Value Added Tax Act, 89 of 1991

What is VAT?

Value-Added Tax (VAT) is a tax charged on the supply of goods or services by a vendor. Registered VAT vendors are obliged to collect VAT from their customers or clients on behalf of the Receiver of Revenue. Vat is only charged on supplies made by a vendor. A taxable activity is any activity carried on continuously or regularly. Taxable supplies do not include salaries, wages and exempt supplies. In September 1991 value-added tax (VAT) was introduced in South Africa. Its implementation was one of the most significant tax developments ever in South Africa. Vat is essentially a tax on expenditure in the domestic economy rather than a tax on the output of the domestic economy. The decision to replace GST with Vat, was largely the result of the perceived deficiencies in the GST system. Some of these deficiencies were that GST is a single stage collection system, GST is a tax on tax and the tax base for GST purposes was too narrow. The general trend internationally is towards the use of VAT as the major form of indirect taxation. Both the VAT as well as the GST system, it’s the end user who ultimately bears the tax. Under the GST system, the tax is generally only charged on the sale to the final consumer. Whilst under a VAT system, the tax is charged on each transaction in the production and distribution chain, most businesses in the chain can deduct the VAT they pay, as input tax. This creates the position that only the person who acquires the goods or services for private use who is not allowed a deduction for VAT paid, and thus actually bears the cost of the tax as well as limiting tax avoidance.

What is output and input VAT? 

The VAT that is charged to customers is called output tax, in turn VAT paid by you as a registered vendor on your purchases from another registered vendor, as well as VAT paid on other business expenses, is known as input tax.  

Who must register?

It is compulsory for a person or company to register as a vendor if he carries on an enterprise and the total value of taxable supplies exceeds or is likely to exceed 300,000 Rand for a twelve month period. (Note the 300,000 Rand limit applies to all separate enterprises, branches or divisions of a vendor as a whole). For a voluntary registration a minimum of at least 20,000 in taxable supplies in 12 months must be made. (Section 23 to 26)

How does vat Work?

The output tax less the input tax in a tax period results in the amount payable/refundable. 

Tax periods

Once registered every vendor is allocated a particular category of tax period. These categories are either A, B, C or D.

Category A and B are for vendors whose taxable supplies for twelve months do not exceed 30 million Rand or for farmers whose taxable supplies exceed 1 million Rand. Category A and B have two month periods, the only difference between the two categories being that the tax period ends on alternative months.

Categories C (one month tax period) is for vendors whose taxable supplies for a twelve month period exceed or are likely to exceed 30 million Rand or for vendors who have specifically applied in writing for a monthly basis.

Category D is for farming enterprises whose taxable supplies do not or are not likely to exceed 1 million Rand. The vendors have six monthly periods ending on the last day of February or August unless the Commissioner for Inland Revenue approves any other month.

Tax period ending on the last day of a month may end within ten days before or after such date provided the vendors accounting dates are as such (for example the 25th of the month).

Calculation of VAT (section 16)

Value-added tax payable by or refundable to a registered vendor is the difference between his output tax and input tax.

Output tax, in general, is the tax which the vendor charges on the supply of goods or services in the course or furtherance of an enterprise carried on by him. The current rate of VAT (Value Added Tax) is 14%. Input tax, in general, is the tax which the vendor himself has borne in respect of goods or services supplied to him (section 1).

Accounting Basis (section 15)

The calculation of the tax payable above is dependant on the accounting basis used by the vendor. Prior to    , two bases were allowed, the invoice basis and the payment basis. Under the payment basis the output tax is calculated when payment are received, the input tax is calculated when payments are made. The invoice basis, the only basis available to companies or corporations, means that the output tax is accounted for, in general, on the issue of an invoice or on a receipt of payment whichever occurs first. In respect of the input tax the same rule applies. (Only an individual that does not exceed 2.5 million Rand for a twelve month period can be payment base, because this will prevent a future cash flow problem when collecting the invoiced amounts more than 60 days after invoicing)

Note, however, that in terms of section 16(2) no deduction of input tax will be allowed unless a tax invoice or debit note or credit note is held by the vendor claiming the deduction at the time when the at return is furnished. (An exception to the rule applies where a tax invoice or debit note or credit note is not required (section 20(6)/(7)/21)).

From a planning point of view the payment basis is more favourable if the vendor grants his customers credit as output tax need only be accounted for in the tax period when payment is received. However, where the vendor acquires goods and services on credit he will only be able to claim the input tax deduction in respect of the vat on the transaction on the tax period when payment to the vendor is made. Thus the debtor and creditor terms of payment situation will determine which basis has the most favourable cash-flow advantage for the vendor (being individuals and partnerships only).

Transactions Subject to VAT

A taxable supply is any supply of goods or services by a vendor in the course or furtherance of an enterprise. VAT is charged at a rate of either the standard rate (14%) or zero-rate (0%). As a general rule, all goods or services are standard rated unless specifically zero-rated or exempt. 

Zero-rated supply (section 11)

The Act provides for taxable supplies at a rate of 14% (standard rate) or 0% (zero-rated). The difference between zero-rated supplies and exempt supplies is that an input tax deduction can be claimed against zero-rated supplies in the same manner as supplies at 14%. No input tax deduction can be claimed against exempt supplies. The most important zero-rated supplies and services are:

* Certain exports; the goods must be exported and services supplied to a recipient in an export country. ‘Export country’ is defined in section 1, and means any country other than the Republic of South Africa. However, it is provided that the President may by notice in the Gazette determine that a specific country or territory shall from a date and to the extent indicated in the notice be deemed not to be an export country.

* The sale of an enterprise or part of an enterprise (which is capable of separate operation) as a going concern to a registered vendor.

* The supplier and the recipient must have agreed in writing that the enterprise (or part thereof) is disposed of as a going concern.

* Supply of certain goods for agricultural use (to a registered vendor, each supply exceeds 500 Rand, and a tax invoice is issued).

* Fuel levy goods (petrol and diesel, but not paraffin).

* Certain listed foodstuffs (except when sold as a meal or refreshment):

brown bread, maize meal, rice, milk, eggs, vegetable oil (excluding olive oil), etc.

Exempt supply (section 12)

No tax is levied on exempt supplies and on input tax is allowed as a deduction. The most important exempt supplies and services are:

* Supply of financial services.

* The supply by associations not for gain of donated goods or services or goods made or manufactured (80% of the value of material used in the making of the goods must consist of donated goods).

* Medical and trade union contrubutions.

* Educational services (by the State or any public institution).

* Accomodation used as a place of residence.

Deemed supply (section 8 & 18)

Certain supplies are treated as deemed supplies for vat purposes. The most important deemed supplies are as follows:

* Cessation of a business.

* Fringe benefits

* Indemnity payments (like short-term insurance claims paid in respect of your business).

Change of use

 If you bought or imported any goods or services for your business but later decide to use these goods or services for your own use, you will have to pay output tax on this. Or if an input tax credit was claimed on any goods or services bought or imported, and after claiming this input tax credit the enterprise uses these goods or services imported or bought for another reason or project in the enterprise, but if the goods or services imported or bought by the enterprise would not be entitled to a input tax credit means that the change in use created a undue tax benefit and the input tax claimed would have to be repaid to the Receiver of Revenue.

 VAT on fringe benefits

 What is a fringe benefit ?

The granting of any taxable benefit or advantage to an employee by an employer in respect of their employment or of their holding of an office, the cash equivalent of the value during the tax year, must be included in the employees ‘gross income’ and form part of the employees taxable income, from which employees tax (PAYE) is deducted (Seventh schedule to the Income Tax Act).

 Now that the employee is taxed, what about the employer?

In accordance to Section 18(3) of the Vat Act, the granting of certain fringe benefits, as detailed in the Seventh Schedule to the Income Tax Act, by a vendor (meaning a person or company registered for vat purposes) to any employee or director is deemed to be a taxable supply for vat purposes as travel, entertainment and subsistance allowances are not fringe benefits detailed in the Seventh Schedule to the Income Tax Act, employers are not obliged to account for vat in respect thereof. 

Essentially the output tax to be accounted for by the employer, is intended to recover the portion of input tax deduction previously claimed by the employer, in respect of the original acquisition of these goods or services which are supplied to an employee for his private use.

Fringe benefits as per the Seventh schedule which are not subject to vat, are benefits granted by a vendor in the course of the employers business of making exempt supplies. The supply itself is zero-rated or exempt, the supply of a benefit other than goods or services (e.g. housing subsidy), provision of entertainment , free use of a company owned holiday flat.

 Where vat is payable, the consideration for the supply of the fringe benefit is, with the exception of the private use of a motor car, the ‘cash equivalent’ of the benefit as determined for income tax purposes (Section 10(13)), and where a benefit has no value for Income Tax purposes, no output tax must be accounted for on the benefit (e.g. certain long service awards). To determine the amount of output tax to be accounted for, the employer must apply the tax fraction (x14/114) to the ‘cash equivalent’ (this will determine the vat amount of the value of the consideration including vat).

 Where the benefit consists of the right to the private use of a ‘motor car’. The cash equivalent for Income Tax purposes includes both a capital cost and a running cost element. When a company acquires a motor car it is usually denied any input tax deduction and fuel is also not subject to vat. So from a vat point, all that remains to be redeemed is the deemed private use in respect of repairs, maintenance and insurance costs, as it is only the vat incurred in respect of these expenses which an employer may usually deduct. The following rules must be used in determining the consideration for the fringe benefit.

-          If the employer was, or would have been, denied an input tax deduction on the acquisition of the vehicle, the amount subject to vat is 0,3% per month or part thereof, of the motor car’s ‘determined value’ (cash cost excluding GST/VAT)

 -          If the employer is, or would have been, granted an input tax deduction in respect of the acquisition of the vehicle, the             consideration is 0,6% per month or part thereof, of the motor vehicle’s determined value

 -          Where the employer is engaged in the business of making taxable and non-taxable supplies, only so much of the            consideration as relates to the making of taxable supplies is subject to vat

 -          Where the employee bears the full cost of repairs and maintenance, the monthly consideration as determined above may be reduced by the lessor of:

-          R 85-00 or

-          R 85-00 multiplied by the ratio of taxable to non-taxable supply use; or

-          The actual consideration as determined

 -          Where an employee contribute an amount to the employer in respect of his private use of a company vehicle, the contribution must be allocated to the items to which it relates. If the employee merely contribute to the cost of fuel, no reduction in consideration for vat is permissible (fuel is zero-rated), but if he contributes to the capital cost or to the costs of maintenance, a deduction may be made of such contributions.

 The employer has to account for the vat in respect of employee’s fringe benefits at the end of the month in which the cash equivalent, or any portion thereof, is required to be included in the remuneration of the employee for PAYE and or SITE purposes. If the employee’s or director’s remuneration not be subject to PAYE and or SITE, then VAT must be accounted for, on the cash equivalent of the benefit, on the last day of the employee’s or director’s year of assessment.

Payment of VAT, penalties and interest (Section 1, 28, 39, 45 & 45a)

Once the VAT return has been completed it must be submitted (with payment if required) to the Inland Revenue (South African Revenue Services) on or before the 25th of the month following the end of the tax period (where the 25th is on a non trading business day then the return will become due on the 23rd of that month). An exception to this rule is in respect of certain imported goods and where special returns are required. Where payment is effected by means of an electronic transfer, the cut-off date for payment is extended to the last business day of the month. The vat return must still be submitted on or before the 25th of the month following the end of the tax period.

A vendor who fails to pay the tax within the prescribed time is liable for penalties and interest (section 39). The penalty is an amount equal to 10% of the tax. Late payment of the vat due will also be subject to interest of 1.2% per month (section 39and definition ‘perscribed tax rate’). Where the Commissioner for Inland Revenue is late in refunding vat, (he has upto 21 working days after receipt of vendors return, provided the return is not submitted late) he will pay the vendor interest at a rate of 16% per year (section 45 and definition ‘prescribed tax rate’).

Record Keeping and Requirements of a Valid TAX INVOICE (SECTION 20 & 21)

A vendor is required to keep adequate records to comply with the Act. In particular tax invoices, debit and credit notes are necessary for the purposes of claiming an input tax deduction. A tax invoice is issued by a registered vendor when making a supply to a registered vendor. The issue must be within 21 days of the request for such by the recipient. This tax invoice supports the recipients claim for an input tax deduction.

Tax invoices must contain particular information and in this respect differs from the normal invoice. The issuing of tax invoices for supplies under 20 Rand (including vat) is optional. Supplies between 20 Rand (including vat) and 500 Rand (including vat) require the following (section 20(5)):

* The words ‘Tax Invoice’ must be printed on the invoice in a prominent place.

* The name, address and VAT Registration number of the supplier.

* Date of the tax invoice which must have an individual serialized number.

* A description of the goods or services supplied.

* The value of the supply, the amount of tax charged and the consideration of the supply (value + vat).

* Where a vendor calculates the tax payable by applying the tax fraction he may reflect on the tax invoice the considerstion for the supply and either the amount of tax charged or a statement that the consideration includes a charge in respect of tax and the rate of tax charged.

Where the supply exceeds 500 Rand (including vat) the following additional information is required:

* The name and address of the recipient.

* Quantity or volume of the goods or services supplied.

The Act also provides for the issuing of debit and credit notes. These are issued if the supply is cancelled/the nature of the supply has been fundamentally altered/the consideration has been altered/goods supplied have been returned (including returnable containers). Debit and credit notes issued, similar to tax invoices must contain specific information. Credit notes must reflect the amount by which the value of the supply shown on the tax invoice has been reduced and the amount of the excess tax, and where the tax charged is calculated by applying the tax fraction to the consideration, the amount by which the consideration has been reduced and either the amount of the excess tax or a statement that the reduction includes tax and the rate of the tax included. The reason for the issuing of the credit note with sufficient information to identify it to the original supply must also be reflected on the credit note.

Time and Value of Supply (SECTION 9 & 10)

Section 9 sets out as general rule that the time of supply is to be the earlier of the time the invoice is issued for the supply, or the tome any payment or consideration is received by the supplier. (Note that this rule does not apply to vendors on the payment basis)

Section 10 sets out a general rule in subparagraph (3) which states that the value of supply will be either the money if the consideration is in the form of money or if the consideration is not in money the open market value at the time of supply.

VAT and Accommodation

 The provision of residential accommodation by way of letting in a ‘dwelling’ is exempt. Accordingly rentals received from the letting of flats and houses, for instance, are generally not subject to VAT.

However, the provision of accommodation in both a ‘residential rental establishment’ and in a ‘commercial rental establishment’, is wholly or partially subject to VAT provided that the person supplying the accommodation is a vendor.

Commercial rental establishments

A commercial rental establishment means:

• Accommodation in any hotel, motel, inn, boarding house, hostel or similar establishment in which lodging is regularly or normally provided to five or more persons at a daily, weekly, monthly or other periodic charge; or

• accommodation in any house, flat, apartment, room, caravan, houseboat, caravan or camping site which constitutes an asset (including a leased asset) of a business undertaking or a separately identifiable part of a business undertaking carried on by any person who -

- lets or holds for letting as residential accommodation five or more houses, flats, apartments, rooms, caravans, houseboats, caravan or camping sites in the course of such business undertaking; and

- derives total annual receipts and accruals from the letting of all such houses, flats, apartments, rooms, caravans, houseboats, caravan and camping sites which exceed R48 000 or there are reasonable grounds for believing that such total annual receipts and accruals will exceed that amount; and

- regularly or normally lets or holds for letting as residential accommodation such houses, flats, apartments, rooms, caravans, houseboats, caravan or camping sites for continuous periods not exceeding 45 days in the case of each occupant.

In other words, where an undertaking lets out at least five such units for periods not exceeding 45 days, the annual gross receipts from all such units must be taken into account in determining whether or not the undertaking falls within the category of commercial rental establishment; or

• accommodation in any house, flat, apartment or room (other than accommodation referred to in any of the above two categories) which is regularly or systematically let or held for letting as residential accommodation for continuous periods not exceeding 45 days in the case of each occupant of such house, flat, apartment or room, if the total annual receipts and accruals from the letting thereof have exceeded R48 000 or there are reasonable grounds for believing that such total annual receipts and accruals will exceed that amount.

Accordingly only the letting of those units, where the turnover per unit exceeds the R48 000 per annum threshold, constitutes the carrying on of a commercial rental establishment; or

• any hospital, nursing home, hospice, convalescent home or rest home (Section 1).

Excluded from the meaning of ‘commercial rental establishment’ is any boarding house or hostel operated either by any employer solely or mainly for its employees, or by a local authority, on a non-profit-making basis.

Thus a commercial rental establishment is either a business in the nature of a hotel or motel, or in the nature of a hospital, or the provision of short-term accommodation in a flat, apartment etc, for example, the letting out on a regular basis of holiday flats for a week or two at a time.

A person only has to account for VAT on accommodation provided in a commercial rental establishment if that person is a vendor. Accordingly, if the person’s only activity is to conduct a commercial rental establishment, his total income therefrom must exceed (or be likely to exceed) R300 000 per annum before he is required to register as a vendor. The R48 000 per annum rental threshold merely determines whether the activity constitutes a commercial rental establishment, not whether the supplier is a vendor. What is set out below assumes that the supplier is a vendor.

For periods of accommodation in a commercial rental establishment of up to 45 days per occupant, the rents or tariffs (including any charges for board) are fully subject to VAT. Once an occupant stays longer than 45 days, only

60% of the value of the ‘domestic goods and services’ received from the occupant from day 46 is taxed (Section 10(10)(a)).

Domestic goods and services are:

• The provision of accommodation in any commercial rental establishment to a natural person for residential purposes; and

• where it is provided as part of this accommodation, the provision of cleaning, maintenance, electricity, gas, heating, air-conditioning, a telephone, television, radio or similar article (Section 1).

Accordingly the provision of domestic goods and services is really the provision of a serviced room. Excluded is the provision of meals and other services such as laundry. Where there is one all-inclusive charge for both the room and meals, the charge must be opportioned between the ‘domestic goods and services’ (ie for the room) and the meals. Unless the Receiver directs to the contrary, the portion relating to the meals and other services must be at least 20% of the total charge (Section 10(10)(c)).

As meals and other services are taxed in full, at least 68% ((80% × 60%) + 20%) of the all inclusive charge would be subject to VAT.

Despite the fact that an occupant may only be taxed on a portion of the value of the accommodation provided to him, the establishment itself may deduct input tax as if the occupant is taxed on the full value.

Residential rental establishments

A residential rental establishment is an establishment of one of the types listed below in which not less than 70% of the persons who stay there are expected to stay longer than 45 days (eg a residential hotel or an old age home). Establishments which may constitute residential rental establishments are:

• Any hotel, motel, inn, boarding house, hostel or similar establishment in which lodging is regularly or normally provided to five or more persons at a daily, weekly, monthly or other periodic charge; or

• any hospital, nursing home, hospice, convalescent home or rest room (Section 1).

In the case of residential rental establishments, VAT is usually charged on 60% of the value of the domestic goods and services from the commencement of the period of accommodation (Section 10(10)(b)). Where an occupant leaves after a period of shorter than 45 days, and has been charged on only 60% of the value, the full value (100%) of the domestic goods and services for the period of occupation becomes taxable.

This necessitates the proprietor’s making an adjustment at that point in time. Accordingly, proprietors running residential rental establishments should (if they are quoting VAT inclusive rates) quote two rates, one for periods of up to 45 days and one for periods longer than 45 days.

The time of supply in respect of all goods and services supplied by either commercial or residential rental establishments is the date of issuing an invoice or receiving any payment whichever is the earlier.

The reason that only part of the value of such accommodation is taxed is to place people living in commercial accommodation on a long-term basis on a similar footing to those renting ordinary domestic dwellings. The intention is that those living in commercial accommodation should not be paying materially more VAT on their basic accommodation (including electricity etc) than their counterparts who are renting their house or flat. The latter do not pay VAT on their rentals.

Entertainment

 With certain exceptions, the VAT paid on entertainment expenses cannot be claimed as input tax. The term ‘entertainment’ is widely defined and includes the provision by a vendor to anyone of food, beverages, accommodation, hospitality and recreation in the course of his enterprise (Section 1).

A vendor is prohibited from claiming an input tax deduction in respect of goods or services acquired by such vendor to the extent that such goods or services are acquired for the purposes of entertainment (Section 17(2)(a)). This means that where goods or services are acquired partially to provide entertainment, to that extent an input tax deduction is denied. For example, if a company leased a three story office block as its corporate headquarters and one storey was used exclusively as a staff canteen (to provide free lunches) and to provide free entertainment to clients, only two thirds of the VAT on the rental would be deductible.

However, in certain circumstances, a vendor is entitled to deduct input tax in respect of his entertainment expenditure. These are:

• Where a vendor acquires goods or services for making taxable supplies of entertainment in the ordinary course of his enterprise.

However, in order for the input tax on such supplies to be deductible, the enterprise must be one which either:

- supplies entertainment to employees or office holders of the vendor or any connected person in relation to the vendor, to the extent that such taxable supplies of the entertainment are made for a charge which covers all the direct and indirect costs of such entertainment, or

- continuously or regularly supplies entertainment to clients or customers for a consideration, to the extent that such taxable supplies of entertainment are made for a charge which

- covers all direct and indirect costs of such entertainment; or

- is equal to the open market value of the supply.

A charge equal to the market value or to cover such costs, does not have to be charged where

- no charge is made for bona fide promotion purposes in respect of supplies to persons who are clients or customers in the ordinary course of the enterprise, of entertainment ‘which is in all respects similar to the entertainment continuously or regularly supplied to clients or customers for consideration’ (eg ‘loss leaders’ in a supermarket), or

- the goods or services are acquired to make taxable supplies of food to such clients or customers and portion of the food is subsequently given to an employee of the vendor or to a welfare organization, as all the food acquired was not consumed in making the taxable supplies (eg the leftovers from a banquet).

(For example, a company which runs a regular canteen service for its employees where a charge covering the direct and indirect costs of supplying the meals is made, is entitled to claim full input tax in respect of all food and beverages purchased for sale at the canteen. However, the company would have to account for output tax in respect of the amount charged for the meals. Similarly a hotel or restaurant would be able to obtain an input tax deduction in respect of its food and beverage purchases which are in turn supplied to guests);

• where the expenditure is in respect of the personal subsistence of a vendor (including a partner in a partnership) or a vendor’s employees (including office holders) who are required to spend nights away from their usual place of residence and from their usual working-place in the course of their employment. (Assume that a

person employed in Durban is required to be away from home for at least one night in Cape Town on business. The VAT on his hotel and restaurant bills for personal subsistence, which are paid by his employer, is deductible by his employer as input tax.);

• where a vendor, who operates a taxable passenger transport service, purchases food, beverages or other ‘entertainment’ in order to provide passengers with meals or refreshments whilst they are being transported. This would not apply in the case of an operator who transports fare-paying passengers by road or rail. Such a service is not a taxable transport service. (For example, an airline operating flights between Johannesburg and Cape Town is able to claim a deduction of all the VAT incurred upon the purchase of the foodstuffs used to supply meals and refreshments to the passengers on such flights.);

• where a vendor organizes a meeting or seminar at which meals or refreshments are provided to the delegates for a charge which covers the cost of the meals or the refreshments. (An example is where delegates attending a seminar are charged a fee of R175 by the presenters which includes a charge for all meals provided. If the fee of R175 is sufficient to cover the presenters’ costs of providing the delegates with the meals, the presenters may deduct as input tax all VAT incurred on food and drink acquired.);

• where a local authority acquires goods or services (‘entertainment’) for the purpose of providing sporting or recreational facilities or public amenities to the public, provided that the local authority’s rates are subject to VAT or the entertainment is provided in the course of a business in respect of which the Minister of Finance has given notice that the business activity falls within the VAT net (eg a caravan park ) (For instance, this means that a municipality whose rates are subject to VAT may claim the VAT incurred by it on the materials acquired by it to clean its public swimming pools.);

• where a welfare organization (as defined) incurs entertainment costs in furthering its aims or objects (Thus an organization which runs soup kitchens to feed the poor is able to claim back any VAT paid upon its purchase of the food.).

Supplies by a Vendor who has been denied INPUT TAX 

The supply of entertainment made by a vendor who was denied input tax upon the initial acquisition of goods or services used to make the supply, is not subject to VAT (Section 10(21)).

Furthermore where a vendor was previously denied input tax by virtue of the provisions of Section 17(2) when acquiring goods, or would have been denied input tax had the VAT Act been in operation when the goods were acquired, then he need not account for any output tax on the subsequent supply of such goods (Section 8(14)). Accordingly if a company purchases a motor car for use by one of its executives, the subsequent disposal of the motor car does not attract VAT, irrespective of whether the vehicle was purchased before or after 30 September 1991.

Supplies between Connected Persons 

Supplies between connected persons are subject to special value and time of supply rules.

The definition of a connected person is fairly broad. The following are regarded as connected persons:

• A natural person (including his estate if he is deceased or insolvent) and any relative (as defined in the Income Tax Act) of such natural person or the estate of any such relative if the relative is deceased or insolvent (para (a)(i));

• a natural person (including his estate if he is deceased or insolvent)and any trust fund of which such relative or the estate of any such relative, if the relative is deceased or insolvent, is a beneficiary (para (a)(ii));

• a trust fund and any beneficiary thereof (para (b));

• a partnership or close corporation and any member thereof (para (c)(i));

• a partnership or close corporation and any other person where that person and a member of such partnership or close corporation, as the case may be, are connected persons (para (c)(ii));

• a company (other than a close corporation) and any person (other than a company) where that person, his spouse, minor child or any trust fund of which that person, his spouse or minor child may be a beneficiary is separately interested (or two or more of them in aggregate are interested) directly or indirectly in at least 10% of the company’s share capital (para (d)(i));

• a company (other than a close corporation) and any person where that person and the person referred to in para (d)(i) or his spouse, minor child or trust fund, or the other company referred to in para (d)(ii), are connected persons (para (d)(iii));

• a company (other than a close corporation) and any other company in which the shareholders are substantially the same persons or which are controlled by the same persons (para (d)(ii));

• separately registered branches or divisions of the same vendor (para (e));

• separately registered branches or divisions of an association not for gain (para (f));

• any person (usually an employer) and any superannuation scheme where the members of the scheme are mainly employees or office holders (or former employees or office holders) of that person (para (g)) (Section 1).

A ‘trust fund’ means

any fund consisting of cash or other assets the administration and control of which is entrusted to any person acting in a fiduciary capacity by any person, whether under a deed of trust or by agreement, or by a deceased person under a will made by that person (Section 1).

Where a supply is made by any person to a connected person for no consideration, or for a consideration which is less than the open market value, and if the consideration for the supply had been the open market value, the recipient would not have been entitled to a full input tax deduction (eg the recipient is not a vendor or the recipient is to utilise the goods or services to make non-taxable supplies) the consideration for the supply is the open market value of the goods or services (Section 10(4)). Open market value is the price normally payable for such goods or services had they been supplied to an independent third party. This rule also applies where the recipient is only entitled to a partial input tax deduction. It does not apply in the case of the supply of fringe benefits.

Where a supply between connected persons occurs, it is deemed to take place at the following points in time (ie the normal time of supply rules fall away):

• Where the supply is a supply of goods, at the time the goods are removed;

• where the goods are not to be removed, when they are made available to the recipient; or

• where the supply is a supply of services, when the services are performed (Section 9(2)(a)).

However, these special time of supply rules are not applicable and the normal rules apply if either an invoice is issued or any payment is made in respect of the supply, on or before

• the day on which the return is furnished for the tax period during which the supply would ordinarily (ie applying normal time of supply rules) be made or

• the last day prescribed by the VAT Act for furnishing the return for the tax period during which the supply would ordinarily be made.

For example, a property development company with one month tax periods donates a personal computer to its wholly owned subsidiary, which earns its income solely from letting out residential property. Since the subsidiary makes only exempt supplies it would not be able to claim an input tax deduction. If the computer is transferred on 3 November, without any invoice being issued, the property development company would have to determine the open market value of the computer, and account for output tax based on the open market value of the computer in its VAT return for the November tax period. If, however, the property development company issued an invoice before the November VAT return was due ie 25 December, it would have to account for VAT on the open market value of that supply only in its return for the December tax period.

In ITC 1605 (58 SATC 314) the appellant (a company and a vendor) had acquired an aircraft and spares from another company, A (Pty) Ltd, a non-vendor. The appellant sought to deduct notional input tax based upon the purchase price, whilst Revenue contended that it must be based upon the market value of the items (being a lesser sum). Revenue’s approach was premised on the assumption that the appellant and A (Pty) Ltd were connected persons at the time of supply (at the relevant time the Act restricted a notional input tax deduction to an amount based on the market value of the second-hand goods only where the parties were connected persons).

The appellant’s only shareholder was B, and A (Pty) Ltd’s only shareholder was C Trust, of which B and his family were beneficiaries.

The court held that the appellant and A (Pty) Ltd were connected persons as:

• B and A (Pty) Ltd were connected persons by virtue of the provisions of paragraph (d)(i) of the definition - as B’s trust was the only shareholder of A (Pty) Ltd; and

• B and the appellant were connected persons by virtue of the provisions of paragraph (d)(i); and

• thus the appellant and A (Pty) Ltd were connected persons by virtue of the provision of paragraph (d)(iii).

The court held that the definition of connected persons is inserted to counteract tax avoidance. Where two possible interpretations of such a provision exist, and one interpretation could lead to tax avoidance, the interpretation which would assist in preventing such avoidance should preferably be used.

 Bad debts 

A supplier who utilizes the invoice basis of accounting for VAT may well have to account to the Receiver for output tax on a supply without first having received payment from his customer. If the debt turns out to be wholly or partially irrecoverable and VAT was previously accounted for on the underlying supply, then that portion of the irrecoverable debt which represents VAT already accounted for as output tax, may be claimed as an input tax deduction (Section 22(1)). The input tax deduction may be claimed only where the supplier (creditor) has ‘written off’ the irrecoverable portion.

For example, a clothing store sells dresses on credit to a customer for R570, including VAT. The repayments are on a ‘10 months to pay’ system. The amount of VAT paid over to the Receiver would be 14/114 x R570 = R70. After 3 payments of R57 each, the payments cease and the debtor cannot be traced. At this stage the debtor would have paid 3 x R57 = R171. Hence the balance written off is R399 (R570 - R171). Of this amount, there is an outstanding VAT component of 14/114 x R399 = R49 which may be claimed as input tax. Note that the applicable VAT rate in such

circumstances is the rate applicable on the date when the goods were delivered, or the time when any payment was received by the supplier, whichever is the earlier.

Revenue regards a debt as irrecoverable once a vendor has complied with both of the following requirements, namely:

• The vendor has written the debt off in its accounting records, and

• the vendor has ceased any recovery action itself and has decided either to take no further action or has handed the debt over to an attorney or debt collector.

In the case of an instalment credit agreement, the deduction is restricted to the VAT in respect of that portion of the cash value which has become irrecoverable.

Where a vendor transfers an account receivable at face value on a non-recourse basis to another person (eg a bank), no deduction is available under this provision - ie the factoring cost of a vendor discounting his debtors on a non-recourse basis does not give rise to an input tax deduction on the basis that portion of the debts are irrecoverable (Section 22(1)(iv)(a)). On the other hand, where account receivables are transferred at face value on a recourse basis, an input tax deduction may be made, but only when an account receivable is transferred back to the vendor and to the extent that he has written off portion of the consideration as being irrecoverable (Section 22(1)(iv)(b)). Thus, again, no deduction may be made in respect of any factoring cost when discounting the debtors on a recourse basis. The deduction may only be made by the vendor to the extent that his account receivables are transferred back to him by the factoring house (eg bank) and he writes them off as irrecoverable.

A deduction of input tax in respect of an irrecoverable debt is not permitted if the vendor has repossessed the goods. Nor is it permitted if the vendor is accounting for VAT on the payments basis, unless the initial supply is in the form of an instalment credit agreement made by him (second proviso to Section 22(1)).

If a vendor subsequently recovers some or all of the amount previously written off, he has to account for output tax thereon.

A vendor (eg a bank) which acquires debtors from another vendor may claim an input tax deduction if portion of the price paid for the debtors subsequently proves to be irrecoverable (Section 22(1A)). In order for this vendor (bank) to be able to claim such a deduction, the following conditions must be present:

• One vendor (say a dealer) has previously made a taxable supply for a consideration in money; and

• this vendor has accounted for the output tax at the standard rate in respect of such supply; and

• this vendor has on or after 4 July 1997 transferred the account receivable relating to such taxable supply at face value to another vendor (the bank) on a non-recourse basis; and

• the bank has written off a portion of the face value (excluding any finance charges or collection costs) of the account receivable.

The bank’s input tax deduction is equal to the tax fraction multiplied by that portion of such face value written off by it. The tax fraction is the one applicable at the time the original taxable supply is deemed to have been made. In calculating the bank’s input tax deduction, the amount of the face value written off by the bank is limited to the amount the bank paid for the account receivable. The face value at the time of transfer is the net value of the account receivable after adjustments for any credit and debit notes and bad debts already made by the dealer.

Recovery of a bad debt previously written off

A vendor may claim an input tax deduction when writing off a bad debt. Should the whole or a portion of the debt previously written off be recovered, he must account for output tax in respect of that portion recovered in the tax period in which it is recovered (Section 22(2)). The output tax which must be accounted for, is the pro-rata portion of the input tax deduction previously claimed, which is subsequently recovered.

This provision applies not only where the debtor pays, but also where the original debt ‘becomes recoverable by him (vendor) by virtue of the reassignment to him of the underlying debt.’ This appears to be an anti-avoidance provision. 

Issue of a credit note by a supplier 

A supplier is usually required to make an adjustment in his VAT return when he issues a credit note. The adjustment is effected by increasing the input tax deduction or reducing the output tax for the tax period in which the credit note is issued.

There could be a number of reasons for the credit note, such as a bulk discount or an incorrectly invoiced amount. The credit note reduces the supplier’s original selling price and thus the VAT thereon. In effect, the vendor would previously have accounted for ‘too much’ output tax.

 Issue of a debit note to a vendor 

A vendor may be issued with a debit note as a result of an increase in the consideration charged for a supply. The vendor (recipient) may make an input tax deduction for the tax on the increased portion of the consideration, in the tax period in which the debit note is issued (Section 21(7)). However, the debit note must be in the possession of the recipient before he may claim the input tax deduction. 

Non-payment by a debtor 

A debtor, who is a vendor and accounts for VAT on the invoice basis and has claimed an input tax deduction in respect of a taxable supply of goods or services made to him, must account for output tax to the extent that he has not paid for the goods or services in full, within 36 months of the end of the tax period within which the deduction was claimed. The output tax is equal to the tax fraction, applicable at the time the deduction was made, multiplied by that portion of the consideration still outstanding (Section 22(3)). The output tax must be accounted for in the tax return, for the first tax period immediately after the expiry of the 36 month period. This adjustment would generally only need to be made by a vendor who is on the invoice basis.

Should a written contract provide that some or all of the consideration is only payable after the tax period in which the input tax deduction is claimed, the 36 month period only starts running for that portion of the consideration from the end of the month within which it is payable in terms of the contract (Section 22(3) proviso).

(The Taxation Laws Amendment Act of 1997 introduced an amendment to Section 22(3)). This amendment appeared to be aimed at reducing the 36 month period to a 12 month period. However, the amendments to Section 22(3) do not appear to have been correctly made with the result that its meaning is unclear.)

Where a debtor, who has accounted for output tax in terms of these provisions, subsequently pays for the goods or services, he may claim an input tax deduction equal to the tax fraction (applicable at the time the initial input tax deduction was made) multiplied by that portion of the purchase price paid (Section 22(4)).

Special Situations - Input Tax (section 17)

* Denial of input tax (section 17(2)). Where a vendor acquires goods or services wholly or partly for the purpose of consumption, use or supply in the course of making taxable supplies the vat charged on the supply to him of the goods or services will qualify wholly or partly as an input tax deduction.

However, the Act specifically denies the deduction of such vat in the following circumstances.

* Goods or services acquired by a vendor for purposes of entertainment. There are execeptions to the rule. The most important are vendors inthe business of supplying entertainment/personal subsistence of a vendor/vendors operating taxable passanger transport services/vendors organising seminars or similar events.

* Club subscriptions

* The acquisition of a motor car by a vendor. (Specifically excluded from the definition are vehicles capable of accomodating only one person, those suitable for carrying more than 16 persons, or vehicles with an unladen mass of 3500kg or more. Caravans and ambulances are aslo excluded from the definition) An exception to the general rule exists in the case of vendors who acquire motor cars for the exclusive purpose of making taxable supplies of those motor cars in the ordinary course of an enterprise which continually or regularly supplies motor cars (for example a motor car dealer).

 

 TERMS AND INTERPRETATION (SECTION 1)

“cash value”

in relation to the supply of goods supplied under an installment credit agreement, means-

(a) where the seller or lessor is a banker or financier, an amount equal to or exceeding the sum of the cost to the banker or financier of the goods, including any cost of erection, construction, assembly or installation of the goods borne by the banker or financier and the tax leviable under section 7 (1) (a) in respect of such supply by the banker or financier; or

(b)                where the seller or lessor is a dealer, an amount equal to or exceeding the price (including tax) at which the goods are normally sold by him for cash or may normally be acquired from him for cash (including tax) and any charge (including tax) made by the seller or lessor in respect of the erection, construction, assembly or installation of the goods if such charge is financed by the seller or lessor under the installment credit agreement; 

“commercial rental establishment”

means-

(a) accommodation in any hotel, motel, inn, boarding house, hostel or similar establishment in which lodging is regularly or normally provided to five or more persons at a daily, weekly, monthly or other periodic charge; or

(b) accommodation in any house, flat, apartment or room (other than accommodation in respect of which the provisions of paragraph (a) or (bA) apply) which is regularly or systematically let or held for letting as residential accommodation for continuous periods not exceeding 45 days in the case of each occupant of such house, flat, apartment or room, if the total annual receipts and accruals from the letting thereof have exceeded R48 000 or there are reasonable grounds for believing that such total annual receipts and accruals will exceed that amount; or

(bA) accommodation in any house, flat, apartment, room, caravan, houseboat, caravan or camping site which constitutes an asset (including a leased asset) of a business undertaking or a separately identifiable part of a business undertaking carried on by any person who-

(i) lets or holds for letting as residential accommodation five or more houses, flats, apartments, rooms, caravans, houseboats, caravan or camping sites in the course of such business undertaking;

(ii) derives total annual receipts and accruals from the letting of all such houses, flats, apartments, rooms, caravans, houseboats, caravan and camping sites which exceed R48 000 or there are reasonable grounds for believing that such total annual receipts and accruals will exceed that amount; and

(iii) regularly or normally lets or holds for letting as residential accommodation such houses, flats, apartments, rooms, caravans, houseboats, caravan or camping sites for continuous periods not exceeding 45 days in the case of each occupant; or

(c) any hospital, nursing home, hospice, convalescent home or rest home,

but does not include-

(i) accommodation in any boarding establishment or hostel operated by any employer solely or mainly for the benefit of the employees of such employer or of a connected person in relation to such employer or of their dependants, provided such establishment or hostel is not operated for the purpose of making profits from such establishment or hostel for the employer or such connected person;

(ii) accommodation in any boarding establishment or hostel operated by any local authority otherwise than for the purpose of making profits from such establishment or hostel;

[Definition of “commercial rental establishment” substituted by s. 12 (1) (a) of Act No. 136 of 1992.]

 “consideration”

 in relation to the supply of goods or services to any person, includes any payment made or to be made (including any deposit on any returnable container and tax), whether in money or otherwise, or any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of any goods or services, whether by that person or by any other person, but does not include any payment made by any person as an unconditional gift to any association not for gain: Provided that a deposit (other than a deposit on a returnable container), whether refundable or not, given in respect of a supply of goods or services shall not be considered as payment made for the supply unless and until the supplier applies the deposit as consideration for the supply or such deposit is forfeited;

 “domestic goods and services”

means the provision to a natural person of the right to occupy for residential purposes the whole or part of the accommodation provided in any commercial rental establishment, including, where it is provided as part of the right of occupation, the provision of-

(a) cleaning and maintenance;

(b) electricity, gas, air conditioning or heating;

(c)                 a telephone, television set, radio or other similar article;

  “entertainment”

means the provision of any food, beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind by a vendor whether directly or indirectly to anyone in connection with an enterprise carried on by him;

 “enterprise”

Any activity or business inside South Africa, carried on continuously or regularly which supplies goods or services to other people at a charge, whether or not for a profit.

 “exempt supplies”

Specific exemptions from VAT in terms of section 12 of Value Added Tax Act, No.89 of 1991.

 “input tax”

Relates to expenses and is the tax a vendor pays on goods or services acquired for his enterprise.

 “output tax”

Related to turnover (sales) and is the tax a vendor charges his customers.

 “second-hand goods”

Goods that have been previously owned and used.

“standard rated supplies”

Supplies with VAT charged at 14%

 “taxable Supplies”

Supplies at the rate of 145 and 0%

 “the Act”

The Value-Added Tax Act No. 89 of 1991 

“turnover”

Total income from sales (wholesale and retail), labour charges in respect of services, fees charged for services.

 “VAT return”

Is known as a VAT201 and is the form you use to declare your output and input tax to the Receiver of Revenue.

 “vendor”

A person who has registered for VAT purposes or should be registered.

“zero-rated supplies”

Sales of goods or services where the rate of 0% is applied.

 “residential rental establishment”

means any commercial rental establishment contemplated in paragraph (a) or (c) of the definition of “commercial rental establishment” in which not less than 70 per cent of the persons to whom domestic goods and services are supplied reside, or are expected to reside, for a period of 45 days or longer;

[Definition of “residential rental establishment” substituted by s. 12 (1) (i) of Act No. 136 of 1992.]

“notional input tax”

In certain circumstances a vendor may acquire goods, not incur any VAT upon the acquisition of the goods, and yet still be entitled to claim a deduction of input tax in respect of the acquisition of the goods. This deduction of input tax is known as notional input tax.

In addition, a vendor is entitled to deduct amounts as input tax in certain circumstances even though he has not directly paid any VAT to a supplier of goods or services.