n Business Tax and Company Law Quarterly - Leasehold improvements - the VAT implications

Volume 5, Issue 4
  • ISSN : 2219-1585


The issue of how VAT must be accounted for under a leasehold-improvement arrangement remains topical. While SARS issued a in 2012 which was intended to bring very necessary clarity to this issue, it was never finalised. This article considers the VAT implications of such an arrangement, and concludes that under such an arrangement two supplies are made, the one by the lessee that makes a supply of leasehold improvements to the lessor, and one by the lessor of the right of use of the property to the lessee. It is further argued that the two supplies themselves constitute consideration payable by the lessee to the lessor (the improvements) and by the lessor to the lessee (the right of use). These considerations may be explicitly provided for in the rental agreement, but most often would be implicit. Given that the considerations are not 'consideration in money', the value thereof must be determined in terms of section 10(3)(), read with section 3, of the Value-Added Tax Act 89 of 1991 ('VAT Act'), being the open-market value of the supply.

The lessee is required to account for output tax on the date on which the supply of the improvements is deemed to be made in terms of section 9(1) or section 9(3)() of the VAT Act. If section 9(1) applies, the rental agreement may constitute an 'invoice' that would trigger a time of supply when the rental agreement is concluded. It is argued that 'payment' of the in-kind consideration (being the value of the improvements and grant of the right of use) would also trigger a time of supply under section 9(1) of the VAT Act, and would similarly takes place on the date on which the rental agreement is concluded, as it is on that date that the reciprocal obligations are extinguished and 'payment' can be said to have been made. The lessor is required to account for output tax under section 9(3)() of the VAT Act on the date on which the rental agreement is concluded on the basis that that is the date on which 'payment' of the consideration (the obligation on the lessee to effect the improvements is extinguished).
Should improvements be effected by the lessee for no consideration (explicit or implicit), then in those circumstances the lessee will not have made a taxable supply of the improvements, as the improvements would not have been supplied by the lessee in the course or furtherance of its 'enterprise'. The lessee would therefore not be required to account for any output tax, but would similarly not be entitled to any input-tax relief in respect of any goods or services acquired by the lessee for the purpose of supplying the leasehold improvements to the lessor.

Loading full text...

Full text loading...


Article metrics loading...


This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error