The South African Revenue Service (SARS) recently issued VAT Ruling VR 015 providing important clarity on the VAT treatment of purpose-built student accommodation supplied directly to students for an unbroken period exceeding 28 days.
The ruling was issued in response to an application from a private company developing student housing for university students. The development offers furnished rooms with various service options, including internet access, meals, and access to amenities such as parking, laundry facilities, a gym, library, and shuttle services.
Student Accommodation qualifies as “Commercial Accommodation”
A key outcome of the ruling is SARS’s confirmation that the accommodation supplied by the developer directly to student tenants, constitutes “commercial accommodation” as defined in section 1 of the Value-Added Tax Act (Act). As a result, the activity qualifies as an “enterprise” for VAT purposes, and the rental is subject to VAT at the standard rate under section 7(1)(a) of the Act.
This clarification is significant because supplies of residential accommodation or "dwelling" are generally exempt from VAT, whereas supplies of commercial accommodation are taxable. The ruling therefore confirms that operators of similar student accommodation facilities may fall within the commercial accommodation provisions of the VAT Act.
Contrast with the Respublica Case
The ruling also clarifies the circumstances in which the supply of student housing will be treated as commercial accommodation by contrasting them with the earlier case of Commissioner for the South African Revenue Service v Respublica (Pty) Ltd [2018] ZASCA 109.
In Respublica, the vendor leased a building to Tshwane University of Technology (TUT) for the sole purpose of accommodating students and supplied certain domestic goods and services under the lease. The Supreme Court of Appeal held that the decisive question was whether the vendor had provided lodging to the university. Since the university itself could not be a lodger and there was no contractual relationship between the vendor and the students, the supply did not meet the definition of “commercial accommodation.” Instead, the lease payments were treated as a standard taxable supply subject to VAT at 14% (the VAT rate at the time).
By contrast, in the recent ruling the developer supplied accommodation and services directly to students. In those circumstances, the supply met the definition of commercial accommodation, and the preferential 60% valuation rule under section 10(10) applied.
Full Input Tax recovery on construction and development costs
SARS also confirmed that the developer may recover VAT incurred on construction and development costs, provided those costs meet the definition of input tax and the normal documentary and deduction requirements are satisfied i.e. the requirements of sections 16, 17, and 20 of the VAT Act are met.
This means that developers of qualifying student accommodation projects may be entitled to substantial VAT recovery on capital expenditure associated with building and furnishing such facilities.
VAT Applies to rentals and ancillary services
The ruling confirms that monthly student rentals are subject to VAT at the standard rate. In addition, charges for services and facilities supplied to students, including catering and other taxable supplies, must generally be treated as taxable supplies for VAT purposes.
SARS further noted that input tax on entertainment-related expenses may be deductible where the consideration charged covers the direct and indirect costs of providing the entertainment or reflects its open market value.
Preferential VAT calculation for long-term occupancy
A noteworthy aspect of the ruling is SARS’s confirmation of the application of section 10(10) of the VAT Act to long-term student accommodation arrangements. Where accommodation is supplied together with qualifying domestic goods and services for an unbroken period exceeding 28 days, only 60% of the all-inclusive charge is deemed to be consideration for the taxable supply of commercial accommodation and is therefore subject to VAT.
This effectively reduces the VAT burden on longer-term occupants and aligns student accommodation with the broader VAT treatment of commercial accommodation supplied for extended periods.
However, SARS cautioned that the 60% rule applies only to the all-inclusive accommodation charge. Separate charges for other goods or services that do not form part of the all-inclusive accommodation package remain outside the scope of the concession and must be treated according to the normal VAT rules.
Industry Impact
The ruling provides welcome certainty for developers and operators of purpose-built student accommodation. By confirming that these supplies constitute commercial accommodation, SARS has clarified both the output tax obligations and the input tax recovery rights of businesses operating in the growing student housing sector. The confirmation of the 60% valuation rule for stays exceeding 28 days is also likely to be particularly relevant for operators offering bundled accommodation packages to university students.
Note that the ruling applies only to the specific applicant and transactions described therein, is effective from the date of issue, and is valid for a period of three years.
