The latest VAT Act amendment concerns the temporary letting of fixed property by developers (Taxation Laws Amendment Act 2021). The change comes into effect on 1 April 2022. New sections 9(13), 10(29), 16(3)(o), and 18D cover this amendment.
Scope (Section 18D)
When a developer temporarily lets a dwelling (which the developer holds as trading stock) as VAT-exempt residential accommodation, that is, under section 12(c), a deemed supply (output tax adjustment) arises.
A ‘developer’ is a vendor who continuously or regularly constructs, extends, or substantially improves fixed property consisting of any dwelling, or parts of that fixed property, with the intention of selling it after construction, extension, or improvement.
‘Temporarily applied’ means the fixed property is used to provide accommodation in a dwelling for a total of 12 months or less. If the letting and hiring agreement is for more than 12 months, section 18D does not apply, but the property is subject to section 18(1) – that is, it will be treated as a total change in use, which means it will be treated as having been supplied for its full open market value at the time of the change in use.
Implication (section 18D): A deemed output tax adjustment arises for the developer.
Time of supply (section 9(13)): The tax period when the rental agreement takes effect.
Value of supply (section 10(29)): The developer’s construction costs. Costs should include VAT.
Sale or VAT reintroduction: If the residential property is sold within 12 months after section 18D VAT output tax adjustment, normal VAT will be levied on the sale at 15%.
When the property is sold, brought back into the VAT net, or deemed supplied under section 18(1), the Commissioner must allow the vendor an input tax deduction under section 16(3)(o). The section 16(3)(o) input tax deduction is the previous output tax adjustment raised under section 18D.
Previous relief (section 18B): Section 18B was implemented on 10 January 2012 to provide temporary relief for property developers when they let properties held as stock for resale (taxable supplies) to tenants. Section 18B relief expired on 31 December 2017.
The relief was a suspension of the obligation to declare output tax on the change in use adjustment when newly developed dwellings were temporarily let to tenants (and used for exempt purposes) while being marketed for sale. Developers with such difficulties were allowed to temporarily let their properties during the relief period without declaring output tax on the adjustment.
Section 18(1) determines supply value based on open market value, while section 18D uses cost inclusive of VAT. This ensures a more equitable position as the property developer would have previously been entitled to an input tax deduction on the development costs. During the temporary letting period, no VAT is levied on the rental income, being a VAT-exempt supply, in other words residential accommodation (section 12(c)).