Value-added tax on the supply of student accommodation

The typical arrangement works as follows: The owner of the building rents individual apartments to the students for a period of 10 months a year. The apartments come with beds and tables. There is a communal kitchen, a laundry facility, and a lounge area with a TV and Wi-Fi.

Sometimes the owners let the buildings to tertiary institutions who, in turn, let the apartments to the students.

How should owners account for value-added tax (VAT) on the rent they charge for the supply of the accommodation?

Unfortunately, that is a difficult question to answer.

Under the Value-Added Tax Act, No 89 of 1991 (Act) the supply of a “dwelling under an agreement for the letting and hiring thereof” is exempt from VAT. So, a person letting a dwelling to a tenant must not charge VAT on the rental, and is not able to claim input tax on the supplies to it, notably, the cost of acquiring or constructing the dwelling.

The term “dwelling” is defined to mean “except where it is used in the supply of commercial accommodation, any building, premises, structure, or any other place or part thereof, used predominantly as an abode of any natural person or which is intended for use predominantly as a place of residence or abode of any natural person, including fixtures and fittings belonging thereto and enjoyed therewith”.

“Commercial accommodation” is defined, to the extent that it is relevant, as “lodging or board and lodging, together with domestic goods and services, in any house, flat, apartment, room, hotel, motel, inn, guest house, boarding house, residential establishment, holiday accommodation…or similar establishment, which is regularly or systematically supplied but excluding a dwelling supplied in terms of an agreement for the letting and hiring thereof”.

“Domestic goods and services” are “goods and services provided in any enterprise supplying commercial accommodation, including…cleaning and maintenance…electricity, gas, air conditioning or heating…a telephone, television set, radio or other similar article…furniture and other fittings…meals…laundry…or…water.”

The supply of commercial accommodation is not VAT exempt.

In the typical arrangement described above, is the owner supplying residential accommodation (dwellings) to students, in which case it must charge no VAT on rentals, or is the owner supplying commercial accommodation, in which case it must charge VAT?

The answer to that question has a significant commercial impact: if the rental is subject to VAT, then students must pay an additional amount for their accommodation, unless the owner absorbs the amount of VAT.

At first blush it appears as if the owners are supplying commercial accommodation to the students. After all, the owners appear to be providing “lodging” together with goods and services like cleaning, electricity, TV sets, water, and laundry facilities.

However, the provision in the VAT Act relating to the exemption of the letting of a “dwelling” contemplates that the supply may be exempt even if it is supplied with “fixtures and fittings belonging thereto and enjoyed therewith”.

So, in my view, the fact that the student apartments are provided with certain amenities is not decisive. (Compare the following statement at page 12 of the guide of the South African Revenue Service (SARS) titled VAT 411 – Guide for Entertainment, Accommodation and Catering (SARS Guide):

The supply of furnishings and fittings is not usually a reliable indicator of whether the supply should be characterised as a dwelling or commercial accommodation. Commercial accommodation is almost always supplied together with the use of furniture and fittings and access to certain facilities and amenities, but these could also be supplied together with a dwelling under the lease agreement, for a fully or partially furnished dwelling.

The real issue is whether or not the agreements under which apartments rented to students are “agreements for the letting and hiring” of a dwelling, in other words, whether or not the agreements constitute lease agreements, in ordinary parlance – as distinct from, on the other hand, commercial accommodation which “involves making available the use of an accommodation unit which forms part of the assets or resources of the accommodation establishment to the guest under a general agreement, understanding, or licence to occupy”
(SARS Guide at page 12).

In my opinion, where owners rent apartments to students for longer periods (for example 10 months) together with furniture, utilities, laundries and communal areas, for an all-inclusive rent, it is more likely that the supply will be exempt from VAT.

However, I recognise that there is a fine line between the supply of a dwelling under a lease and the supply of commercial accommodation, and that each arrangement should be considered on the relevant facts.

In the case of Respublica (Pty) Ltd v C: SARS case number 864/2014 the taxpayer concluded a five year lease agreement with a university. The property was let for the sole purpose of accommodating the university’s students. The property was divided into smaller units which were furnished with a kitchenette, bathroom and bedroom/living area. The taxpayer supplied water and electricity, maintenance costs, management of the building, a common TV room and laundry services.

The university paid the taxpayer monthly rental. The rental included an amount for utilities. The taxpayer sought guidance from the court on the manner in which it should account for VAT. (Notably, the taxpayer sought an order to the effect that its supply to the university was one of “commercial accommodation”, and that it accordingly was liable to account for VAT at the relevant rate on the rental. The taxpayer did not seek an order to the effect that the supply to the university was that of residential accommodation.)

The court held that the word “lodging” in the definition of “commercial accommodation” should be given a wide meaning under the Act and that the term should be read in conjunction with the purpose for which the property was let to the university, that is, for the purpose of accommodating students. The court accordingly held that, despite the fact that the university itself could not, and did not lodge in the building, the letting of the accommodation by the taxpayer to the university constituted the supply of “commercial accommodation” under
the Act.

For a full discussion of the case see our Tax and Exchange Control Alert of 18 March 2016.

In my view, that judgment is not support for the view that the supply of all student accommodation with amenities should be treated as “commercial accommodation”. The court did not consider at all whether or not the supply could have been that of a dwelling under a lease.

The Respublica case is, however, support for the position that if an owner of an apartment building leases the building to the university, and the university then sub-leases the apartments to students as a dwelling under a lease agreement, the supply of the building to the university will also be the supply of a dwelling under a lease agreement and, accordingly, exempt from VAT.

Finally, there is an important policy consideration which I alluded to above. The reason why the letting of residential accommodation is exempt from VAT is mainly because a VAT system should not discriminate against people who rent their residences, as opposed to owning their own residence where owning a residence is an exempt supply (see du Preez, H and Klein, AE The value-added tax implications of the temporary change in use adjustments by residential property developers: an international comparative study at page 61). That consideration is even more pertinent where the tenants are students who, by virtue of the high cost of tertiary education, will no doubt in the overwhelming number of cases have less means than “ordinary” tenants to pay VAT if it were levied on rental for student accommodation.

Ideally, the Legislature should amend the Act to make it clear how the supply of student accommodation should be treated for VAT purposes.