Aiding frantic dads, broke developers

Thirty years ago kids left home to go to the army or university and never came back. To move back in with mom and dad afterwards was considered naff. Today, they never leave – and boyfriends and girlfriends move in too, to help whittle away mom and dad’s pension plan.

My mother would never have tolerated such sport in the family home. But today’s parents say: “It’s so much safer to have the kids at home.”

It is now eight years since the top of the residential property boom. And it is five years since the real growth rate in property prices dived below 10% a year, to hover around zero ever since. Estate agents promise: “It’s coming back,” but nobody really believes them.

The euphoria from 2003 to 2005 got every developer and his dog jumping on the bandwagon. Local governments leapt on as well, in the hope of increasing their rates and taxes revenue. But it took two to five years to sort out all the rezonings and basic services, so when the developments finally reached the market, it was all over.

The logical remedy is for developers to rent out their properties until the market recovers. But this creates an interesting VAT dilemma.

The rental of residential property is generally exempt from VAT, whereas the sale of residential property is VAT leviable. Thus, when a VAT-registered property developer rents out property, a “change-of-use” occurs for VAT purposes. The VAT payable can easily exceed the rent the developer receives. That’s why you drive past so many developments that are like ghost towns, with all the houses standing empty.

SARS has been reluctant to make exceptions to the “change-in-use” rules for fear of abuses or a plethora of lobbying for other exceptions.

But the situation in the residential property market is so bad now that SARS has allowed a three-year postponement of the “change-in-use” rule for developers renting property while the market recovers.

There should be some imaginative use of the concession. If I were a father trying to get my kid out of the nest, I would be looking for a three-year lease on generous terms – and an option to buy.

No question that the greatest gift parents can give a child is an education. But a close second is a first home. Few of us can afford that – but this amendment may just solve the riddle: “How do you get the kids out the house without buying them one?”

Originally published in the Sunday Times Tax Talk column.

No Comments »

No comments yet.

RSS feed for comments on this post. TrackBack URL

Leave a comment