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Let’s say that your VAT registered company bought an office block as an income earning going concern from a VAT vendor.

The deal complied with s11(1)(e) of the Value Added Tax Act and was zero rated.

Your company then converted the offices into residential units.

What are the VAT implications of this?

My understanding is that when the conversion has been completed and the residential units become available for letting, the original unpaid Input VAT should be added to the Output VAT and paid over to SARS. If only part of the commercial property, say, 60%, being less than 95%, is converted to residential use, then the VAT payable is 60% of the total unpaid VAT.

S18 and s18A of the Act appear to deal with this, but in a very clumsy way. For ease of reading, I have deleted the bits that are not relevant to this discussion.

  1. Change in use adjustments.

(8)  Where a deduction of an amount contemplated in paragraph (b) of the definition of “input tax” in section 1 has been made by any vendor in respect of the sale to him of any second-hand goods and subsequently—

(b)       the nature of that sale is fundamentally altered;

and, as a result of the occurrence of the abovementioned event, the input tax actually deducted in relation to such sale exceeds the input tax properly deductible by the vendor, the amount of that excess shall be deemed to be tax charged in relation to a taxable supply made by that vendor in the tax period during which the said event has occurred.

18A.   Adjustments in consequence of acquisition of going concern wholly or partly for purposes other than making taxable supplies.

(1)  Where—

(a)       an enterprise has been supplied to any vendor; and

(b)       the supply of such enterprise was charged with tax at the rate of zero per cent; and

(c)       such enterprise is acquired by such vendor wholly or partly for a purpose other than for making taxable supplies,

such enterprise shall be deemed to have been supplied by him by way of a taxable supply in the course of his enterprise:

Provided that where the intended use of such enterprise in the course of making taxable supplies is equal to not less than 95 per cent of the total intended use of such enterprise, the enterprise may for the purposes of this Act be regarded as having been acquired wholly for the purpose of making taxable supplies.

(2)  The value of the supply deemed by subsection (1) to have been made by the vendor, shall be the full cost to such vendor of acquiring such enterprise, reduced by an amount which bears to the amount of such full cost the same ratio as the intended use or application of the enterprise in the course of making taxable supplies bears to the total intended use or application of the enterprise.

(3)  Notwithstanding anything in this Act, the supply deemed by subsection (1) to have been made by the vendor shall be deemed to be made in the tax period in which the supply of the enterprise is made.

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