Working from home – The VAT swamp when selling the property

In the previous article we discussed the VAT benefits of working from home. These benefits can become a nightmare when the new normal returns to the old normal and businesses are no longer conducted from home. This article deals with the implications if a private residence used partially for business purposes is sold.

In the last article in this series we shall deal with the impact if the VAT enterprise activities cease.

Introduction

The pleasure of a VAT deduction when a property is first partially used for business purposes quickly evaporates when a VAT vendor subsequently discovers that the initial benefit was only the marketing department at work.

Selling of a residential property partially used for VAT enterprise purposes may come with a nasty sting in the tail!

Properties acquired before 30 September 1991

A residential property acquired before 30 September 1991 and owned by a natural person may be sold without VAT if no input or other deduction has ever been made in respect of such property.

Input tax or other deductions “made in respect of such property” will include any costs directly attaching to the property, e.g. the purchase price of the property, repairs and maintenance in respect of the property and any permanent  enhancements made thereto for the purposes of the taxable trade carried on.

Input tax or other deductions “made in respect of such property” will not include the furnishing and other equipping of the work space if it does not become part of the capital structure. It will also not include general consumables, e.g. water and electricity charges.

If any input tax or other deduction has been claimed in respect of the property in the past, the full sales price of the property will be subject to VAT.

The VAT vendor will under these circumstances be entitled to an input tax deduction/notional input tax deduction based on the original cost of the property but only to the extent that the property was used for non-taxable purposes.

For example, if the property was originally acquired for R1 million and was used 10% for business purposes and is subsequently sold for R10 million, the full sales price will be subject to VAT and the VAT vendor will be entitled to a deduction of 15/115*R1 million*90%. Some goods news; if the sale of the property is subject to VAT there will be no transfer duty payable.

Properties acquired on or after 30 September 1991

The sale of residential properties acquired on or after the date of introduction of VAT in South Africa and use partially for VAT enterprise purposes will always be subject to VAT in full.

A deduction as discussed above based on the original cost of the property will also be allowable under these circumstances.

In situations where the market value of a property has significantly increased since the original acquisition thereof, the net amount of VAT that becomes payable on the sale of the property and the VAT deduction to which the seller is entitled does not compensate fully for the savings in transfer duty. This may impact negatively on the amount that the seller can realise on the sale of the property. On the other hand, if the market value of the property did not increase significantly, the net VAT impact is likely to be less significant and the savings in transfer duty may result in a higher net price being realised for the property.

Conclusion

Ultimately it is about understanding the VAT rules and applying the rules to your best benefit where possible.

In the next article we shall deal with real nasty VAT pitfalls that should be avoided at all cost if possible.