The new value-added tax (VAT) increase that was announced by the ex-minister of finance, Malusi Gigaba, will see VAT increase from 14% to 15% on Sunday, 1 April 2018. This one percent change will have consequences for the property market, including property transactions, registrations and estate agent commissions.
We will break down the effects of the VAT increase on each of these variables in the property market. This will give buyers, sellers and agents an insight into what to expect going forward from the beginning of April 2018.
How will the VAT increase affect property transactions?
The VAT rate that needs to be paid on a property transaction will be determined by one of two factors; the date of registration of transfer of the property at the Deeds Registry, or the date that the payment is made to the seller – whichever comes first. Any registration or payment made before 1 April will accrue 14% VAT, and 15% on or after 1 April.
If a deposit is paid to and held by, the transferring attorney, it is not considered to be a full payment for the property and will not trigger the supply of the property. Usually, the buyer’s bank will pay for the property in full, in which case the supply of the property can be triggered from that day.
However, if the seller and the buyer reach an agreement that the property can be paid off over a period of time, the amount of input and output tax of both parties will be calculated from the time of supply of the property. If the supply is triggered before 1 April, the buyer’s payments to the seller over the agreed period of time will not increase because of the VAT increase (i.e. they will stay at 14%).
Therefore, the time of supply of a property dictates the VAT rate. If payment and transfer take place after 1 April, any tax invoices issued to the buyer before 1 April (at 14% VAT) will have to be corrected to the new 15% rate.
Specific rules and exceptions
There is a rate-specific rule that may affect the rate of VAT for buyers who have signed a purchase contract before 1 April, but payment and registration only take place after this date. This rule overrides the above rules, and 14% VAT will be paid, if the following criteria are met:
- The buyer enters into a written agreement to purchase the residential property before 1 April 2018.
- The full payment and the registration of the property will only take place on or after 1 April.
- The VAT-inclusive purchase price was outlined and stated in the written agreement.
This rate-specific rule applies to residential properties, which includes the following:
- An existing building, together with the land on which it is located, and any other real rights associated with the property.
- A ‘plot-and-plan’ deal where the land is purchased together with a building package for a house to be constructed on that land.
- The construction of a new building by a vendor carrying on a construction business.
- A share is a share block company which a right to the use of a residential building.
How will the VAT increase affect the seller and the estate agent’s commission?
There are two possible scenarios to this problem; firstly, if the sales contract states that a percentage commission plus VAT is payable, then VAT will be 15% if the transfer takes place on or after 1 April. The result is that the seller will receive a lower net amount of the selling price because of the increased VAT if the transfer takes place on or after 1 April.
Secondly, if the sales agreement states that a fixed commission includes VAT, then the seller will receive the same amount regardless of the VAT increase, but the estate agent will receive less. So, the stipulations in the sales agreement will determine who is more affected by the VAT increase – commission plus VAT means that the seller is affected; commission includes VAT means that the agent is affected.
In practice, here is the effect a one percent VAT increase has on a house sale; on a R2.5m house sold before 1 April, commission (R100 000) plus 14% VAT (R14 000) means that the seller gets R2 386 000. On or after 1 April, the commission remains at R100 000 but 15% VAT (R15 000) means that the seller gets R2 385 000.
Please note that article is not intended for legal advice. Although due care was taken to ensure that the facts are correct, the article should not be referred to for legal purposes.
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