Effective as of 1 April 2018, there will be an increase of the VAT rate from 14% to 15%. Real estate transactions are also affected by the increase.
This controversial decision has resulted in conveyancers wondering how it will affect real estate transactions that are taking place or still under negotiation.
This is especially applicable in concern with the sale of residential property.
Which VAT rate will these transactions be subject to if they are concluded on or after 1 April 2018?
VAT is payable by the seller on the earlier date of when the registration of the property takes place at the Deeds Office, or when payment for the purchase of the property is made.
The VAT rate in effect at the time of either two events is the rate which is applicable. This serves as the general rule of supply.
Under certain circumstances, the Value Added Tax Act of 1991 provides an exception regarding the increase, however this is dependent on certain requirements being met. Also the exception is only applied in the case of residential properties.
In Section 67A(4) of the Act, it mentions the requirements. Firstly, if there needs to be a written sales agreement which was entered into prior to 1 April 2018. Also, the agreed to price needs to be stated in the contract.
The payment for the purchase price and the registration of transfer then takes place after 1 April 2018.
If all these have been met then the VAT rate which is in effect at the time the agreement was entered into will be the rate which is applied.
Even though the transfer will only take place after 1 April 2018 when the new VAT rate will be active, if the agreed to price is mentioned in the sales agreement and was entered into before that date, then the VAT rate will be outgoing rate of 14%.
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