Value added tax (VAT) vendors who purchase fixed property from a non-vendor are to receive a greater input tax deduction (VAT deduction) due to recent changes to the Value-Added Tax Act 89 of 1991, effective from January 10 2012.
Previously when a vendor purchased a property from a non-vendor the VAT deduction was limited to the amount of transfer duty payable by the vendor on the purchase price of the property. This deduction was only allowed if the vendor purchased the property for the purpose of generating VATable income. For example, a vendor acquires a commercial property which he leases to generate an income.
Limiting the VAT deduction to the amount of the transfer duty payable no longer applies. A vendor purchasing a property from a non-vendor will now be entitled to claim a VAT deduction equal to the tax fraction of 14/114 applied to the lesser of the purchase price or open market value of the property. Before being entitled to the deduction the vendor must be a South African resident who has paid the full purchase price and the transfer of the property must have been registered in the Deeds Office. As in the past, the property must be purchased by the vendor to generate VATable income.
As an example of the increased benefit consider the following: A vendor who purchased a property for R5 million from a non-vendor before 10 January 2012 paid transfer duty of R317 000 and his VAT deduction was limited to this amount. After 10 January 2012 if the vendor made the same purchase he would be entitled to a VAT deduction of R614035 (R5m x 14/114). This represents an increase in the vendor's VAT deduction in the amount of R297035.
If a vendor acquires property from a non-vendor for private use he cannot claim the VAT deduction. Should he at a later stage change his intention and start generating a VATable income from the property the adjustment provisions in the Act will apply. Regrettably, these provisions were not amended and the vendor's VAT deduction will be limited to the amount he paid in transfer duty.