VAT : leases, lodging, sub-leases and purpose

• Pages: 20-24
• Date: 01 March 2019
• Author: David Clegg
• Published date: 01 March 2019
• DOI: 10.10520/EJC-14ceb28103
• Record Number: btclq_v10_n1_a4.

20 © Siber ink

VAT:

LEASES, LODGING, SUB-LEASES AND PURPOSE

DAVID CLEGG*

AbstrAct

The recent Supreme Court of Appeal case of Respublica (Pty) Ltd v C:SARS

has, according to the author, shed some light of the VAT treatment of leases

and subleases of f‌ixed property. However, there remains some uncertainty in

respect of certain scenarios involving sub-leases and head-leases, and SARS is

called upon to provide some guidance in regard thereto.

Respublica had entered into (as lessor) a f‌ive-year lease agreement with

the Tshwane University of Technology (‘TUT’) in respect of a multi-apartment

building close to the university. The property was let to TUT for the express

and sole purpose of accommodating its students (and holiday groups during

vacation time). TUT was required to pay a monthly amount for utilities and it

was stated that the premises were appropriately furnished and that mainte-

nance and cleaning was the responsibility of TUT lessor (i e ‘domestic goods

and services’ as def‌ined for VAT purposes were included in the lease). TUT in

turn entered into furnished and serviced accommodation arrangements with

students and with holiday visitors for shorter periods.

While it was accepted by all the parties that the student lodging supplied

by TUT to its students was exempt from VAT, Respublica contended that

because the student lodging supplied by TUT to its students was to be for

periods exceeding 28 days, the taxable value of its supply to TUT under the

lease should be only 60% of the rental consideration in terms of section

10(10) of the Value-Added Tax Act. SARS, however, contended that the 60%

value concession that applied to the supply of lodging exceeding 60 days did

not apply in these circumstances as Respublica did not supply ‘lodging’ as

required by section 10(10).

While the High Court had found in favour of Respublica, the court

accepting that Respublica had, as lessor, supplied lodging, the SCA on appeal

held that it was incorrect to conf‌late the agreement of lease entered into

between Respublica and TUT, and the distinct supply of accommodation

made by TUT with the students, however much those agreements may have

been designed to dovetail with one another. The court held that they were

distinct and separate agreements made between different parties. That being

the case, the court held that the supply of the accommodation by Respublica

to TUT did not constitute the supply of ‘lodging’ as contemplated in section

10(10) of the VAT Act, and Respublica was therefore required to account for

VAT on 100% of the value of the rental considerations payable by TUT.

The author concludes that it is now clear that the terms of a sublease

cannot generally affect the VAT treatment of its head-lease. Thus, if A lets

a property to B to be used as a dwelling and B sublets the premises wholly

or partially for (vatable) business purposes to C, that should not affect the

exempt nature of the head-lease.

* Independent Tax Consultant, Advocate of the High Court.