SMEs operating in the property sector enter a new tax threshold, the impact can be on pricing or cashflow management, as they may need to either increase the rental price and price in the VAT amount or absorb the VAT from their own rental income to avoid overpricing their properties in the market.
Image: Sebastian Machill, 2025.
Since the value-added tax (VAT) threshold for businesses has not been adjusted for inflation, rising property prices and construction costs can push small developers and commercial landlords over the R1 million mark without real growth in profitability.
In the property sector, the impact can be particularly harsh for small operators in townships and rural areas.
“They are brought into the VAT net due to price escalation rather than meaningful expansion,” says Micaela Paschini, the team lead for Tax Legal at Tax Consulting SA, and Megan Langton, the tax attorney at Tax Consulting SA.
The independent tax practice says the compulsory R1 million VAT registration threshold has not been adjusted since 2009. It says that after 17 years of inflation and economic changes, many small businesses are pulled into the VAT net long before reaching a sustainable scale.
“Industry submissions emphasise the disproportionate administrative pressure, cash‑flow strain, and competitive disadvantage created by this threshold. A more realistic threshold, around R2.2 to R2.5 million, reflects inflationary adjustment and SME economic realities.”
By not adjusting the threshold, the VAT system quietly expands from below. More SMEs must register, collect VAT, maintain audit‑ready records, and interact with SARS’ increasingly data‑driven systems.
This increases visibility, compliance touchpoints, and ultimately revenue, without any change to the statutory rate, the firm says.
Once registered, cash flow becomes strained, says Paschini and Langton. They say property projects often involve long build cycles and delayed payments, yet VAT is payable to South African Revenue Services (SARS) on taxable supplies even if funds have not been received. Refund delays can further reduce working capital, they say.
“The result is higher compliance costs and tighter margins in already price-sensitive markets, making sustainable growth more difficult.”
According to the firm, keeping the VAT registration threshold unchanged effectively brings more businesses into the VAT system over time as turnover increases with inflation and economic growth. It adds to the tax base without increasing the VAT rate.
“National Treasury has previously indicated that adjusting the threshold involves balancing competing policy concerns.
"Increasing it would reduce compliance burdens for small businesses. However, setting it too high could exclude too many businesses from the VAT system and create financial strain when businesses suddenly cross the threshold.”
Treasury has also noted that South Africa’s current threshold remains broadly competitive when compared to many Organisation for Economic Co-operation and Development (OECD) countries with VAT systems, they add.
Keeping the R1 million threshold unchanged means many SMEs are pulled into the VAT system sooner, especially when inflation is taken into account, says the tax experts.
They say once registered, they face ongoing compliance obligations, including VAT returns, strict record-keeping, digital documentation, and being audit-ready. “This takes time, money and focus away from growing the business.”
“Cash flow can also become strained. In many cases, VAT must be paid to SARS before customers have paid their invoices, particularly where payment terms extend to 60 days or longer.
“In some cases, VAT registration can also create a competitive disadvantage. Businesses with little input VAT to claim may struggle to compete on price against smaller, unregistered competitors who can charge less.”
The National Treasury has acknowledged that the threshold may create an incentive for businesses to limit turnover to stay below it. “That mindset alone can discourage expansion, hiring and investment, ultimately restricting SMEs’ ability to scale and contribute more meaningfully to the economy,” Tax Consulting SA says.
The government has not adjusted the VAT threshold mainly due to fiscal strategy and revenue protection, given that the tax base in South Africa remains subdued and significantly under pressure, Ncumisa Mkunqwana, CEO of Chapu Chartered Accountants.
By keeping the threshold at the current rate, it helps the government collect more revenue as small businesses enter the new threshold without having to officially increase the tax rate, Mkunqwana says.
“However, this causes an administrative burden to small businesses as they need to implement systems to be compliant with SARS. Moreover, this creates additional expenses for small businesses as they need to procure the services of professional accountants or tax consultants to help them ensure that their financial affairs are in order to avoid penalties for non-compliance,” she says.
The accountancy firm says that as SMEs operating in the property sector enter a new tax threshold, the impact can be on pricing or cashflow management as they may need to either increase the rental price and price in the VAT amount or absorb the VAT from their own rental income to avoid overpricing their properties in the market.
“However, there are ways that property investors can look at in order to reduce their taxable income. We recommend that they consult the services of a tax advisor, as circumstances may differ on a case-by-case basis,” Chapu says.
The Minister of Finance Enoch Godongwana will deliver the 2026 Budget on Wednesday, February 25.
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