The recent Budget Speech contained several surprises for South African businesses and consumers, including the first VAT increase in the post-apartheid era.

With the official VAT rate set to increase to 15% on the 1st of April, consumers are bracing themselves for higher prices.  But what effect – if any – will a higher VAT rate have on commercial property?

The VAT increase: a necessary sacrifice?

Surprising as an increase in the VAT rate may be, many experts believe that it may be the best way for government to plug the gap between revenue and expenses without harming the economy.

  • As the Zuma era comes to a close, the government’s fiscal position reflects a decade of excessive spending and dwindling tax revenues.
  • With government facing a budget shortfall of more than R40 billion, (Ex) Finance Minister Malusi Gigaba (now Nhlanhla Nene), announced measures to slash expenditures by R85.7 billion over the next three years.
  • Personal income taxes have risen considerably over the past few years, and SA’s corporate tax rate is high by global standards at 28%. An increase in the VAT rate is seen as the least harmful option, seeing as many basic food items are VAT-free.

Taking the added revenues from VAT, estate duties, and the controversial new sugar tax into account, Gigaba was confident that government debt will stabilise around 56% of GDP. This should send a clear message to investors and credit ratings that South Africa has returned to stability and fiscal discipline.

Property transactions will now attract VAT of 15%

With the 1st of April looming as the implementation date of the new VAT rate, the commercial property sector will see higher VAT on commercial property sales, rentals, and management services.

  • Unlike residential sales, commercial sales will attract VAT of 15% if transfer goes through after April 1st – irrespective of when the sales agreement was signed.
  • VAT on monthly rent and property management services will increase to 15% as of the 1st of April.

The VAT increase in this year’s Budget Speech was a ‘predictable surprise’ – and for owners and tenants, there are just a few weeks to prepare for it.

With economic growth predicted to pick up in 2018, property owners may be able to pass on the increase to their tenants (who will pass it on to their customers) without any serious financial consequences.

If you’d like to buy, sell, or lease office space in the greater Cape Town area, we’d love the opportunity to present our portfolio of cutting-edge commercial properties to you. Contact us today to connect with one of our area specialists.