Value-added tax on new residential

properties: A comparative study to

establish possible alternatives
regarding developers registered
for VAT purposes
L Julyan
School of Accounting Sciences
University of South Africa

Abstract
This article reports on a study on the value-added tax (VAT) levied on
new residential properties sold to individuals by developers registered for
VAT purposes. The objective of the research was to evaluate the current
VAT provisions applicable to new residential properties in South Africa
by measuring them against the principles of taxation, and by comparing
the results with those obtained for the United Kingdom, Canada and Aus-
tralia. Similarities and differences are established and evaluated. It is rec-
ommended that the supply of new residential properties in South Africa be
zero rated.
Key words
Australia – GST Canada – GST / HST
Developers registered for VAT Goods and services tax (GST)
Harmonious sales tax (HST) New residential properties (housing)
Principles of taxation South Africa – VAT
United Kingdom – VAT Value-added tax (VAT)

1 Introduction
In a previous article published in this journal, the author reported on a compari-
son between current value-added tax (VAT) legislation and practices in South
Africa that relate to the development of new residential properties sold to
individuals by developers who are registered for VAT purposes and the VAT
legislation and practices of selected countries (Julyan 2004:119-136). The
countries that were selected as a basis for comparison with South Africa were
the United Kingdom, Canada and Australia (Julyan 2004:121-122).

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Value-added tax on new residential properties

1.1 Summary of basic VAT provisions in the countries

included in the previous article
It is not the intention of this article to re-examine the content of the previous
study, but some basic information from the previous study has to be provided
here to enable the reader to follow the current discussion. It was established that
all four selected countries apply VAT, but that in Canada and Australia this tax
is known as the goods and services tax (GST). Canada also has a harmonious
sales tax (HST), which is currently applied in three provinces and is a combina-
tion of the GST and a provincial sales tax (PST). The HST appears to be the
way future sales taxes are going in Canada. Those provinces that do not apply
the HST have a PST in addition to the GST. The HST would therefore provide a
fair basis of comparison with the VAT rates in the other three countries (Julyan
2004:123-124).
Table 1 below shows the percentage VAT, GST or HST payable in South
Africa, the United Kingdom, Canada and Australia respectively on the supply of
goods and services in general, based on the exclusive price of goods and ser-
vices. The bottom row of the table shows the VAT, GST or HST percentages on
inclusive prices.
Table 1 Summary of basic VAT, GST or HST rates
South United Canada Canada Australia
Africa Kingdom GST HST GST
VAT VAT
% VAT on exclusive price of
goods or services 14% 17,5% 7% 15% 10%
% VAT on inclusive price 12,28% 14,89% 6,54% 13,04% 9,09%

(Source: Julyan 2001:284)

1.2 Summary (based on the case study) of the application

of VAT, GST or HST to new residential properties sold
to individuals by developers registered for VAT
purposes
The VAT, GST or HST provisions relating to new residential properties sold to
individuals by developers registered for VAT purposes are summarised briefly
below.

1.2.1 South Africa

In the previous article (Julyan 2004:125, 128-129, 131), it was established
that the basic inclusive South African VAT rate of 12,28% which applies in
general to the supply of goods and services also applies to new residential
properties sold to individuals by developers registered for VAT purposes. This
is evidence that South Africa does not have rebates or concessions in place that

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 Julyan

are applicable to new residential properties sold by developers registered for

VAT purposes.

1.2.2 United Kingdom

In the previous article (Julyan 2004:123, 125), it was established that, in the
United Kingdom, in terms of section 30(1) of the British Value Added Tax Act
of 1994 (VATA), the supply of new residential accommodation is zero rated.
Zero rating implies that the supply is taxed at a rate of zero. In terms of section
24(1) of VATA, input tax paid on the acquisition of goods and services may be
claimed back. Note (12) to Schedule 8 of VATA excludes certain items, how-
ever, some of which, like carpeting and stoves, appear to be used in most
homes. This in effect means that the input tax paid on the excluded items in
terms of Note (12) to Schedule 8 and which cannot be claimed back represents
the effective VAT payable on a new house. The 0,30% effective VAT payable
on the new house in Table 2 below represents the amount assumed in the case
study for carpeting and stoves.

1.2.3 Canada
In the previous article (Julyan 2004:126), it was established that a new housing
rebate in terms of section 254 of Part IX of the Canadian Excise Tax Act (the
ETA) applies to new land and buildings sold to individuals by developers
registered for GST purposes. In terms of section 254 of the ETA, the output tax
payable is reduced by the following rebate:
l Where the total consideration does not exceed C$350 000, there is a rebate
by an amount that is the lesser of C$8 750 or 36% of the output tax of the
house.
l Where the selling price exceeds C$350 000, but is less than C$450 000, the
following formula applies:
A x [C$450 000 – B) ÷ C$100 000,
where
A is the lesser of C$8 750 or 36% of the total GST paid, and
B is the selling price.
In terms of section 169(1) of the ETA, all input tax payable may be claimed
back. The case study applied in the previous article (Julyan 2004:127-129, 131-
134) was based on houses in three different price ranges, namely houses priced
respectively at C$70 000, C$250 000 and C$375 000. In the application of the
formula to the C$70 000 house, the output tax payable would be reduced by the
full 36% rebate. In the case of the C$250 000 house, the 36% rebate would
theoretically amount to C$11 739, but it is in fact limited to C$8 750, with the
result that the effective rebate is 27% of the output tax payable. The second
formula applies to the house with a value of C$375 000, where the rebate is
reduced to C$6 563, which is 13% of the output tax payable. This explains the
range of effective GST or HST rates shown for Canada in Table 2 below.

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Value-added tax on new residential properties

1.2.4 Australia
In the previous article (Julyan 2004:126), it was determined that in Australia,
developers registered for GST purposes may, in terms of section 75-5 of the A
New Tax System (Goods and Services Tax) Act 1999 (GST Act), choose to pay
GST based on the margin rather than on the selling price of the property. In
terms of section 75-10 of the GST Act, the margin is defined as the difference
between the considerations of the supply and the acquisition. In terms of section
75-20 of the GST Act, no input tax credits may be claimed back where the
margin scheme is chosen.

1.2.5 Summary of VAT, GST or HST provisions applied to the case

study
In the twelfth edition of Meditari, Julyan (2004:127-128) set out the details of
the background to the information set out in Table 2 of the current article
(below), which summarises the effective VAT, GST or HST rates payable on
new residential properties in the four countries under review, sold to individuals
by developers registered for VAT purposes, after all rebates or concessions on
residential properties have been taken into account. The effective percentages in
Table 2 were calculated by applying the VAT provisions of the selected coun-
tries to a case study. The case study was based on residential properties in three
different price ranges. Only the Canadian GST or HST rate payable was affected
by the price range of the property.

Table 2 Effective VAT, GST or HST rates payable on new residential

properties based on the case study
South United Canada Canada Australia
Africa Kingdom GST HST GST
VAT VAT
% net VAT/GST/HST 8,35%
based on inclusive 4,19% to to
selling price 12,28% 0,30% 4,79% 11,29% 4,48%

(Source: Julyan 2004:128)

A comparison of Tables 1 and 2 shows a substantial difference between the
inclusive percentage VAT, GST, or HST rates in Table 1 and Table 2 for all the
selected countries except South Africa, where the rate reflected in both Table 1
and Table 2 remained at 12,28%. In the United Kingdom, the percentage VAT
rate was 14,89% in Table 1, but was reduced to 0,30% in Table 2. The percent-
age HST or GST rate in Canada was 13,04% (GST 6,54%) in Table 1, while in
Table 2 it was reduced to between 8,35% and 11,29% (GST 4,19% to 4,79%),
depending on the value of the property. The same pattern emerges for Australia,
where the percentage GST rate was 9,09% in Table 1, but was reduced to 4,48%
in Table 2. This means that rebates or concessions exist with regard to new
residential properties sold to individuals by developers registered for VAT
purposes in all the selected countries other than South Africa.

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In conclusion, the previous article (Julyan 2004) established that South Africa
was the only country of those reviewed that did not have special rebates or
concessions in respect of VAT on residential properties developed by develop-
ers registered for VAT purposes and sold to individuals (Julyan 2004:130).

2 Objectives of the research project

The primary objective of this article is a critical evaluation of the current VAT
legislation and practices in South Africa that relate to the development of new
residential properties sold to individuals by developers who are registered for
VAT purposes and the legislation of selected foreign countries in this regard,
with a view to establishing differences between the practices in the four
countries under review, and making recommendations for possible changes.
This research is particularly necessary in the South African context, given the
socio-political importance of housing in the country, especially affordable
housing (South Africa 1991:20).

3 Research design
This research proposed to:
l Establish the principles of taxation that underpin any tax system;
l Investigate how current South African legislation and practices with regard
to VAT payable on new residential properties sold to individuals by devel-
opers registered for VAT purposes measure up against the principles of
taxation;
l Investigate how current legislation and practices dealing with VAT payable
on new residential properties sold to individuals by developers registered
for VAT purposes in the United Kingdom, Canada and Australia measure
up against the principles of taxation;
l Evaluate the current situation in South Africa with regard to VAT on new
residential properties, draw conclusions and make recommendations on the
basis of this study.

4 Limitations on the scope of the study

Because this research flows from, and is based on the findings of the compara-
tive study published by the same author in an earlier volume of this journal
(Julyan 2004:119-136), the limitations of this study correspond to those of the
above-mentioned comparative study. Briefly, this article is limited to:
l The VAT on residential properties sold to individuals by developers regis-
tered for VAT purposes; and
l VAT to the exclusion of other property taxes (the study does not consider
any other taxes which could apply to properties or could affect the disposable

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Value-added tax on new residential properties

income available to purchase properties, namely transfer duty, capital gains

tax and income tax.)
The relationship between the average income of individuals and the cost of
residential properties in all the selected countries was excluded, therefore
vertical equity was not addressed in this study.

5 Principles of taxation
The principles of taxation are the basic criteria against which any tax system
should be measured to determine whether it is a “good” tax system (Woellner,
Vella and Chippindale 1990:27).
When the principles of taxation are mentioned, the famous four canons of
Adam Smith come to mind: certainty, equality or ability, convenience and econ-
omy (Stamp 1936:3).
According to Stamp (1936:3), these principles are “progenitors of thought”.
In our complex modern world, we cannot, however, claim to find the whole
“duty of man and the State” in them. These principles should be elaborated upon
and analysed in greater detail to determine their relevance to the circumstances
we are faced with today (Stamp 1936:3). The principles of taxation that are
relevant to modern times are investigated in the sections below.

5.1 Simplicity and certainty

Lewis (1982:9) argues that a tax system should be simple enough for the major-
ity of the citizens to understand it and it should be simple to operate, resulting in
reasonable costs in relation to the tax collected. These costs are twofold,
namely, administrative costs (borne by the authorities) and compliance costs
(borne by the taxpayer). The compliance costs include the studying of relevant
instruction booklets for the completion of the forms, the cost of obtaining
professional help or advice and the completion of the forms (Lewis 1982:9).
The developer is usually the taxpayer responsible for compliance relating to
VAT on housing. The author has therefore decided to test the simplicity of the
tax based on the assumption that it should be simple enough for the majority of
developers to understand it, rather than the majority of citizens or taxpayers.
Woellner et al (1990:32) state that simplicity is linked to certainty. Certainty
dictates that a taxpayer should be able to calculate his or her tax liability in
advance with reasonable accuracy (Lewis 1982:11).

5.2 Equity or fairness

Equity or fairness means that every taxpayer should contribute his or her “fair
share”. There is, however, no agreement on the definition of a “fair share”
(Rebhun 1982:27). Rebhun (1982:27) identifies two approaches to equity,
namely the benefit approach and the ability-to-pay approach. In terms of the
benefit approach, every taxpayer pays tax according to the benefits that he or
she enjoys. In contrast to this, the ability-to-pay approach, which has been

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favoured in the twentieth century, only focuses on the means of the taxpayer
(Rebhun 1982:27). It should be borne in mind, however, that the VAT system
should not be looked at in isolation. The progressive income tax system in use in
South Africa plays an important role in the redistribution of income, thereby
contributing to equity and fairness in general (South Africa 1991:6). The inter-
action between income tax and VAT has, however, been excluded from the
scope of this article.
Lewis (1982:10) identifies horizontal equity as the “equal treatment of tax-
payers with similar taxable capacities”. Vertical equity, on the other hand,
implies that taxpayers with different taxable incomes should bear different tax
burdens. The author is of the opinion that this relates more to direct taxes on
income earned than to indirect consumption-based taxes such as VAT. Vertical
equity has been excluded from the scope of this article.
The question whether VAT complies with the principle of equity or fairness is
a very contentious issue. One line of reasoning in evaluating whether VAT is
equitable or fair is to determine whether a constant ratio exists between the tax
load and the expenditure incurred. VAT appears to comply with this require-
ment (South Africa 1991:5).
Another line of reasoning states that the person bearing the cost of VAT
should determine whether it is an “equitable and progressive” tax or an “inequi-
table and regressive” tax. Where the burden of VAT is borne mainly by the
entrepreneur, thereby resulting in a minimal increase or no increase in the price
of goods and services, VAT is deemed to be an “equitable and progressive” tax.
However, where the burden of VAT is passed on to the consumer, resulting in
increased prices, VAT is deemed to be an “inequitable and regressive” tax
(Rebhun 1982:27-28).
Rebhun (1982:28) argues that the authorities could use a multiple-rate system
to change VAT into an “equitable and progressive” tax by introducing reduced,
standard and luxury rates. Basic necessities could be taxed at the reduced rate,
luxurious goods and services at the luxury rate and any other goods and services
could be taxed at the standard rate. The Report of the VATCOM (South Africa
1991:4) mentions that, for this very reason, many VAT systems have multiple
rates. However, the report also states that multiple-rate VAT systems are “ac-
knowledged” to be inefficient and result in a “significant” increase in compli-
ance costs.
It was decided to use the person bearing the cost of the VAT as the basis for
measuring the equity or fairness of VAT on new residential properties in South
Africa, the United Kingdom, Canada and Australia..

5.3 Neutrality
Neutrality in a tax system is indicated by the fact that “decisions are not influ-
enced by tax factors” (Rebhun 1982:30). Rebhun (1982:30) states that the
neutrality of a tax can only be determined in relation to another tax. In evaluating

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whether a tax meets the principle of neutrality, Rebhun (1982:30) suggests a set
of guidelines – the tax:
l Should be levied equally on enterprises, irrespective of whether they are
profitable or non-profitable;
l Does not show bias towards certain businesses, irrespective of whether they
are using debt or equity financing;
l Does not benefit integrated producers over small entrepreneurs;
l Is not affected by the form of business used (for example, whether the
business is a company, partnership or sole proprietorship); and
l Deals with capital-intensive or labour-intensive industries in the same
manner.
Only the first of the above guidelines appears to be applicable to the develop-
ment of new residential properties.

5.4 Flexibility
Flexibility in a tax system is considered to have been accomplished when both
the tax structure and the rates can be changed without this change’s giving rise
to delays or problems. The reasoning behind this is that any change would have
an immediate effect on the income earned by the state or alternatively cause an
immediate change in the behaviour of taxpayers (Woellner et al 1990:33).
As the rates of sales taxes or VAT can easily be changed, resulting in im-
mediate price changes and consequent changes in the behaviour of taxpayers,
these taxes are deemed to be very flexible (Woellner et al 1990:33).

5.5 Fiscal adequacy

Woellner et al (1990:34) describe fiscal adequacy as the condition which stipu-
lates that “the tax should generate the requisite amount of revenue needed by the
government”.
VAT meets the principle of fiscal adequacy because the main argument ad-
vanced in favour of VAT is that it is an effective way of raising “large and
buoyant revenue” for the government (South Africa 1991:2).

5.6 Political acceptability

Political acceptability implies that the tax should not give rise to political
difficulties in the relevant country or within other tax jurisdictions (Woellner et
al 1990:34).
VAT, as an indirect consumption-based tax, is perceived as being accepted
more readily than direct taxes by both the public and politicians (McManus
1990:5).

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6 VAT legislation on new residential properties,

measured on the basis of the principles of taxation
In this study, the VAT legislation applicable to new residential properties sold to
individuals by developers registered for VAT purposes in all the selected
countries was measured against the principles of taxation, and differences are
determined that could form a basis for recommendations for changes to the
South African VAT legislation.

6.1 Simplicity and certainty

According to the report of the VATCOM (South Africa 1991:7), the VAT sys-
tem introduced in South Africa aims to comply with the principle of simplicity
by:
l Using a single VAT rate;
l Keeping exemptions to a minimum; and
l Applying the tax to a very broad base of goods and services.
One rationale for the introduction of VAT was the desire to comply with the
principle of simplicity and to keep compliance costs to a minimum (South
Africa 1991:7).
The VAT applicable to new residential properties in South Africa appears to
conform to the principle of simplicity, as it is simple enough for the majority of
developers to understand, and it is simple to operate for both the authorities and
the developers. The administrative costs borne by the authorities would involve
checking the value of the supply, calculating the output tax, the input tax credits
claimed back and the net VAT payable/refundable and processing the form and
the monetary rewards. The compliance costs borne by the taxpayer would
include the determination of the value of the supply and the calculation of the
output tax, the input tax credits claimed back and the net VAT payable/
refundable. Studying the relevant booklets for the completion of the forms is a
once-off cost. The VAT provisions in South Africa also meet the principle of
certainty as the developer can determine the tax liability accurately.
In the United Kingdom, in line with the principle of simplicity, the zero rating
used implies that the supply is taxed at a rate of zero and input tax credits are
claimed back. Administrative costs borne by the authorities would involve
calculating and checking the input tax credits claimed back and ensuring that
none of the items excluded in terms of Note (12) to Schedule 8 of VATA, such
as carpeting and stoves, have been claimed as an input tax credit. A more
effective way to check compliance is to ensure that the net VAT payable on the
supply equals the value of the items excluded, such as carpeting and stoves,
multiplied by the VAT rate. Compliance costs borne by the developer would
include determining the value of the supply and indicating the zero rate, the
input tax credits claimed back (ensuring that VAT on Note (12) items is not
claimed back) and the net VAT payable. The author is of the opinion that this

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procedure would not affect simplicity in terms of administrative or compliance

costs, as it would not be necessary to calculate the value of the supply or the
output tax. A developer in the United Kingdom is able to determine his or her
tax liability accurately, and therefore the principle of certainty is met.
In Canada, the provisions of section 254 of the ETA are simple enough for
the majority of developers to understand. This system is simple for the authori-
ties and developers to operate. The administrative costs borne by the authorities
involve all the functions required by the South African system, namely checking
the value of the supply, calculating the output tax, the input tax credits claimed
back, the net GST or HST payable/refundable and processing the form and
monetary rewards. As in the South African situation, the compliance costs borne
by the developer include determining the value of the supply and calculating the
output tax, the input tax credits claimed back and the net GST or HST payable
or refundable. In addition to this, the rebate in terms of section 254 of the ETA
has to be calculated by the developer and checked by the authorities. The author
is of the opinion that a rebate on the output tax payable as allowed to developers
in terms of section 254 of the ETA would marginally affect simplicity in terms
of the administrative costs, as the authorities would have to check an additional
calculation. Compliance costs could be affected on the first house built, as the
developer would have to follow the instruction booklet to determine the rebate
that may be claimed. Thereafter, the author is of the opinion that compliance
costs would not be affected.
At first glance, the margin system used in Australia appears to be more com-
plicated than the South African VAT provisions. Upon closer examination,
however, it becomes apparent that the calculation and checking of the margin
looks more complicated than it really is. In Australia, the value of the supply,
less the value of the acquisition, is the margin which is subject to GST at the
GST rate of 10%. In the South African system, both these figures have to be
calculated, as well as the output tax, input tax and the net VAT pay-
able/refundable. The Australian system is simpler than the South African one, in
that input tax cannot be claimed back. The overall effect of the Australian
margin system is probably that the principle of simplicity is marginally nega-
tively affected, as the administrative costs borne by the authorities and the
compliance costs borne by the developer are slightly higher than those of the
other three countries selected.

6.2 Equity or fairness

It was stated in Section 5.2 of this article that a tax is deemed to be an “equitable
and progressive tax” when the burden of that tax (in this case VAT) is borne
mainly by the entrepreneur, thereby resulting in a minimal increase or no price
increase in the price of goods for the consumer. In South Africa, it is clear that it
is mainly the individual consumer who bears a heavy tax burden with regard to
VAT (Franzsen 1993:1071); therefore VAT on new residential properties in
South Africa appears to be an “inequitable and regressive” tax. As shown in

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Section 5.2 of this article, Rebhun argues that a multiple rate system could be
used to change VAT into an “equitable and progressive” tax.
In the Report of the VATCOM, it is acknowledged that VAT has a greater
effect on low income households, as the ratio of consumption to income drops
as the scale of income increases (South Africa 1991:5). The exemption of basic
foods and necessities is an attempt, albeit an inefficient one, to rectify this
imbalance (South Africa 1991:6). The author is of the opinion that housing is a
necessity which should also qualify for exemption. Many believe, however, that
methods outside the tax system should be used to ameliorate the lot of the poor
(South Africa 1991:6). In the South African system, only basic foodstuffs are
exempt from VAT and no reduced rates, concessions or rebates apply to new
residential properties. Therefore VAT on new residential properties does not
appear to meet the principle of equity or fairness.
In the United Kingdom, the supply of new residential accommodation is zero
rated, with the result that the supply is taxed at 0% and all input tax credits other
than those in Note (12) of Schedule 8 to VATA are claimed back. There is no
VAT cost that is borne by the consumer other than the Note (12) exceptions,
chief of which are the VAT on carpeting and stoves.
It appears to the author that the United Kingdom system represents a classic
case of the use of multiple rates for the supply of goods deemed to be necessi-
ties. The VAT on residential accommodation in the United Kingdom appears to
meet the principle of equity or fairness, as VAT in that country has become an
“equitable and progressive” tax, owing to the multiple rates used.
In Canada, the new housing rebate in terms of section 254 of the ETA reduces
the GST or HST which is payable on a development, and which is ultimately
borne by the consumer. The new housing rebate of 36% of the output tax pay-
able, as applied in the case study, limited to C$8 750 for new houses up to a
value of C$350 000, and the formula which applies where the sales value is
between C$350 000 and C$450 000, reduces the GST or HST which is borne by
the individual buying the house by between 13% and 36%, depending on the
value of the property. This appears to make the GST or HST on a new house
more “equitable and progressive” and partly satisfies the principle of equity or
fairness.
The margin scheme which applies to new residential properties developed by
developers registered for GST purposes in Australia has the effect of reducing
the GST from a general rate of 10% to a rate of 4,48% on new residential
properties, based on the margin assumed in the case study. This scheme there-
fore has the effect of substantially reducing the GST payable on new residential
properties by developers registered for GST purposes. The GST which is ulti-
mately borne by the consumer is reduced to approximately half. Owing to this
reduction in the VAT borne by the consumer, a tax which was “inequitable and
regressive” becomes more “equitable and progressive”, partly satisfying the
principle of equity or fairness.

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Value-added tax on new residential properties

6.3 Neutrality
The VAT system in South Africa should be measured against that applied in the
three other countries selected for this comparison. As the VAT payable is not
based on profitability, the principle of neutrality appears to be satisfied with
regard to VAT in South Africa and the United Kingdom, and the GST or HST in
Canada. It appears that the margin scheme provided for in Australia would not
meet this criterion, as it is based on a margin, which would be affected by
profitability.

6.4 Flexibility
In South Africa, the United Kingdom, Canada and Australia, the VAT rates can
easily be changed, which would result in immediate price changes, thereby
satisfying the principle of flexibility. Regarding the VAT, GST or HST on new
residential properties sold to individuals by developers registered for VAT or
GST purposes, none of the special concessions or rebates provided for on new
residential properties would affect flexibility, as all these concessions or rebates
are based on a particular rate, irrespective of what the rate may be.

6.5 Fiscal adequacy

The effective VAT rate on new residential properties sold to individuals by
developers registered for VAT purposes in South Africa is substantially higher
than that of the other countries selected. Hence, it is obvious that from the point
of view of fiscal adequacy South African VAT is superior to the VAT in the
United Kingdom, the GST or HST in Canada and the GST in Australia. As
indicated in Table 2, the HST or GST on new residential properties in Canada
effectively contributes between 8,35% and 11,29% (GST 4,19% to 4,79%) to
the fiscus and the GST in Australia 4,48%, thereby appearing to satisfy the
principle of fiscal adequacy. The VAT on new residential properties in the
United Kingdom, which only effectively contributes 0,30% to the fiscus, ap-
pears not to meet the principle of fiscal adequacy. In the opinion of the author,
fiscal adequacy is a relative term, which should not be seen in isolation, but
should rather be linked to the income the authorities are prepared to forfeit by
passing rebates on to homeowners, making residential properties more afford-
able.

6.6 Political acceptability

Since the concept of special rebates or concessions on new residential properties
by developers registered for VAT purposes is well established in the United
Kingdom, Canada and Australia, and in fact accepted as the norm in these
countries, the principle of political acceptability is undoubtedly satisfied there.
Because South Africa last enjoyed concessions on new residential properties
when general sales tax applied, before the inception of VAT, the principle of a
lack of rebates or concessions has largely been accepted. If South Africa were to

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introduce special concessions or rebates with regard to VAT on new residential

properties, the author believes that this would be unlikely to create political
difficulties. Instead, it would probably be seen as evidence of a greater com-
mitment by government to the provision of affordable housing.

6.7 Summary of the VAT applicable to new residential

properties measured on the basis of the principles of
taxation
When measured against the principles of taxation, the VAT on new residential
properties sold to individuals by developers registered for VAT purposes in
South Africa satisfies the principles of simplicity and certainty, neutrality, flex-
ibility, fiscal adequacy and political acceptability. However, as has been shown
in this study, the principle of equity or fairness is not met.
The VAT provisions relating to new residential properties in the United
Kingdom have been found to comply with the principles of simplicity and cer-
tainty, equity or fairness, neutrality, flexibility and political acceptability. The
finding of this study is that the principle of fiscal adequacy has not been met, as
the effective percentage of VAT on new residential properties is almost zero.
The VAT provisions relating to new residential properties in the United King-
dom contributed substantially lower revenues to the government than those of
South Africa, Canada and Australia.
The GST or HST applied to new residential properties in Canada has been
found to meet the principles of neutrality, flexibility, fiscal adequacy and politi-
cal acceptability. However, the principles of simplicity and certainty are prob-
ably not fully satisfied. This study has established that the principle of equity or
fairness is partly met by the Canadian system.
Regarding the principle of fiscal adequacy, the Canadian GST provisions
were found to be superior to those of the other countries selected, but inferior to
the South African VAT provisions, therefore ranking second to those of South
Africa.
When the Australian GST provisions relating to residential developments
were measured against the principles of taxation, it has been found to be doubt-
ful whether the principles of simplicity and certainty and neutrality are met. The
principles of flexibility, fiscal adequacy and political acceptability appear to be
met.

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Value-added tax on new residential properties

Table 3 Summary of findings: VAT, HST and GST provisions on new

residential properties measured against the principles of taxation
Principle of taxation South United Canada Australia
Africa Kingdom
Simplicity and certainty √ √ P P
Equity or fairness x √ P P
Neutrality √ √ √ √
Flexibility √ √ √ √
Fiscal adequacy √ x √ √
Political acceptability √ √ √ √
√ The principle appears to have been met.
x The principle does not appear to have been met.
P The principle appears to be partially met.

7 Evaluation of the VAT legislation on new

residential properties where the principles of
taxation have not been met
Table 3 indicates that the VAT on new residential properties sold to individuals
by developers of residential properties in South Africa meets all the principles
of taxation, except equity or fairness. As stated previously, the findings of this
study indicate that the cost of VAT borne by the consumer is substantially
higher in South Africa than in the United Kingdom, Canada or Australia. In
view of the fact that South Africa is a developing country with a critical short-
age of housing, and that government has repeatedly affirmed its commitment to
the provision of housing (Knowles and Imm 2000:6), one cannot help wonder-
ing why the VAT on new residential properties is substantially higher in South
Africa than in developed countries such as the United Kingdom and Canada.
Since December 1994, the government has been providing housing subsidy
schemes to speed up the provision of housing. Considerable progress has been
made: 1,46 million houses were built from 1994 to February 2003 (South Africa
2003:147). In its 1994 election campaign, the ANC pledged to deliver one
million houses within five years (Knowles and Imm 2000:6). When this is
compared with the number of houses actually completed, it becomes apparent
that the housing subsidy scheme has been unable to deliver as many houses as
promised. Knowles and Imm (2000:7) argue that the subsidy scheme is a com-
promise between popular demands for the state to deliver complete houses for
all and an attempt to spread housing benefits as widely as possible. It could be
argued that a special VAT rebate or concession on new residential properties,
such as that applied in the United Kingdom, Canada or Australia, or a combin-
ation of the best features of the systems of all three countries, could help to
make housing more accessible to the average citizen in South Africa, and could
also render VAT on new residential properties more equitable and fair.

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 Julyan

According to Table 3, the system of VAT applied to new residential proper-

ties in the United Kingdom meets all the principles of taxation, except fiscal
adequacy. This indicates that very little revenue is raised for the fiscus from
VAT on new residential properties. Examples of other supplies that (like new
residential properties) are zero rated in terms of Schedule 8 to the British
VATA, include medicines, food and transport. A policy decision appears to
have been taken in the United Kingdom not to subject such basic items to VAT.
Table 3 indicates that the Canadian GST or HST on new land and buildings
sold to individuals by developers registered for GST purposes satisfies all the
principles of taxation except for the principles of simplicity and certainty, and
equity and fairness. Both these tax principles were found to be partially met.
The new housing rebate allowed on output tax was found to affect simplicity
marginally, as it involves an additional calculation that was not required by the
more basic systems, such as those used in South Africa and the United King-
dom. The principle of equity or fairness was found to be partially met, as the
cost of GST or HST is borne by the consumer, but the new housing rebate has
reduced the cost considerably.
Table 3 indicates that the Australian GST system on new residential proper-
ties is the system that least satisfies the principles of taxation. The margin
scheme that is applied to new residential properties means that the principle of
neutrality is not met, as the GST is based on the profitability of the develop-
ment. The principle of simplicity and certainty is considered to be partially met,
because the calculation of the GST due is slightly more complicated than in the
basic systems used in the United Kingdom and South Africa. As in the Canadian
system, the principle of equity or fairness is partially met, as the cost of GST is
borne by the consumer, but the effect of the margin scheme reduces this cost to
almost half of the basic GST rate.

8 Alternative to the current application of VAT to

the developers of new residential properties in
South Africa
Before an alternative can be recommended, all factors should be considered.
Overall, the VAT system on new residential properties in the United Kingdom
appears to be superior to the others in terms of all the principles of taxation,
except fiscal adequacy. It should be remembered, however, that VAT on resi-
dential properties only contributes to, and does not determine, fiscal adequacy.
Fiscal adequacy is determined by an interaction between the various taxes raised
by a government.
Consideration should be given to the Canadian system, where it was found
that the principles of simplicity and certainty, and equity or fairness were only
marginally affected by the GST provisions. The Canadian GST provisions on
new housing would earn substantially more revenue for the government than the

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Value-added tax on new residential properties

VAT provisions of the United Kingdom would yield. This does not necessarily
imply that the Canadian choice is the best option.
In South Africa, the only way in which the principle of equity or fairness per-
taining to VAT on new residential properties could be met would be by zero
rating the supply. It may well be argued that South Africa could not afford to
zero-rate new residential properties, as is done in the United Kingdom, because
it would result in a substantial drop in revenue raised by the fiscus. It is the
opinion of the author that if zero rating is unaffordable in South Africa, a multi-
ple-rate system providing for a reduced rate of VAT on new residential proper-
ties should be considered, as it would probably affect the principle of simplicity
and certainty less than a rebate on output tax would. Where a multiple rate
system is not possible, a VAT rebate on new residential properties should be
considered. The fear that special VAT concessions on new residential properties
would reduce the VAT revenue currently earned should not be allowed to
override other concerns. The commitment by government to provide affordable
housing should be weighed up against any loss in VAT revenue from the sale of
new residential properties, and alternative sources of revenue should be investi-
gated to compensate for any loss in VAT revenue from the sale of new residen-
tial properties.
The proposed alternative to the current application of VAT on new residential
properties in South Africa is zero rating the supply. Where zero rating cannot be
afforded, a reduced VAT rate on new residential properties in a multiple-rate
system or a new housing rebate should be investigated.

9 Suggested future research

The outcome of this article suggests the following related topic for future
research: A study of the relationship between the average income of individuals
and the cost of residential properties in the selected countries. The results of
such a study could be used as the basis for formulating a recommendation for a
limit on the value of the residential properties, if any, that should be considered
for multiple rates, concessions or rebates on residential properties in South
Africa.

10 Summary and conclusion

This article set out to determine whether there is an alternative to the current
application of VAT to new residential properties in South Africa. The study was
restricted to new residential properties sold to individuals by developers regis-
tered for VAT purposes.
The principles of taxation which form the basic criteria against which any tax
system should be measured to assess whether it is a good tax system were
determined. The principles of taxation which could relate to VAT on new res-
idential properties were found to be the principles of simplicity and certainty,

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 Julyan

equity or fairness, neutrality, flexibility, fiscal adequacy and political acceptabil-

ity.
The VAT legislation and practices pertaining to new residential properties in
South Africa, the United Kingdom, Canada and Australia were measured
against the principles of taxation. In the article, it has been shown that the VAT
payable on new residential properties in South Africa does not meet the prin-
ciple of equity or fairness. The point was raised that a special concession such as
zero rating, a reduced VAT rate or a VAT rebate on housing in South Africa
was the only way in which the principle of equity or fairness could be met. Such
a system would reinforce the effect of the housing subsidy scheme currently
applied.
The principle of fiscal adequacy of VAT on new residential properties is not
met in the United Kingdom, but this appears to be a policy decision, as is
evidenced by the fact that other essential commodities, like medicines, food and
transport, are also zero rated in the United Kingdom.
In Canada, the principles of simplicity and certainty and of equity and fair-
ness were found to be only marginally affected by the special rebate on new
housing, and a VAT rebate on housing as an option for South Africa should
therefore not be ruled out.
The VAT on new residential properties in Australia fared the worst in terms
of the criteria applied. In this case, the principles of simplicity and certainty and
of equity or fairness were found to be only partially met. The principle of
neutrality was found not to be met, because the margin scheme that is used is
based on profit.
Overall, the VAT provisions of zero rating new residential properties as ap-
plied in the United Kingdom were identified as best meeting the principles of
taxation. If these principles were applied to South Africa, the zero rating could
help alleviate the housing shortage, and, at the same time, it would complement
the housing subsidy scheme currently in operation in South Africa. The point
was then raised that South Africa may not be in a position to afford the zero
rating of new houses. The suggestion was made that alternative sources of
revenue be investigated to make up for the loss in VAT revenue from the sale of
new residential properties, failing which, a multiple rate system using a reduced
rate of VAT on new residential properties or a VAT rebate on new housing
should be considered.
In conclusion, it is proposed that the supply of new residential properties in
South Africa be zero rated.

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