VAT and the real estate consumer

The Value-Added Tax (VAT) rate has been raised from 14% to 15% this month, and the change is set to raise the cost-to-consumer of all sorts of goods and services, from food and clothing to cell phone, insurance, municipal, medical and transport services.

However, it will in most cases not affect the cost of the roof over your head, whether you rent currently or are paying off a bond. Renting out residential accommodation is what is known as an "exempt supply" of a service, which means that landlords cannot charge VAT on monthly rentals, even if they or their agents are registered as VAT vendors.   

In addition, the VAT Act provides that the "supply of credit" (such as a home loan) is also exempt from VAT if there is an agreement in place that commits the borrower to repaying an amount greater than the amount borrowed - that is, if interest is payable on the loan. This means that you don't pay VAT on your monthly home loan instalment.  

For those who are about to buy a home, the good news is that VAT only applies to newly-built homes purchased from a developer or a builder, or to those pre-owned homes that are sometimes sold by a commercial owner like a company or a trust rather than an individual.

In other words, the seller of the property must be VAT vendor for VAT to be included in or added to the purchase price. This means that in the vast majority of cases, those who purchase pre-owned homes will not have to worry about the VAT increase. They will pay a different form of tax on the transaction, known as Transfer Duty - and the first R900 000 of the purchase price will be exempt.

More good news is that those who have already bought a new home from a developer and are currently waiting for building to be completed before the property can be transferred into their name will pay VAT at the old rate of 14% if their sale agreement was signed before 1 April. 

This will save them about R7500 on property that cost R1m VAT included, and is provided for in Section 67A(4) of the VAT Act. This states that, subject to certain conditions, the VAT rate that was force on the date that a written sales agreement was concluded will apply to the sale of a fixed property, even if there is an increase in the VAT rate after that, and even if the transfer of the property takes place after the VAT increase date.

The conditions are that:

• The property must be a "residential dwelling";
• The price to be paid for the property must be stated in the written agreement;
• The agreement must have been signed by both buyer and seller before the VAT increase date; and
• The actual supply (transfer) of the property is scheduled to take place on or after the date of the VAT increase.

For those who are in the process of selling a property, it is worth noting that most estate agents' commissions will be subject to the 1 percentage point increase in the VAT rate from this month onwards - even if you gave them the mandate to market the property before 1 April and even if a sale agreement was signed before 1 April.

The reason for this is that VAT on services (such as those that estate agents provide) is generally payable at the same time as payment for those services is rendered, and in the case of real estate transactions, commission is usually paid on or slightly after the date that the actual transfer of the property is registered.

Fortunately, the impact will not be significant in most cases. For example, if the commission on a residential property sold for R1m is equal to R75 000 including VAT, the 1 percentage point increase in VAT on that commission amounts to R572.

Meanwhile, rental property owners should note that commissions charged by the managing agents do not form part of the rent, even if they are deducted from any rent collected. They are separate payments for services rendered and will thus also be subject to the VAT increase this month.