The term ‘supply’ is widely defined in the Value-Added Tax Act 81 of 1991 (VAT Act) to include performance under a rental agreement.
The rental of commercial property such as office space and factories is subject to VAT where the rental income exceeds the R1 million threshold. VAT registration is then compulsory, and the landlord will have to charge VAT on the rental income. The rental of a property for residential accommodation – for example flats, apartments and houses – is exempt from VAT in terms of section 12(c). Section 12(c) refers to the supply of a ‘dwelling’.
The term ‘dwelling’ is defined in section 1 as any building, premises, structure or any other place or part used or intended to be used predominantly as a place of residence or abode of a natural person, including all the fixtures and fittings belonging to the dwelling except where it is used in the supply of commercial accommodation.
The landlord of a block of apartments will therefore be exempt from charging VAT. It is common practice in the property rental industry for the landlord to pass on service-related charges such as property rates, electricity, water and refuse to the tenant.
VAT IMPLICATIONS: ON-CHARGING PROPERTY RATES
The property rates recovered from the tenant form part of the consideration for the rental of the property, and as such is subject to VAT in terms of section 7(1)(a) of the VAT Act.
A ‘municipal rate’ as defined in section 1 of the VAT Act is levied by a municipality and is subject to VAT at the zero rate in terms of section 11(2)(w) of the VAT Act. The landlord is not a ‘municipality’ as defined, and therefore when the landlord on-charges to the tenant a ‘municipal rate’ that was charged to it by the ‘municipality’, this is no longer a ‘municipal rate’ as defined.
VAT IMPLICATIONS: ON-CHARGING ELECTRICITY AND WATER AND REFUSE
The original supply is subject to VAT at the standard rate. The on-charging of these services will also be subjected to VAT at the standard rate in terms of section 7(1)(a), as these services form part of the consideration for the rental of the property.
Author: Muneer Hassan CA(SA) is a Tax Consultant and a Senior Lecturer in Taxation at UJ