If there is a slump in the property market it has been commonplace for developers to temporarily let dwellings. Historically, the difficulty that this created for developers was that Sars regarded the temporary letting as a change of use from making taxable supplies to exempt supplies.
This resulted in the developer having to make an output tax adjustment calculated by applying the tax fraction of the open market value of the property when the change of use occurs.
With effect from January 10, 2012 section 18B of the Act was introduced, which allowed a developer to temporarily let dwellings for a period up to 36 months. Initially section 18B was to cease on January 1, 2015 but was extended for three years up until January 1, 2018.
Under these provisions the developer was deemed not to have made a taxable supply when the property was temporarily let, and the output tax adjustment was suspended during the relief period. The developer was only deemed to have made a taxable supply at open market value on the earlier date of the expiry of a 36-month period after concluding the lease, or the date when the developer permanently applied the property for a non-taxable purpose.
Sars has now issued a ruling to give clarity on the cessation of section 18B.
According to the ruling the 36-month period is calculated from the date that any agreement for temporary letting is entered into for the first time during the period January 10, 2012 to December 31, 2017.
Where the 36-month period expires after 31 December 2017, and the property was not permanently applied for non-taxable purposes, the developer must account for the output tax in the tax period when the 36-month period expired.
For example, if a developer entered into a lease for the temporary letting of a dwelling for the first time on December 31, 2017, then the developer must account for the output tax adjustment in the tax period within which December 31, 2020 falls.
* This article has been written by Graeme Palmer, a Director in the Commercial Department of Garlicke & Bousfield Inc. For more information contact Graeme on telephone : +27 31 570 5496, email: [email protected]
NOTE: This information should not be regarded as legal advice and is merely provided for information purposes on various aspects of tax law