[Question] VAT on Life Right Scheme development

[Roger15]

Hi,

A property developer has now switched to dealing with developing Life Right Schemes. The developer used to develop sectional title schemes but now has switched his focus to life right schemes as this entitles the entity to have almost a continual/everlasting income based on the fact that the owner entity will always have a right to a percentage of the resale value as the developer has a clause which states that the development entity has the right to a part of income for the resale of all units.

Now the question is, can the developer claim input VAT amounts on the development costs and then when units are finalised, must output VAT be charged on the sale of the units(sale of the life rights to the section of the property). Or is it just the certificate that is exempt from VAT or the whole development in relation to inputs and outputs in total?

Thanks

[CLIVE-TRIANGLE]

As far as I know the rights equate to rental income, thus no output vat, and consequently no input vat.

[Roger15]

But the developer is selling the units to purchasers in the way a developer would normally sell sectional title units and freehold units. The full purchase price remains payable...

[CLIVE-TRIANGLE]

Normally in life rights schemes, there is no change of ownership. So, no transfer duty and no vat.

As I understand it, what is actually paid for is the right to occupy by the purchaser (or the surviving spouse), not ownership.

[Roger15]

Yes, no change in ownership, however limited rights. I am unsure of the section in the VAT act that stipulates this and I find it strange that just because ownership doesnt transfer from the company, VAT is totally ignored on the development of a scheme and selling units thereof.

[bammer]

Since the supply is exempt from VAT (in terms of section 12(c) of the VAT Act), VAT incurred in respect of making the supply cannot be claimed as input tax (section 16(3)(a) read with the definition of "input tax").

Also see paragraph 11.5 of VAT 409 - Guide for Fixed Property and Construction http://www.sars.gov.za/AllDocs/OpsDo...al%20Guide.pdf:

"A “right of occupation” in relation to a housing interest, is defined as a right which confers the power to occupy a portion in a housing development scheme for the duration of the lifetime of the purchaser or any other person mentioned in the contract in terms of which the housing interest is acquired, without conferring the power to claim transfer of the ownership of the portion to which the housing interest relates. This is typically found in respect of housing development schemes for retired persons.
The sale and re-sale of the right of occupation under a life right is exempt from VAT."

[Roger15]

Hi Bammer,

Would this mean, when the life right development company resells a unit even the estate agent commission paid is denied of input VAT? Would this not mean that every part of this company would be unable to claim any input VAT's in all respects? IE in terms of running the company...bank charges inputs etc?
Thanks

[CLIVE-TRIANGLE]

Correct, because at no stage will the company be engaged in an "enterprise" for vat purposes, because exempt supplies are specifically excluded. The ultimate sale of the units would be subject to transfer duty, not vat.

If the company has a mixed bag of activities then you would have to separate the inputs into exempt supplies and taxable supplies, and if that is not possible, do an acceptable apportionment.

[Roger15]

So say company 100% for development of life right units only (retirement scheme), all inputs + outputs denied. Only transfer duty applicable on the sale of the unit...so if the unit was sold for R750k, R4500 Transfer Duty payable. Who pays that? Seller (the company) or the purchaser?
The life right development company receives resale commission...I assume that would also be non Vatable...normally in a sectional title scheme the units are sold and VAT output is payable and transfer duty ignored because the developer is VAT registered.

[CLIVE-TRIANGLE]

Who pays that? Seller (the company) or the purchaser?

The purchaser pays it.

The life right development company receives resale commission...I assume that would also be non Vatable

To my knowledge this is vatable.

In your example you are actually defining two activities. The second in my opinion is the furtherance of an "enterprise" and thus is vatable. Input vat on selling expenses, be it advertising or whatever, would be deductible.