The proposed change to raise VAT from 15% to 17% has negative implications for property owners. Picture Courtney Africa/African News Agency(ANA)
The potential increase in VAT (value added tax) could reduce consumer spending, particularly on non-essential items, negatively impacting property owners with retail exposure as tenants might struggle.
Ridwaan Loonat, a senior analyst for Property at Nedbank Corporate and Investment Banking, said VAT is charged on rental income from commercial properties if the landlord is VAT registered, but not on residential rental income.
“Higher VAT can also contribute to inflation as businesses pass on the increased costs to consumers. This could lead to higher development costs for new projects, with developers passing these costs onto buyers,” Loonat said.
Finance Minister Enoch Godongwana was scheduled to table the 2025 Budget on 19 February. However, in an unprecedented eleventh-hour announcement, the budget was postponed to 12 March. Amongst other things, the budget that was to be presented showed potential VAT rate increase from 15% to 17%.
Ahead of the planned tabling, Treasury had shared budget documents - under embargo - with select media and economists, including one of our own.
Despite the delay, the embargo has since been lifted. In this week’s publication is a summary of the key elements contained in the budget document, keeping in mind that a new budget could be formally tabled on 12 March 2025.
He said it is important to note that real estate often acts as a hedge against inflation, as property prices have the potential to rise.
“However, this must be considered in the context of current market conditions. Property prices tend to increase with the cost of raw materials and labour.
“However, if inflation is too high or the economy is fragile, this could affect the likelihood of further interest rate cuts and ultimately GDP growth.
“Real estate total returns have a strong correlation with real GDP growth," the analyst told Independent Media Property.
Dr Farai Nyika, an academic at the Management College of Southern Africa (MANCOSA), said the widely publicised budget which was meant to be delivered on Wednesday had several proposals that have implications for the property sector and property owners.
Firstly, Nyika said the tax brackets were to be adjusted fully for the lowest taxpayers, and partially for the others. He said this means that taxpayers would have more rands in their pockets up to the set tax thresholds.
“Since most South Africans earn less than R850 000 p.a., these individuals would be cushioned a little from the annual rates and electricity tariff increases that kick in from April to July. About 70% of houses sold in South Africa cost less than R1m, thus the tax adjustments were particularly welcome,” Nyika said.
He said that secondly, the proposed change to raise VAT from 15% to 17% has negative implications for property owners.
“Electricity purchases incur VAT in RSA, so that means one will receive fewer units of electricity for every rand spent. In addition, the fixed home user tariff/ charge will also increase by 2% for homeowners to whom these apply.
“VAT is a flat tax and is therefore regressive as it impacts lower income households and property owners more than it does for higher income households. Remember that municipalities also charge VAT on water, so this basic human right becomes even more expensive per unit. Thus, the relief provided to homeowners from the adjusted tax brackets will be eroded by the VAT increases.”
The Mancosa academic said this outlook may change as the budget is presented on 12 March.
Finally, Nyika said increasing VAT makes it more expensive to buy a house if the seller is a VAT vendor.
He said in this case the purchase price is higher because it can incur both transfer duty and VAT(though not in every instance as there are caveats here that apply); if the seller is not a VAT vendor, then the prospective home buyer will only incur transfer duty, and not VAT.
He said that he anticipated that this proposed change in VAT will shake up the property market significantly.
“For instance, we could see increased demand for properties costing less than R1m from buyers who may have looked for properties of up to R1.3m to R1.5m. Again, this outlook may change when the budget is presented on 12 March,” Nyika said.
Independent Media Property