Geraldine Connell
28 February 2010
Could tax changes to make student accommodation cheaper be on there way?
One of the interesting VAT proposals in the Budget is a review and possibly an amendment which addresses the shortcomings of the VAT legislation relating to accommodation as either commercial or residential. In particular, student accommodation appears to be the focus of the change.
It is well known that South Africa's insufficient student housing accommodation has reached crisis levels - there are far more students requiring accommodation than can be catered for at present. The Department of Higher Education and Learning is anxious to resolve this problem quickly and is increasing funding for student accommodation. Furthermore, educational institutions are encouraged to provide student accommodation as cheaply as possible.
The VAT Act exempts certain supplies from VAT, such as education, passenger transport by road and the letting out of a dwelling. The purpose of exempting supplies from VAT is to reduce the ultimate cost to the end-user by not charging him VAT. Ironically, such a mechanism may sometimes not actually reduce the cost to the end user since the VAT incurred by the supplier becomes a cost and is ultimately on-charged to the end user. So for example, the VAT incurred on acquiring a flat cannot be claimed by the person who lets out that flat as a dwelling.
On the other hand, commercial accommodation in a flat which is supplied together with so-called 'domestic goods and services' is subject to 14% VAT if the total annual receipts for that supply exceed R60 000. So one major difference between whether a supply of accommodation is subject to VAT or exempt, depends on whether the accommodation comes with "domestic goods or services". What are these services?
They include any of the following: cleaning and maintenance; electricity, gas, air conditioning or heating; a telephone, television or similar article; furniture and fittings; meals or laundry. If the accommodation is supplied with any of these, it is subject to 14% VAT.
A "dwelling" is defined as any place used primarily as a natural person's place of residence. The letting of such a place is exempt from VAT provided that no domestic goods and services are provided and that the accommodation is provided on a semi-permanent basis, much like acquiring a home. Confusion could arise here as a result of the fact that a "dwelling" is defined to include fixtures and fittings that belong to it. Arguably, this could alter the tax treatment of the supply of the dwelling since it would also fall within the definition of commercial accommodation with domestic goods and services if the R60 000 income threshold were achieved.
On the surface, it appears that charging VAT on accommodation will make it more expensive for students, but this is not necessarily the case. Not only can the landlord claim back all the VAT on the capital and running costs thereby reducing the overheads, but the VAT Act gives a further concession. If the accommodation is provided for periods of more than 28 days, VAT is only payable on 60% of the all-inclusive charge for the accommodation and the domestic goods and services. The reason that only part of the value of such accommodation is taxed where an occupant stays longer than 28 days, is to place people living in commercial accommodation on a long-term basis on a similar footing to those renting ordinary domestic dwellings. Those living in commercial accommodation should not be paying materially more VAT on their basic accommodation than their residential counterparts.
It will be interesting to see whether the VAT law amendments increase the ambit of the exempt supplies in an attempt to make student accommodation cheaper. Detailed calculations should be done to assess whether exemption from VAT really does lower the price of accommodation or not.
*Geraldine Connell is from Deloitte
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