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How VAT increase affects market

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This small rise in the cost of VAT – from 14% to 15% – could cost buyers anything from a few hundred rand more to tens of thousands of more.

The VAT increase which will come into effect on April 1 will have varying impacts for property buyers, with the type of seller the main indicator of how much more they will have to pay.

Depending on the type of seller, and the property price, this small rise in the cost of VAT – from 14% to 15% – could cost buyers anything from a few hundred rand more to tens of thousands of more.

Fortunately, most buyers may not feel this increase as most sellers are not VAT vendors.

Paul Stevens, chief executive of Just Property, says Transfer Duty or VAT is payable on the transfer of fixed property in South Africa, and is calculated on the purchase price of the property. However, a transaction cannot be subject to both – it is either one or the other.

Effectively, the status of the seller determines whether VAT is payable.

“VAT on an immovable property is applicable when the seller is a registered VAT vendor and the property forms part of the seller’s taxable earnings.

“In terms of a VAT transaction (where one or all parties are registered for VAT), the purchase price is VAT-inclusive unless otherwise stated in the Offer to Purchase.
“The seller must take care to calculate the purchase price accordingly to include the portion payable to Sars,” Stevens says.

Most home sellers are not VAT vendors so there will not be a 1% increase in the purchase price of a property, says Lara Colananni, specialist conveyancing attorney at Guthrie Colananni Attorneys. The associated services, like conveyancing and/or bond costs, will, however, be affected. 

“On a property transaction of R1.5 million, the VAT component of these services will nominally increase by a few hundred rand. Examples of these services are conveyancing fees, estate agent commission, bank fees and the cost of compliance certificates.”

A property at this price will, therefore, cost buyers an extra R476.50 and sellers an additional R850, more or less, Colananni says.

However, it is a different story when sellers are VAT vendors, says Craig Guthrie, specialist commercial attorney at Guthrie Colananni Attorneys.

“Typically, when buying from property developers or institutional owners, VAT is included in the purchase price. Because VAT-registered sellers pay VAT, there is no transfer duty.  In these transactions the purchase price should increase by 1%.”

Using the property price example of R1.5m, Guthrie calculates this property purchased from a VAT vendor will see buyers forking out an extra R15 476.50. The seller in this transaction, on the other hand, can recover his estimated R850 extra VAT from SARS.

Homeowners should also be aware that certain running costs that incur VAT will also increase, such as insurances, levies, bank charges, repairs and maintenance.

“There will also be an increase in the construction or replacement cost of residential property as these costs will attract VAT at the higher rate.  Over time, and assuming house demand remains the same, it is likely the VAT increase will affect house prices, especially the price of new properties.”

Landlords will also be subject to increased billings if their property management companies are VAT-registered, Stevens says.

He advises buyers and sellers to always discuss the matter of VAT with either an auditor or attorney before signing any deals as some circumstances dictate that transfer duty is payable, and not VAT. Therefore, the implications “can be significant”.

According to David Campbell of Meumann & White attorneys and conveyancers, if a residential property sales agreement is signed by both buyer and seller before April 1, 2018, and the price of the sale or construction of the property is stated in this agreement, the VAT payable on the transaction will be at the rate of 14%, even if the date of registration or transfer is only on or after this date.

The VAT increase to 15% is likely to result in continued consumer caution in the coming months as South Africans weigh up the immediate impact and fuel levy increases, says Lew Geffen, chairperson of Lew Geffen Sotheby’s International Realty.

However, he says the property industry is likely to be “significantly buffered for now” by the fact that many investors who have been holding back will start to feel renewed confidence and will re-enter the market. 

“The increased activity will in turn stimulate a price recovery in most areas with steady and stable growth the hallmark of the year.”

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