1% matters - how the VAT increase affects property sales

26 March 2018

The power of one: a phrase that has been quoted in many a cliched motivational poster, but one whose power has never quite been fully grasped - until now. The 1% VAT increase which is set to take effect as of 1 April 2018 has set the country alight with many burning questions, most of which cannot be comprehensively answered by our knowledgeable friend Google.

Raising VAT to 15% has muddied the waters of long-standing transactions in many sectors - none more so than in the property sector. Now more than ever, buyers and sellers need to pay particular attention to VAT charges and how the increased rate will affect their real estate transactions.

As with most before and after transformations, the complication arises in the grey area that lies between the start of a project and the big reveal date. Just as we decide between calling the construction zone the "old lounge" or "new dining room" during the renovation, consumers are going to grapple with whether to apply the 14% or 15% VAT charge to transactions which began prior to 1 April, but only concluded (that is, paid for and delivered to the client) after 1 April. The key to finding an answer to this question is to know what is legally expected from you in various situations:

VAT on residential property sales

According to 67A(4) of the VAT Act, VAT payable by the seller of a residential property can be calculated at the time that the transaction is first agreed to provided that:
1. There is a written and signed agreement to the sale of the property dated before 1 April 2018, and
2. The price has been agreed to within the contract.

In short, if you signed a contract with a buyer before 1 April, then 14% VAT may be applied to the transaction even though the registration of transfer for the property and payment only takes place after 1 April 2018.

VAT on commercial property sales

However, the same rule cannot be applied to the sale of commercial real estate. In the case of these sales, the general rule of supply applies, which means that the applicable VAT rate will be 15% if the payment and conclusion of the transaction only occurs after 1 April.

VAT on agent's commission

This calculation is a personal topic which should be discussed between the seller and their agent based upon the business relationship they've formed. Because an ongoing supply of services is supplied by the agent, it is difficult to put a timestamp on when the transaction comes to its official end. In strict legal terms, you may calculate VAT at 14% if you receive the invoice for commission before 1 April, and at 15% if you receive the invoice for commission after 1 April. However, an arguably more reasonable way to go about the calculation is to apply a time allocation to it. This would mean that if the agent began marketing your property on 2 March and the sale of your property was concluded on 2 April, then a 14% VAT charge can be applied to 50% of the commission, and the other 50% will carry a 15% VAT charge.

Final words of advice

The increase in VAT has seen most South Africans bracing themselves for the worst. While the increase does mean slightly tightened purse strings for most of us, it is by no means a cause for alarm for those who keep themselves up-to-date with the change. The implications of the VAT increase can be confusing to fully understand. But, as long as you keep yourself informed throughout the process and speak to knowledgeable sources that you can rely on, you can avoid any financial blunders that can occur as a result of this change.

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