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Developers who build residential units must charge VAT at the standard rate (14%) when selling the units. The developers are entitled to claim VAT on the cost of supplies made to them, for example, building materials, etc.

However, in some cases developers are not able to immediately sell the units which they have built. In those cases the developers often let the property to individuals until they are able to find buyers.

The problem then is that there is a change of use for VAT purposes: the developer who held the units to sell as stock (and raising VAT at the standard rate) now starts using the units to supply a ‘dwelling’ (and raising no VAT as the supply is exempt from VAT).

The effect of that ‘change of use’ is that the developer must account for VAT on the value of the units as if it had sold the units. Naturally, this has adverse cash flow consequences for the developer as it must fund the VAT out of its pocket.

Fortunately, under s18B of the VAT Act, a developer in that position may let the unit for a period of 36 months after concluding the lease without triggering the VAT on the ‘change of use’. If the developer sells the unit during the 36 month period, the developer must account for VAT on the sale at the standard rate. If, however, the developer is not able to sell the unit within 36 months then, at the end of that period, there will be a change of use and the developer will have to account for VAT on the value of the unit as if it had sold the unit, i.e. at market value.

S18B of the VAT Act has been deleted as of 1 January 2018

Unfortunately, the reprieve provided by this section is no longer available. If the units are rented because they cannot be sold a ‘change of use’ is triggered and vat has to be immediately accounted for based on the market value of units sold or saleable.

Let’s look at the numbers



  • Don’t rent unsold units
  • Property developers that find themselves in a cash flow squeeze, can approach SARS to pay the VAT amount due in instalments over an agreed period. The developer must be able to satisfy SARS that it has a cash flow problem and is unable to settle the VAT in a single payment, and that its financial position is likely to improve in the short term. SARS may also request the developer to provide suitable security before it agrees to the payment of the VAT in instalments.
  • If the developer has paid the VAT on an unsold unit which is temporarily let and it subsequently manages to sell the unit, then VAT is payable on the total sales consideration; the developer can then deduct the total VAT amount previously paid.

It was hoped that SARS and National Treasury would address the problem in the 2018 National Treasury Budget, unfortunately this did not materialise. Both the New Zealand and Australian tax authorities have successfully addressed this issue, and guidance could be drawn from them to find a suitable solution in a South African context.

Legislation Reference:

  • S18A of the VAT Act
  • S167 of the TAA
  • S168 of the TAA

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