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Fractional ownership: Take note of these Vat consequences...

by , 20 December 2013
Fractional ownership enables you to own a share in a desirable vacation property together with other owners. The Vat treatment of this type of ownership is far from simple. Make sure you avoid inviting a SARS audit and get your Vat right!

According to the Practical Vat Loose Leaf Service, fractional ownership refers to the collective ownership of an asset, with its usage normally allocated to the joint owners or shareholders by means of an ownership usage roster, as well as dividing running costs amongst the shareholders or joint owners.

The purchase of a fractional interest in a luxury property can be structured as either:

  • The sale of shares in the company owning the property; or
  • Joint ownership of an undivided title deed.

SARS says that the supply of rights and interests in fractional ownership structures constitutes 'fixed property' for Vat purposes.

Here are the Vat implications of fractional ownership

Output tax: If you're a Vat registered developer, you need to account for Vat at 14% on the sale of each fraction – regardless of the nature of the fractions sold (i.e. shares or undivided title deeds).

The Practical Vat Loose Leaf Service, says 'should you sell or transfer fractions to connected persons who won't be entitled to claim full input tax thereon (for example, family members who aren't Vat registered), Vat will need to be accounted for on the open market value of the supply, regardless of the amount received.'

Input tax: As a Vat registered developer, you'll generally be entitled to claim full input tax deductions on expenses incurred for fractional ownership developments.

Developers often retain fractions or shares in the development for investment purposes. Unless you use the retained fractions for the making of (other) taxable supplies, you'll:

  • Either not be entitled to full input tax claims; or
  • Be required to make an output tax adjustment in the first period that the property is applied for nontaxable purposes (based on the open market value of the property at that stage).

Now that you know the Vat implications of fractional ownership, make sure you comply to avoid inviting a SARS.

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