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Revealed: The Vat consequences of fractional ownership

by , 19 September 2013
Fractional ownership allows you to own a share in a desirable vacation property together with other owners. But the Vat treatment of this type of ownership is far from simple. Make sure you avoid inviting a SARS audit by getting the Vat right. Here are the Vat consequences of a fractional ownership.

According to the Practical Vat Loose Leaf Service, a common misconception is to confuse fractional ownership with timeshare.

Don't make that mistake.

Fractional ownership gives the right of ownership and usage, whilst timeshare refers to simply owning usage time.

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

So be sure to take note of these Vat consequences

Here's how to treat Vat in a 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).

Should you sell or transfer fractions to connected persons who won't be entitled to claim full input tax (for example, family members who aren't Vat registered), you'll have to account for Vat 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.

The Practical Vat Loose Leaf Service explains that 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).

These are the Vat consequences of fractional ownership. Ensure you apply them correctly to avoid penalties.

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