Purchase Your Development Property Before VAT Increases

With the budget speech looming on 22 February, there is much speculation about when increases we can expect. The harsh reality is that government has to increase revenue. Where they will get it from remains to be seen, but it’s unlikely that personal and company tax will be increased.

Experts are predicting that the most obvious source of additional revenue is for government to increase VAT – and it’s anticipated that this will increase by 2% from 14% to 16%.

Whilst that’s not great news for the consumer, it is accepted that it’s the fairest way to spread the burden. Increasing the VAT by 2% is anticipated to generate an additional R 48 billion, according to recent news reports. So what does this mean for the property purchaser?

If you’re considering purchasing a development property directly from a developer, which will include VAT instead of transfer duty, it means the cost of your purchase will increase by 2%. That’s not an insignificant amount of money. On a property of R 2 million that means an extra R 40 000, for no additional value.

If VAT is increased it remains to be seen from which date it will become effective. There is a possibility that there could be some notice given. There is, however, no assurance as to how long that notice period might be, if at all.

If you’ve been contemplating the purchase of a property where VAT is included in the price, it means that now is the time to buy! The legal option that we’ve obtained suggests that VAT will be applicable at the rate at the time the sales contract is concluded.

So, if your offer to purchase is concluded prior to the effective date of a VAT increase, all indications are that you won’t be impacted by an increase in VAT. Developers do cover themselves in the event that the government makes a change to the rate of VAT retrospective by including a clause stating that any increase in the rate is to be borne by the purchaser. However, as stated above, legal opinion confirms this is highly unlikely.

What is your next step if you’ve been holding off on your decision? With only days before the budget speech, it means you should be shopping for a suitable development property now.

The good news for purchasers is that now is a great time to apply for home loan finance. The banks still have a good appetite for home loans and are more competitive on their interest rates than they’ve been in many years. What they will want from you is a deposit of sorts. The higher your deposit, the better your interest rate in most cases.

Saving 2% on your purchase is a really good reason to make a decision now. It remains to be seen if there will be further increases in transfer duty, which applies to property transactions without VAT. Should this increase as well it’s usually effective immediately. Make your decision now to avoid the extra wasted costs.

Steve Caradoc-Davies
Principal, Harcourts Platinum

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