Commercial Accommodation - SARS versus Respublica

Commercial Accommodation - SARS versus Respublica

Judgement in the case  CSARS v Respublica (Pty) Ltd (1025/2017) [2018] ZASCA 109 was delivered by the Supreme Court of Appeal on September 2018. The case dealt with the Value-Added Tax (VAT) implications of “commercial accommodation” in a specific scenario. The case specifically considered whether the supply of a building and related goods and services to an educational institution for use by its students under a written agreement constitutes a supply of commercial accommodation for VAT purposes.

For VAT purposes, short-term stays in accommodation establishments are taxed at full value, and 60% of the value of accommodation that comprises a dwelling is taxed. The justification for this is that people residing in their own or rented dwellings are not subject to VAT on full cost. Mortgage interest and municipal rates, or alternatively, rent are not subject to VAT at the standard rate. The VAT base is approximately 60 per cent of GDP, and natural persons should be taxed at an equivalent rate on accommodation establishments. The term “commercial accommodation” includes “…lodging or board and lodging, …with domestic goods and services, in any house, flat, apartment, room, hotel, motel, inn, guest house, boarding house, residential establishment, holiday accommodation unit, chalet, tent, caravan, camping site, houseboat, or similar establishment, … regularly and systematically supplied and … total annual receipts … exceeds R60 000 per annum or is reasonably expected to exceed that amount in a period of 12 months, but excluding a dwelling supplied in terms of an agreement for the letting and hiring thereof…”

Respublica owns immovable property in Tshwane, comprising of six buildings consisting of furnished apartment-style living units suitable for student accommodation, and communal areas and facilities. Respublica concluded an agreement to lease to Tshwane University of Technology (TUT) the immovable property. In terms of the agreement the premises were let to TUT for the sole purpose of allowing it to offer student accommodation to its students and for no other purpose. TUT was permitted to use the premises to accommodate holiday groups during university holidays. TUT would allow students to occupy the leased premises pursuant to valid lease agreements, which envisaged TUT issuing a letter to students confirming their allocation to the residence for the academic year, without which a student might not occupy the accommodation. The terms of admitting students to the residence, presumably included the costs thereof, and concluded directly between the students and TUT. Respublica did not select or place any students or holiday visitors as this was done by TUT. TUT took all necessary measures to control and ensure proper discipline of the students accommodated on the premises, including strict house rules. In terms of the lease Respublica lets the leased premises to TUT, defined as the buildings on the immovable property. TUT had to ensure that students vacate the premises when they ceased to be students or when their rights to reside were terminated. TUT paid a monthly rental, calculated with reference to a minimum number of beds to be provided in the leased premises, irrespective of whether t the minimum beds were occupied. TUT had to restore the premises on termination of the lease and not to make alterations to the premises without consent or cause or permit damage to the premises or the commission of any nuisance on the leased premises. Respublica provided agreed furnishings and amenities (such as internet connectivity and entertainment areas with televisions) as part of the leased premises, laundry facilities and utilities (water and electricity) to the leased premises. Respublica had to do routine maintenance and repairs and provide management services, security and cleaning.

Respublica argued that it was obliged to charge VAT on 60% of the total consideration received from TUT under the agreement since it supplied domestic goods and services at an all-inclusive charge in an enterprise supplying commercial accommodation for an unbroken period exceeding 28 days. Respublica argued that its supply to TUT was in fact accommodation supplied by it and used by the students, who were in fact the “lodgers.”

The Court had to consider whether Respublica provided lodging to TUT. The Court referred to the dictionary meaning of “lodging” as “a temporary place of residence” or “a temporary residence; sleeping accommodation,” and a “lodger” is “a person who pays rent in return for accommodation in someone’s house” or “a person who occupies a room in the house of another of which room that other person retains control.” The ordinary meaning of “lodger” is a natural person who actually takes up temporary accommodation. As a result, technically, lodging cannot be provided to a juristic person. The Court drew a distinction between a “lodger” and a “lessee” on the basis that a “lodger” is a natural person, whereas a “lessee” may be a natural or juristic person. The Court also drew a clear distinction between “a contract for board and lodging” and “a contract of letting and hiring”. The Court found that the (legal) between TUT and Respublica had little resemblance to conventional arrangements for the provision of board and lodging. 

The Court remarked that Respublica’s approach did not properly consider the nature of the contractual arrangements and that it resulted in two distinctly separate supplies. The Court found that the two distinct legal relationships had to be considered. The first, between Respublica and TUT and, the second, between TUT, the students and holiday visitors. The Respublica and TUT agreement was a lease of immovable property to TUT, including the provision of specified services and utilities. The agreements between TUT and the students and holiday visitors dealt with shorter term agreements in terms of which TUT supplied accommodation to these persons. Respublica and the students or holiday visitors did not enter into any agreements. This resulted in two separate supplies. TUT’s supply of accommodation to the students constitutes a supply, “…necessary for and subordinate and incidental to the supply of [educational services] [and] supplied for a consideration in the form of…payment for board and lodging,” which is exempt from VAT.

The Court found in favour of SARS, and arguable correctly so. The Respublica case again demonstrates that the legal substance of agreements between parties can substantially vary the tax consequences, even though the ultimate result or economic effect (non-tax) could be the same. These agreements could have, if been structured differently, without changing the economics of the transactions, had completely different tax consequences. Tax turns on intent and legal construct between parties.

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Commercial Accommodation - SARS versus Respublica