following:
- the sale of any immovable property and its accompanying dwelling;
- the sale of any right of occupation;
- a sectional title encompassing a dwelling; and
- the sale of any immovable property where the sole purpose of such immovable property is that of a dwelling.
If the purchase price regarding any of the above sale agreements, has been pre-determined and specifically stated in the written agreement, which was signed by the parties thereto, and the subsequent registration and transfer of the property only takes effect after 1 April 2018, then VAT shall be levied and payable at 14%.
Although the increase in the VAT rate is unwelcomed by South Africans in general, it is important to note that the VAT Act provides remedies to parties to sale of immovable property agreements provided certain conditions are met and parties are advised to consult their legal/tax advisor in order to establish whether or not their transaction will be subject to 14% or 15% VAT rate.
It is clear that the protection afforded by the applicable sections only extend to a sale of immovable property agreement and accordingly an agreement relating to the sale of immovable property where such property is sold and/or constructed for commercial purposes, such an agreement will be subject to the increased VAT rate of 15% and the exception shall not apply. Due to the uncertainty amongst contracting parties regarding the applicable VAT rates parties are advised to carefully review the stipulations of a sale of immovable agreement prior to the signing thereof, in order to ensure that such an agreement clearly stipulates the purchase price, and date of registration of transfer of the immovable property.