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Advice: VAT Implications Leasehold Improvements

Legislative changes have been introduced to the Value Added Tax Act 89 of 1991 to clarify the implications for both the lessee and the lessor when the lessee undertakes voluntary or compulsory improvements on leased land for no consideration.

Lessee implications

A deemed supply is triggered in terms of section 8(29), which deems the lessee to supply goods (that is, the building improvement to lessor) thus resulting in a deemed output. The time of supply is when the improvements are completed. However, in terms of section 10(28), the value of the supply is nil. On the basis that the lessee is deemed to have made a supply of goods when the improvement is undertaken, the lessee is therefore entitled to claim input VAT on the leasehold improvement undertaken if in possession of necessary valid documentary requirements. No deemed supply is triggered in terms of section 8(29) if the leasehold improvements are applied fully for non-taxable supplies, for example residential letting being an exempt supply.

Lessor implications

In terms of section 18C, the lessor has to account for output VAT, but only to the extent that the leasehold improvements undertaken is applied for non-taxable purposes. The value of the output adjustment is calculated by applying the tax fraction (14/114) to the amount per agreement, or if no amount is stipulated, open market value (OMV) multiplied by the percentage applied for non-taxable supplies.


A leases land to B for a monthly rental of R114. B is required to effect leasehold improvements to the land to the value of R1 140 for no consideration. B erects a building consisting of office space 70% and residential accommodation (for example a penthouse) 30%. The improvements are completed on 30 April 2018. A and B are both VAT registered vendors under category B.

Lessee: Input VAT on monthly rentals (114 x 14/114) x 2 = (R28). Leasehold improvement, a deemed supply is triggered, the lessee is deemed to have made a taxable supply of goods to the lessor. The time of supply is the completion of improvements, in other words 30 April 2018, falling in VAT period 04/2018. The value of the supply is nil. The lessee is further entitled to the input VAT on the value of improvements (1 140 x 14/114) = (R140). The input VAT can be claimed if in possession of the necessary supporting documentation.

Lessor: Output VAT on monthly rentals (114 x 14/114) x 2 = R28. Leasehold improvement section 18C output VAT adjustment is triggered (1 140 x 14/114 x 30%) = R42.


These new amendments take effect on 1 April 2018. The policy reasoning cited by National Treasury for the introduction of section 18C is to place the lessor in the position that the lessor would have been had the lessor undertaken the leasehold improvements and used the improvements for non-taxable supplies. The input VAT is permitted as a deduction in the hands of the lessee and the output tax adjustment is triggered in the hands of the lessor, on the basis that the improvements become property of the lessor. Section 18C was legislated to have the effect that the lessor ultimately bears the potential output VAT, where leasehold improvements are undertaken by the lessee for no consideration.