VALUE ADDED TAX VAT PRESENTED BY Amon Munyukwi

VALUE ADDED TAX (VAT) PRESENTED BY Amon Munyukwi amon@cta 101. co. za 083 347 1518

TESTING POSSIBILITIES q. Journals q. Calculation q. Discussion q. Integration with other topics

VAT ACT q. Overview of VAT ü VAT is a type of indirect tax and a direct cost to the final consumer, as he cannot claim the amount back from (SARS). ü However, in certain instances, an enterprise registered as a vendor may claim back the VAT Input from SARS. ü It is therefore critical to understand the mechanisms of VAT in any enterprise, as it has a direct cash-flow effect on the enterprise. ü VAT cash-flows represent between 7% and 20% of turnover and Non compliance with the VAT legislation has massive punitive consequences.

OVERVIEW OF VAT q VAT is levied interms of the VAT Act at a rate of 15% or 0% ü OUTPUT VAT: Output Tax on supplies of goods or services by the vendor. ü INPUT VAT: Input tax on supplies of goods or services to the vendor. VAT OUTPUT less VAT INPUT add/less Adjustments = VAT PAYABLE/REFUNDABLE

VAT q. KEY ASPECTS OF VAT ü Consideration = (1. Value 2. Timing 3. Calculation) Value plus VAT ü Consideration includes VAT ü The value of a supply excludes VAT ü VAT fraction 15/115 is applied on consideration (amount including VAT). ü Standard Rate 15% is applied on value of supply (amount excluding VAT).

TYPES OF SUPPLIES Three types of supplies 1. Taxable Supplies ü Standard Rated supplies at 15% or ü Zero Rated Supplies at 0% and 2. Exempt Supplies ü Do not have any VAT implications 3. Denied Supplies ü VAT Input is denied- sec 17(2).

VAT -BASICS Vendor (Registration) q. A ‘vendor’ is any person who is, or is required to be, registered under the VAT Act. q. Compulsory registration; ü total value of the taxable supplies for the preceding 12 months exceeded R 1 million, ü Anticipates that the total value of the taxable supplies in terms of a written contractual obligation for the following 12 months will exceed R 1 million, or ü total value of the taxable supplies made by a foreign supplier of electronic services has exceeded R 50 000.

COMPULSORY REGISTRATION q. Where a person carries on two separate businesses, he must register when the joint taxable supplies of the two businesses exceeds R 1 million, since it is the ‘person’ who conducts the enterprise, not the ‘enterprise’, that registers for VAT. q. If each business is conducted in a separate company (or other legal person), each company is required to register only when the taxable supplies of that company exceeds R 1 million.

VOLUNTARY REGISTRATION q. Requirements ü value of the taxable supplies of all his enterprises is >R 50 000 during a previous 12 month period. ü total value of taxable supplies of that person is <R 50 000, but can reasonably be expected to exceed that amount within 12 months from the date of registration as a vendor. § Please take note that where the value of the taxable supplies has not yet exceeded R 50 000, such vendor should be registered on payments basis until the value of its taxable supplies exceeds R 50 000. ü Persons supplying commercial accommodation - only once the supplies exceed R 120 000 for a 12 -month period.

THE ACCOUNTING BASIS -Sec (15) THE ACCOUNTING BASIS -sec 15 Invoice Basis Payment Basis ü Earlier of issue of invoice or ü Payments made (Input) or ü Payment received (Output) ü Payment received If the vendor changes from the payments basis to the invoice basis, he should prepare a list of his enterprise’s debtors and creditors, showing the amounts owing at the end of the tax period immediately preceding the changeover period. VAT Payable/Refundable = Output tax due on outstanding debtors less input tax receivable on creditors

TAX PERIODS -Sec (27) Category will be given in questions CATEGORY A B C NB; Please read this – Silke and Sec 27 D E

OUTPUT VAT q. Interms of Sec 7(1) of the VAT ACT: ü OUTPUT VAT is levied on the supply of goods or services in South Africa by a vendor in the course or furtherance of an enterprise Sec 7(1)a, or ü On the importation into South Africa of goods by any person (any person, not a vendor only) Sec 7(1)b, or ü On the supply of imported services to a non-vendor or to a vendor in respect of nontaxable supplies –Sec 7(1)c

VAT OUTPUT q. VAT output is never apportioned; there are only two circumstances where the apportionment of output VAT is permitted; ü Indemnity payments and ü Fringe Benefits

IMPORTED SERVICES-Sec 7(1)(c) Imported services-Sec 7(1)(c) In terms of s 1 of the VAT Act, ‘imported services’ are defined as the supply of services ü by a supplier who is a non-resident or carries on business outside South Africa ü to a recipient who is a resident of South Africa ü to the extent that the services are used in South Africa for the purposes of making a non-taxable supply. NB: VAT is not payable if the services are imported and fully used for the purposes of making taxable supplies.

IMPORTED SERVICES-Sec 7(1)(c) ü If the recipient of the imported services is not a vendor, the recipient is required to pay the VAT within 30 days from the time of supply - Sec 14(1)). ü If the recipient of the imported services is a vendor, the vendor is required to include the VAT in the tax period in which the supply was made- (proviso to Sec 14(1)). Case: CSARS v De Beers Consolidated Mines Ltd Determining whether services are imported for taxable on non taxable supplies. (Please read case in Silke)

IMPORTED SERVICES-Sec 7(1)(c) q. Example; A company in South Africa received professional advice relating to their total business from a foreign company (not a resident of South Africa nor a VAT vendor). The company’s business entails the making of both taxable and exempt supplies in a ratio of 70: 30. The non-resident company charges the bank R 80 000 for such services. Discuss the VAT implications of the transaction (Include calculations and journals).

IMPORTED SERVICES-Sec 7(1)(c) q. The following imported services will not attract VAT- Sec 14(5): ü a supply of services that was already subject to VAT at 15% ü a supply that, if made in South Africa, would be subject to VAT at 0% or would have been an exempt supply ü the supply of educational services rendered by foreign educational institutions to South African students ü the rendering of services by an employee to his employer or the rendering of services by a holder of office in performing the duties of his office. This will thus result in excluding the supply of certain services by a non-resident, for example a director, from falling within the ambit of imported services, and ü for supplies of a service of which the value per invoice does not exceed R 100.

IMPORTED SERVICES-Sec 7(1)(c) q. Imported services: Time of Supply -Sec 14(2) ü earlier of the dates of the issue of an invoice, or the making of any payment by the recipient in respect of that supply -Sec 14(2). q. Imported services: Value of Supply -Sec 14(3) ü the greater of the value of the consideration for the supply, or the open-market value of the supply -Sec 14(3).

IMPORTATION OF GOODS-Sec 7(1)b &13 q The importer of the goods must pay VAT, even if he is not a vendor Sec 7(2). q If goods are imported by a vendor to be used or supplied in the course of making taxable supplies, the VAT paid on importation would qualify as input VAT. q Certain imported goods are exempt from VAT upon importation eg; § goods abandoned, destroyed or damaged before entered for home Consumption- Sec 13(3)

IMPORTATION OF GOODS q. Importation of goods from other countries Time of importation Sec 13(1)(i) ü The time of importation is when the importation of goods is deemed to take place. ‘Importation’, in relation to goods, means when goods enter South Africa, or are cleared for home use or a customs procedure before the arrival of the goods in South Africa in terms of the Customs Control Act.

IMPORTATION OF GOODS q. Calculation of VAT on importation Sec 13(2)(a) ü VAT payable on goods imported from countries other than the BLNS countries is, according to s 13(2)(a); thus; 15% of the total of ü customs duty value, plus ü 10% of customs duty value, plus ü non-rebated customs duty payable and any import surcharges.

IMPORTATION OF GOODS q. Example; a. Yusuf Construction (Pty) Ltd imported marble that has a cost price and a value for customs duty purposes of R 140 500 from Zimbabwe. Import surcharges of R 7 100 were levied. Yusuf imported the marble for use in his own home. q. Discuss the VAT implications of the transaction (include calculations and journals).

IMPORTATION OF GOODS-SEC 7(1)B &13 q. Importation of goods from BLNS countries; § Botswana, Lesotho, Namibia and Swaziland q. The customs union member countries do not levy any customs duty on any imports from each other. VAT may however be charged.

IMPORTATION OF GOODS-SEC 7(1)B &13 Time of importation Sec 13(1)(iii) ü The ‘time of supply’ is defined as the time when goods enter South Africa Sec 13(1)(iii), and is usually when goods physically enter South Africa via a designated commercial port. Calculation of VAT on importation Sec 13(2)(b) ü VAT payable on goods imported from BLNS countries is equal to 15% of the customs duty value Sec 13(2)(b).

FURTHERANCE OF AN ENTERPRISE q. In the course or furtherance of an enterprise Sec 7(1)(a) An ‘enterprise’ is generally defined as ü any enterprise or activity ü carried on continuously or regularly ü in South Africa or partly in South Africa ü by any person ü in the course or furtherance of which ü goods or services are supplied for a consideration, ü whether for profit or not.

FURTHERANCE OF AN ENTERPRISE q CARRIED ON CONTINUOUSLY OR REGULARLY ü Once-off private sales do not attract VAT, as they will not be deemed to be a supply in the course of an enterprise. ü If, for example, an Accountant sold his private home, the supply of his home would not be in the course of the accounting enterprise and would not attract VAT. ü If the Accountant (vendor) sold the offices from which he conducted his accounting enterprise, the sale of the offices would be in the course of the enterprise and should attract VAT.

FURTHERANCE OF AN ENTERPRISE q. Specifically included in the definition of an ‘enterprise’ ü Anything done in connection with the commencement or termination of an enterprise. ü The activities of a welfare organisation and foreign donor funded project. ü The supply of electronic services by a person from a place in an export country- Please Silke for more details (Unit 32. 7. 4)

FURTHERANCE OF AN ENTERPRISE q. Specifically excluded from the definition of an ‘enterprise’ The supply of services by an employee to his employer. A hobby. An exempt supply The supply of commercial accommodation, if the total value of such supplies does not exceed R 120 000 for a period of 12 months. ü Certain supplies made by branches or main businesses situated outside South Africa iff; ü ü § the branch or main business can be separately identified, and § an independent system of accounting is maintained for that branch or main business.

OUTPUT VAT (ZERO RATED SUPPLIES)-SEC 11 q. Exported goods -Sec 11(1)(a)(i) and (ii) q. Exported services -Sec 11(2) q. The sale of a going concern -Sec 11(1)(e) and 18 A

OUTPUT VAT (ZERO RATED SUPPLIES EXPORTED SERVICES -SEC 11(2) q EXPORTED SERVICES WILL QUALIFY FOR THE ZERO RATE ONLY IF THE DOCUMENTARY REQUIREMENTS ARE ADHERED TO- SEC 11(3). 1. TRANSPORTATION (S 11(2)(A), (B) AND (D)) q THE RENDERING OF A TRANSPORT SERVICE TO PASSENGERS OR GOODS IS ZERO-RATED, IF TRANSPORTED FROM ü A PLACE OUTSIDE SOUTH AFRICA TO ANOTHER PLACE OUTSIDE SOUTH AFRICA, OR ü A PLACE IN SOUTH AFRICA TO A PLACE IN AN EXPORT COUNTRY, OR ü A PLACE IN AN EXPORT COUNTRY TO A PLACE IN SOUTH AFRICA. ü ANY SERVICES COMPRISING THE INSURING OR ARRANGING OF INSURANCE FOR ANY OF THE ABOVE PASSENGERS WILL ALSO BE ZERO-RATED (S 11(2)(D)).

OUTPUT VAT (ZERO RATED SUPPLIES Example; If the flight from Australia to Rome has to land in Johannesburg and Cape Town as well, the Johannesburg- Cape Town leg (a connecting flight) will also be zero-rated as it forms part of the Australia- Rome ticket (part of international carriage) (s 11(2)(b)). 2. Ancillary services to exported goods (s 11(2)(e)) q. The term “ancillary transport services” is defined in sec 1 of the VAT Act and means stevedoring (loading or unloading ships) services, lashing and securing services, cargo inspection services, preparation of customs documentation, container handling services and storage of transported goods or goods to be transported. These are also zero-rated if supplied to a non-resident that is not a vendor.

OUTPUT VAT (ZERO RATED SUPPLIES 3. Services rendered outside South Africa (s 11(2)(k)) q. A service is zero-rated if it is physically rendered outside South Africa. It could thus be zero-rated even if the service is rendered to a resident, as long as the service is physically rendered outside the borders of the country. 4. Services to non-residents (s 11(2)(l )) q. Services supplied to a non-resident (not physically rendered outside South Africa) may only be zero-rated if the services are supplied directly to that non-resident, or any other person, and both the non-resident and the other person are not in South Africa at the time the services are rendered.

OUTPUT VAT (ZERO RATED SUPPLIES) q. Scenarios; q. Silke; Pg 1047 together with Stellenbosch Farmers’ Winery Limited v CSARS.

ZERO-RATED SUPPLY: THE SALE OF A GOING CONCERN SEC 11(1)(E) AND 18 A q. The sale of a going concern q. The disposal of an enterprise as a going concern is a zero-rated supply if the parties agreed in writing that such enterprise, or part thereof, is disposed of as a going concern. q. Conditions ü The intention to transfer it as an income earning activity is sufficient ü All the assets necessary for carrying on the enterprise are disposed of by the supplier to the recipient. ‘Disposed of’ =outright sale or rental of the assets necessary for carrying on of the enterprise. )

THE SALE OF A GOING CONCERN ü The parties have at the time of the contract agreed in writing that the consideration for the supply is inclusive of VAT at the rate of 0%. ü Both the parties (supplier and recipient) must be registered vendors for VAT purposes. Scenarios : Silke pg 1049 Read and highlight Interpretation note 57 of the VAT ACT.

THE SALE OF A GOING CONCERN q. Calculations relating to going-concern sales 1. 100% taxable usage At least 95% taxable supplies, then, output tax = 0% on the full transaction. 2. More than 50% taxable usage for the purposes of the going concern ü If the assets of the going concern were applied by the seller mainly (that is more than 50%) for taxable supplies in the going concern, but also partly for other purposes, all the assets will be deemed to form part of the going concern disposed of and the full selling price is zero-rated.

THE SALE OF A GOING CONCERN 3. Less than 50% of the selling price relates to the going concern ü If the goods or services of the enterprise were applied by the seller partially for purposes of the going concern, but not mainly (thus less than 50%), only the portion of the selling price that relates to the going concern may be zerorated. Section 8(15) determines that the seller must make an apportionment. a. The seller must charge VAT at 15% in respect of the non-goingconcern portion. b. The seller must charge VAT at 0% in respect of the going-concern portion that was applied for taxable purposes.

SALE OF A GOING CONCERN q. Example; Sale of going concern. A vendor sells tenanted fixed property for R 2 100 000. The building is partly let as residential flats (exempt supplies) and partly as commercial offices (taxable supplies). Assume that all requirements are met and that the sale qualifies as the sale of a going concern. Discuss the VAT implications of the transaction, show calculations, if: (a) 60% of the fixed property is used as residential flats and 40% as commercial offices, or (b) 25% of the fixed property is used as residential flats and 75% as commercial offices.

ZERO RATED SUPPLIES-Sec (11) ü The supply of goods and services for use for agricultural or other farming purposes ü The supply of gold coins, such as Kruger Rands- Sec 11(1)(k)). ü Certain basic foodstuffs; for example, brown bread, maize meal, etc ü The supply of fuel levy goods, eg petrol and diesel, etc Run through Sec 11.

EXEMPT SUPPLIES -Sec (12) q. No output tax is levied in respect of exempt supplies, and no input tax relating to the expenditure on these supplies may be claimed. 1. Financial services- Sec 12(a), eg, interest Sec 2(1)(f). Bank charges are taxable. § Although the provision of financial services is an exempt supply, it will be zero-rated if physically rendered outside South Africa. ü The zero-rating of financial services takes precedence over exemption. § Zero rated; Input can be claimed § Exempt supplies; Input can not be claimed.

EXEMPT SUPPLIES -Sec (12) 2. Donated goods and services- Sec 12(b) ü The exemption also applies if the goods being supplied were made or manufactured by a PBO, provided that at least 80% of the value of the materials used consists of donated goods. 3. Residential accommodation-Sec 12(c) ü Commercial accommodation is subject to VAT at the standard rate. § Persons supplying commercial accommodation with a value not exceeding R 120 000 in any 12 - month period are not carrying on enterprises. Such persons will thus be eligible for voluntary registration only once the supplies exceed R 120 000 for a 12 -month period.

COMMERCIAL ACCOMODATION q. Value of the supply: Commercial accommodation-Sec 10(10) ü Output tax must be levied on the full value of the supply where accommodation and domestic goods and services are supplied for a period of 28 days or less. ü Where domestic goods and services are supplied at an all-inclusive charge in any enterprise supplying commercial accommodation for an unbroken period exceeding 28 days, the consideration in money is deemed to be 60% of the all-inclusive charge -Sec 10(10).

COMMERCIAL ACCOMODATION NB: -Where separate prices are charged for accommodation in a room and any other services (eg; meals, cleaning services, etc): the charge must be apportioned between accommodation and the other services where the occupant stays for an unbroken period exceeding 28 days. -VAT will be levied at 100% on the other services and only at 60% on the fee for the room.

EXEMPT SUPPLIES -Sec (12) 4. Transport of fare-paying passengers (in a bus or taxi, but not a gameviewing vehicle) ü A supply of transport services by a hotel to and from the airport will not be an exempt supply if the residents of the hotel are not charged separately for such service. ü Travel by air in South Africa is a standard rated supply. ü Travel in a game viewing vehicle or hearse is subject to VAT at the standard rate.

EXEMPT SUPPLIES -Sec (12) 5. The supply of qualifying educational services by the State, a school, a public higher education institution or certain institutions in South Africa that meet the definition of a PBPO is an exempt supply. Sec 12(h)(i). 6. The supply of childcare services by a crèche or an after-school care centre also exempt (s 12(j)).

DEEMED SUPPLIES-SEC 8, 8 A & 18(3) q 1. Ceasing to be a vendor-Sec 8(2) On date of ceasing to be a vendor, output tax will also become payable on: ü Goods (except goods were input tax was denied, for example motor cars and entertainment (s 17(2)) and rights still owned by a person on the day he ceases to be a vendor. ü outstanding balances, owing to suppliers, not older than 12 months. These provisions will not apply where that person ceased to be a vendor as a result of his death or sequestration and the executor or trustee of that estate carries on that enterprise.

CEASING TO BE A VENDOR-SEC 8(2) q. Value of the supply: Ceasing to be a vendor -Sec 10(5) A. Goods and rights owned. - consideration is the lesser of: ü the cost of acquisition, manufacture, assembly, construction or production of the goods or services, as well as related costs such as transportation or delivery, costs relating to trading stock and other deemed costs, including VAT charged to the vendor (if the goods or services were acquired from a connected person, then the open-market value on the date of acquisition to the extent that it exceeds the consideration), and ü the open-market value on date of ceasing to be a vendor.

CEASING TO BE A VENDOR-SEC 8(2) q. B. Outstanding balances owing to suppliers ü Outstanding balances not older than 12 months: § The consideration is the amount that has not been paid (s 22(3) proviso (ii)(BB)). ü balances owing older than 12 months: § Sec 22(3) provides that a vendor will be obliged to account for an amount of output tax if he has not paid the full consideration for a supply within 12 months. The output tax liability for these outstanding balances would therefore arise because of the non-payment within 12 months and not because of the cessation of the enterprise. If the Sec 22(3) output tax liability was already accounted for, no additional output tax liability would arise on date of cessation of the enterprise. The outstanding balances owing to suppliers could only trigger output tax to the extent that input VAT were actually claimed on the supply that gave rise to the outstanding balance (s 22(3)(a)).

CEASING TO BE A VENDOR-SEC 8(2) Note: ü Where a vendor deregisters solely because the total value of taxable supplies in the preceding 12 months did not exceed the voluntary registration threshold of R 50 000 or the compulsory registration threshold of R 1 000, the output VAT payable in respect of the deregistration should be paid within six months -Sec 8(2 E).

CEASING TO BE A VENDOR-SEC 8(2) q. Time of supply: Ceasing to be a vendor-Sec 8(2) and 9(5) ü Where goods or rights are deemed to be supplied by a vendor who ceases to be a vendor, the time of supply is immediately before the vendor ceases to be a vendor.

DEEMED SUPPLIES-SEC 8, 8 A & 18(3) q 2. Indemnity payments- Sec 8(8) q. This is a deemed supply iff; ü The insured is a vendor- not applicable to non-vendors, ü The payment relates to taxable supplies made by the vendor, ü the payments relate to the total reinstatement of goods for which an input tax deduction was not denied (Sec 17(2)) and such goods are stolen or damaged beyond economic repair.

INDEMNITY PAYMENTS q. Value of the supply: Indemnity payments (s 8(8) Value of the supply = tax fraction (15/115) x Consideration Received This Output Tax can be apportioned to the extend of which the loss was incurred by the vendor in the course of his enterprise.

INDEMNITY PAYMENTS q. Time of supply: Indemnity payments-Sec 8(8) ü The time of supply is the date of receipt of that payment or the date of payment to another person, as the case may be. Note: ü If the insurer replaces the damaged or stolen goods, there can be no output tax consequences for the vendor, as there was no indemnity payment. ü If the payment is made to a third party to indemnify the vendor, the vendor also has to pay output tax,

DEEMED SUPPLIES-SEC 8, 8 A & 18(3) q 3. Fringe benefits- Sec 18(3) q. The following fringe benefits are subject to VAT: ü Assets given to employees. (only assets given free of charge or at a low rate. There is, however, no VAT applicable to assets supplied for entertainment purposes, zero-rated or exempt supplies, or motor vehicles. ) ü The right of use of an asset given to an employee (for example, the use of a company car provided to an employee). ü Services made available by the employer to the employee for private purposes.

FRINGE BENEFITS- SEC 18(3) q. Value of the supply: Fringe benefits -Sec 10(13) a. All other fringe benefits (other than the use of a motor vehicle ü Output VAT = Consideration for the supply is deemed to be the cash equivalent of the benefit used for income tax purposes, multiplied by the tax fraction. b. Right of use of a motor vehicle ü Output VAT is calculated in two ways;

RIGHT OF USE OF A MOTOR VEHICLE 1. Where VAT Input was denied in respect of a motor car as defined. OUTPUT VAT PER MONTH = ü 0, 3% x Determined Value (determined value for VAT purposes, excludes VAT). LESS § a). all amounts paid by the employee to the employer, excluding finance charges, fuel and the portion of the amount that relates to the fixed cost of the motor car –Sec 8(14). § b). R 85, if the employee bears the full cost of repairs and maintenance ü Multiply the net amount by the VAT fraction (15/115) ü Then, multiply by the percentage of taxable usage.

RIGHT OF USE OF A MOTOR VEHICLE 2. Where VAT Input was claimed in the case of any other vehicle. OUTPUT VAT PER MONTH = ü 0, 6% x Determined Value (determined value for VAT purposes, excludes VAT). LESS § a). All amounts paid by the employee to the employer, excluding finance charges and fuel. § b). R 85, if the employee bears the full cost of repairs and maintenance ü Multiply the net amount by the VAT fraction (15/115) ü Then, multiply by the percentage of taxable usage.

RIGHT OF USE OF A MOTOR VEHICLE q. Key Points to Remember ü Where there is a reduction in the determined value, the depreciation allowance is calculated according to the reducing-balance method at the rate of 15% for each completed period of 12 months from the date on which the vendor first obtained such vehicle, to the date when the employee was first granted the right of use thereof. ü Cost of repairs and maintenance of the motor vehicle does not include fuel.

RIGHT OF USE OF A MOTOR VEHICLE q. Journals to record the Output VAT ü Dr Employee Costs ü Cr Output VAT xxx The output tax results in an additional salary cost that should be deductible for income tax purposes.

RIGHT OF USE OF A MOTOR VEHICLE q. Time of supply: Fringe benefits-Sec 9(7) ü The time of supply is deemed to be the end of the month in which the cash equivalent of the benefit or advantage is granted to the employee. ü However, where the cash equivalent is not required to be included on a monthly basis, the supply is taxable on the last day of the year of assessment of the employee.

DEEMED SUPPLIES q 4. Payments exceeding consideration-Sec 8(27) and 16(3)(m) When a vendor receives any payment for a taxable supply of goods or services at the rate of 15% that is in excess of the consideration charged, output tax will be payable if the excess is not refunded within 4 months. ü The excess portion shall be deemed to be a supply of services performed by the vendor in the course or furtherance of his enterprise (s 8(27)). ü In the event that the excess payment is refunded on a date after the output tax has been accounted for, the vendor will become entitled to claim an additional input tax credit (s 16(3)(m)).

PAYMENTS EXCEEDING CONSIDERATION q. Value of supply: Payment exceeding consideration-Sec 10(26) ü the excess portion of the payment received. q. Time of supply: Payment exceeding consideration-Sec 8(27) ü The time of supply is deemed to be the last day of the tax period during which the four-month period ends.

DEEMED SUPPLIES q. SARS v British Airways ü Where a single supply of goods or services would, if separate considerations had been payable, have been charged partly at the standard rate and partly at the zero rate, each part of the supply is deemed to be a separate supply. Sec 8(15). ü In terms of the British Airways vs SARS, a single supply of service is only capable of notional separation into its component parts, as contemplated by s 8(15), when the same vendor supplies more than one service, each of which, had it been supplied separately, would have attracted a different tax rate.

OUTPUT TAX (NON-SUPPLIES)-Sec 8(14) Section 8(14) provides that if the input tax has been denied in terms of the VAT Act, then no output tax is levied on the supply. Typical examples will be where goods or services were acquired for entertainment purposes, or the supply of a motor car (other than an employer granting the use of a motor car to an employee) (s 17(2)).

OUTPUT TAX: NO APPORTIONMENT-SEC 8(16) q. If a vendor acquires goods or services partly for the purposes of making taxable supplies and subsequently sells these goods, the vendor will be deemed to make a taxable supply of goods or services in the course of his enterprise and the total consideration received for such supply will be subject to VAT (s 8(16)). ü Only two exceptions to this rule are § fringe benefits and § indemnity payments.

TIME OF SUPPLY: GENERAL RULE-SEC 9(1) q. General rule for the time of supply is the earlier of: ü the date of the invoice, or ü the date the payment of the consideration is received by the supplier.

TIME OF SUPPLY q 1. Connected persons Sec 9(2)(a) ü the time of supply is the time of removal in the case of the supply of goods that are to be removed, or ü the time of supply is the time they are made available to the recipient in the case of goods that are not to be removed, or ü the time of supply is when the services are performed in the case of services.

TIME OF SUPPLY q 2. Rental agreements-Sec 9(3)(a) ü the time of supply is the earlier of the date on which payment is due, or the date on which payment is received. Note: A ‘rental agreement’ is any agreement for the letting of goods, excluding a finance lease

VALUE OF THE SUPPLY-Sec(10) q. Remember: 1. Value Amount = then the amount of VAT is calculated by applying 15% to the value amount, 2. Consideration = then the amount of VAT is calculated by applying the tax fraction (15/115) to the amount of the consideration.

VALUE OF THE SUPPLY-Sec(10 q 1. General rule-Sec 10(3) ü the amount of the money if the consideration is in money, or ü the open-market value of the consideration is not in money consideration. less the amount of VAT included in the

VALUE OF SUPPLY q 2. Connected persons -Sec 10(4) When a vendor supplies goods to a connected person ü A. for no consideration, or ü B. for a consideration that is less than the open-market value, or ü C. the consideration cannot be determined at the time of the supply, and the connected person would not have been able to claim a full input tax credit, Then; the consideration of the supply is deemed to be its open-market value.

VALUE OF SUPPLY q 3. Entertainment -Sec 10(21) ü When a supplier makes a supply of entertainment and no input tax could be claimed in respect of the acquisition of goods and services for the purposes of entertainment, the value of the supply is nil. ü This will be the case even if the supply was made to a connected person.

VALUE OF SUPPLY Value of the supply: Supply for no consideration-Sec 10(23) 1. Supply for no consideration - Value of the supply is deemed to be nil (excluding connected persons). 2. Promotional supplies, eg; product samples made for no consideration in a business context are generally regarded as taxable supplies if they are made in an effort to promote other taxable supplies which are usually made for a consideration by the enterprise. The value of these taxable supplies, as they are made for no consideration, is still deemed to be nil (INN 70).

INPUT VAT q. INPUT VAT is always apportioned; a vendor can only claim Input VAT credit to the extend of taxable supplies in the course or furtherance of his enterprise- Sec 17 (1). q. If 95% or more of the purchased goods or services will be used in the making of taxable supplies, the full input tax credit may be claimed and no apportionment is necessary -de minimis rule.

INPUT VAT q. Input VAT should usually be deducted in the period during which the time of supply occurs, or for imported goods, the period during which the goods are released in terms of the Customs and Excise Act. q Input VAT may be claimed in a later period if the vendor is unable to claim input tax in the aforementioned period. This later period may not be more than five years after the tax period during which the input tax deduction should have been made-proviso to s 16(3).

VAT INPUT q. Input VAT may be claimed only if the vendor is in possession of documentary proof that substantiates the vendor’s entitlement to the input tax, eg; Tax Invoice (read Sec 20 for Tax Invoices) q. The Commissioner has powers to prescribe (s 16(2)(f)) or accept (s 16(2)(g)) different documentary proof that a vendor must have before claiming Input VAT; ü South Atlantic Jazz Festival (Pty) Ltd v CSARS; sponsorship agreements were accepted as sufficient proof to enable input tax to be claimed despite no tax invoices being issued.

VAT INPUT q. Debit Notes and Credit q Notes (Read this please- Silke).

DENIAL OF INPUT TAX-Sec 17(2) 1. Entertainment: VAT Input is denied on goods or services acquired for the purposes of entertainment; eg. provision of food, beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind, by a vendor to anyone in connection with an enterprise carried on by him.

DENIAL OF INPUT TAX-Sec 17(2) Key cases where input tax will not be denied on entertainment; a. Vendors in the business of supplying entertainment, as long as a charge is made by the vendor for the entertainment. b. Any meal, refreshment or accommodation of a vendor, his employee or any self-employed natural person who is required to be away from his usual place of residence and usual place of business for at least one night. Please Read more cases in Silke

DENIAL OF INPUT TAX-Sec 17(2) 2. Club membership fees and subscriptions ü Input VAT is denied in respect of any fees or subscriptions for the membership of any club or association of a sporting, social or recreational nature. ü Input VAT is however, not denied if the payment is for the professional membership of an employee, for example membership to SAICA -CA(SA).

DENIAL OF INPUT TAX-Sec 17(2) q 3. Motor car: (Define please) q. VAT Input on the acquisition of a motor car is denied- Sec 17(2)c; q. The following are not motor cars as defined- (Input Vat is not denied). ü Ambulances ü Game-viewing vehicles ü hearses - for the transport of deceased persons.

MOTOR CAR q. The denial of input tax does not apply in the case of a vendor who; ü is a car-dealer, ü runs a car-hire business at an economic rental, ü acquired the motor car for the purpose of awarding that motor car as a prize in consequence of a betting transaction-supply in terms of s 8(13), or ü regularly or continuously supplies motor cars as prizes to clients or customers (other than employees, office-holders or any connected person in relation to that employee, office-holder or vendor).

MOTOR CAR q. A vendor that acquires a ‘motor car’ for which an input tax deduction is denied upon acquisition, and subsequently utilises such vehicle for purposes for which an input tax deduction would have been allowed on acquisition, may deduct input tax after the subsequent change of use of the motor vehicle- Sec 18(4)

SECOND-HAND GOODS- NOTIONAL INPUT q. Notional Input VAT can only be claimed if the vendor can prove that; ü second-hand goods are acquired by him, ü a resident of South Africa and the goods, ü are situated in South Africa and the goods have been supplied by any person and the supply is a non taxable supply (exempt or denied or from a non vendor).

SECOND-HAND GOODS- NOTIONAL INPUT q. The following are not second hand goods; ü animals, ü gold coins -Sec 11(1)(k), ü goods consisting solely of gold unless acquired for the sole purpose of supplying such goods in the same state without any further processing or ü any other goods containing gold unless those goods are acquired for the sole purpose of supplying those goods in the same or substantially the same state to another person.

SECOND-HAND GOODSq. Fixed property usually also qualifies as second-hand goods if it was previously owned and used. q. All supplies of fixed property as part of the land reform regime are, however, excluded from the definition of ‘second-hand goods’.

NOTIONAL INPUT VAT q. Calculating Notional Input VAT: ü Notional VAT input is calculated by applying the tax fraction (15/115) to the lesser of; § the purchase price, or § open-market value, ü This deemed VAT may only be claimed to the extent that payment has been made for the second-hand goods. If only a portion of the purchase price for the secondhand goods has been paid, then only the same relative portion of the deemed input tax may be claimed- (section 16(3)(a)(ii)(aa)).

NOTIONAL INPUT VAT q. Lesser of purchase price or open market value does not apply to the motor industry on the trade in of second hand vehicles. q. A binding general ruling (BGR 12) allows motor dealers to deduct the deemed input tax on the full consideration paid for a second-hand vehicle traded-in under a non-taxable supply.

NOTIONAL INPUT VAT ü If, after a deduction of input tax on second-hand goods, the sale is cancelled, the consideration is reduced, or the second-hand goods are returned, and the input tax actually deducted exceeds the input tax properly deductible, the difference should be accounted for as an output tax -Sec 18(8). Read on Documents to be maintained

NOTIONAL INPUT VAT Zero-rating of movable second-hand goods exported (proviso ss 11(1) and 10(12)) ü When second-hand goods are exported, the zero-rating as per s 11 is not applicable if, in respect of such goods, deemed input tax has been claimed by that vendor or any connected person to the vendor. ü When such second-hand goods are exported, the value of the supply shall be deemed to be the purchase price of the supplier. If the supplier bought the goods from a connected person who was entitled to claim a deemed input tax, the value of the supply will be the greater of the purchase price of those goods to the supplier and the purchase price of those goods to the connected person. Effectively, the zero rate applies only to the mark-up.

SPECIAL RULES- INPUT VAT 1. Fixed Property VAT takes precedence over Transfer Duty ; ü a supply of fixed property that is subject to VAT (zero or standard) is exempt from transfer duty. ü If a supply of fixed property does not attract VAT (exempt), the supply will be subject to transfer duty.

FIXED PROPERTY Time of supply; Fixed Property qthe earlier of: ü the date of registration (where registration of transfer is effected in a deeds registry), or ü the date on which any payment is made in respect of the consideration for such supply - Sec 9(3)(d) arw Sec 16(3)bb.

FIXED PROPERTY q. Fixed property – Exempt supplies q. Payments basis (s 16(3)(b)(i)) ü When a vendor is registered on the payments basis, the deemed input tax is always claimable only to the extent that the payment has been made. q. Invoice basis (s 16(3)(a)(ii)(bb)) ü The deemed input tax for vendors registered on the invoice basis can only be claimed once the fixed property is registered in the name of the vendor. After registration in the name of the vendor, the deemed input tax can further only be claimed to the extent that payment was made for the supply.

FIXED PROPERTY Fixed property – Taxable supplies q. Taxable supplies btwn parties that are not connected persons, or where they are connected persons, but the supply was not deemed to be at market value (thus Sec 10(4) was not applied), ü Input tax may only be claimed in proportion to the amount paid, irrespective of the date of transfer. ü The output tax is also only accounted for to the extent that payment is received (ss 16(3)(a)(ii. A) and 16(4)(a)(ii)).

SPECIAL RULES- INPUT VAT 2. Installment Credit Agreements Suspensive Sale Finance Lease Read Silke pg 1088 for differences

INSTALLMENT CREDIT AGREEMENTS Installment credit agreements - Suspensive sale and finance lease are similar to a large extent, the major difference lies in the person carrying the risk of ownership of the goods supplied. ü For suspensive sale - risk of ownership will pass to the purchaser on the date that the suspensive sale condition is complied with. ü For finance lease- risk of ownership will pass to the lessee on the date that the lease agreement is concluded.

INSTALMENT CREDIT AGREEMENTS q. Value of the supply- sec 10(6) ü the consideration in money for the supply is deemed to be its cash sale value. ü VAT based on the cash cost will be claimed in total as input tax at the earlier of delivery or payment date by the purchaser or lessee, whilst the seller or lessor raises output tax in total on the cash cost of the goods at that time. The cash cost excludes interest, as interest is exempt from VAT because it constitutes consideration for the supply of a financial service.

INSTALMENT CREDIT AGREEMENTS q. Time of supply- sec 9(3)(c) ü General Rule; time of supply is the earlier of the time of delivery of the goods or the time any payment is received. ü General rule does not apply when the buyer has a right to return the goods within a certain time. Thus for a suspensive sale agreement, the time of supply is when the ‘cooling-off’ period of five days has expired (s 9(2)(b)).

INSTALMENT CREDIT AGREEMENTS Example: A bank enters into a finance lease on 15 Dec 2017 of the current tax year for the lease of a ‘motor car’ to a clothing manufacturer, as follows: R Cost of motor car (Including VAT). . . . . . 112 000 Finance charges. . . . . . . . 39 200 Total…………………………………………………………………. 151 200 The agreement states that 48 monthly instalments of R 3 200 (including VAT) are payable. The motor car was delivered on 1 Jan 2018. The motor car is a ‘motor car’ as defined for VAT purposes. Discuss the VAT implications of the above transaction if both parties have a 1 month tax period.

SPECIAL RULES- INPUT VAT q 3. Rental agreements q. Any lease agreement other than an installment credit agreement q. Time of supply ü Earlier of when payment is due; or when payment is received q Value of supply = Actual lease instalment

CHANGE IN USE (Sec 18) 1. LESS THAN OR EQUAL TO 100% TAXABLE USE TO 0% TAXABLE USE ü The output tax must be levied-sec 18(1); calculated by; multiplying the tax fraction (15/115) by the open-market value (s 10(7)), ü Time of supply is the date on which the goods are applied for non-taxable purposes (s 9(6)).

CHANGE IN DEGREE OF USE (Sec 18) ü Where a vendor has made an adjustment to output tax as contemplated in s 18(1) in circumstances where less than 100% input tax was originally claimed; ü an additional input tax adjustment must be provided for the unclaimed portion of the input tax. The adjustment is required to be made on the date on which the goods are supplied -Sec 16(3)(h)

Sec 16(3)(h)- Additional Input VAT q. Sec 16(3)h additional Input VAT will be calculated as follows; A x B x C, where; A = 15/115 B = Lesser of: Adjusted Cost (Including VAT) OR Market Value OR Value at previous C = % non taxable use before in use

ADJUSTED COST q. Adjusted cost”, means the cost of any goods or services where tax has been charged or would have been charged if section 7 of this Act had been applicable prior to the commencement date, in respect of the supply of goods and services or if the vendor was or would have been entitled to an input tax deduction in terms of paragraph (b) of the definition of “input tax”;

ADJUSTED COST q. Effect of calculating Adjusted Cost is that any costs incurred in acquiring the assets which are not VAT inclusive (or deemed to include VAT) are excluded. q. Egs; include finance charges or labour charges by a non-vendor (no VAT chargeable), and salary and wages incurred in the manufacture, assembly, construction or production of those goods or services

ADJUSTED COST q. Example; Calculating Adjusted Cost; ü Energy (Pty) Ltd produces globes at a total cost of R 2, 50 each. The globes are then packaged into pairs at a total cost to Energy (Pty) Ltd of R 0, 30 per pair and finally delivered to clients. The globes are sold at R 7, 50 per box (Inc. VAT), even though the market value thereof is R 8, 00 per box. The market strategy of Energy (Pty) Ltd is the reason for charging clients less than competitors. The cost of a globe is made up as; Labour & Material (R 0, 70 and R 0, 60) R 1, 30 Fixed overheads R 0, 80 Capitalised interest R 0, 40 Total cost R 2, 50 The fixed overheads consist of a capitalised depreciation charge of machines used in the manufacturing process.

CHANGE IN DEGREE OF USE (Sec 18) Example; Change in Use Stopilla Sunzu (a VAT vendor) purchased 30 lawnmowers to be sold in his nursery. Each lawnmower cost him R 1 500 (including VAT). He originally acquired the lawnmowers for making only 65% taxable supplies. Stopilla decided to take two of the lawnmowers for his own private use in his garden at home. Stopilla usually sells the lawnmowers for R 2 000 each (including VAT). Discuss and calculate the VAT implications of the transaction.

PROPERTY DEVELOPERS – Sec 18 B q Sec 18 B ceased to apply on 1 January 2018: UNISA POSITION IS NOT CLEAR q Construct and Sale residential houses Furtherance of an enterprise q Temporary shift from a resale intention to a rental Sec 12(c)-Exempt Taxable supply Exempt ü Sec 18(1) applies and will result in cash-flow problems for the developer. ü Section 18 B provides a temporary relief of 36 -month grace period to rent residential property before resale. The developer does not have to make a s 18(1) output tax adjustment on the date of the rental application. ü If the vendor rents the residential fixed property beyond the permissible 36 -month period, an output tax adjustment will apply (s 18 B).

PROPERTY DEVELOPERS – Sec 18 B q. Sec 18(B) relief WAS only applicable to developers as defined; q. A developer means: ü a vendor that continuously or regularly ü constructs, extends or substantially improves ü residential fixed property with the sole purpose of selling that fixed property -sec 18 B(1)

PROPERTY DEVELOPERS – Sec 18 B q. Time of supply for the change of use adjustment is; ü the earlier of the date of the expiry of the 36 -month period of residential rental, or ü the date that the fixed property is permanently applied for a purpose other than making taxable supplies -sec 18 B(3). q. Value of supply is the open market value of the residential property on the date of the deemed supply and not on the date of rental application- sec 10(7).

PROPERTY DEVELOPERS-From 1 Jan 18 q. Many residential property developers kicked off 2018 with a major cash flow challenge as a result of a substantial value added tax (VAT) liability which they may face in respect of the temporary letting of residential units which have been developed for resale. q. If the developer has paid the VAT on an unsold unit which is temporarily let and it subsequently manages to sell the unit, then VAT is payable on the total sales consideration. The developer may then deduct the total VAT amount previously paid in the tax period in which the unit is sold. q. However, allowing a full deduction of the VAT previously paid contradicts with s 18(4), which provides for a deduction to be made only on the lesser of the adjusted cost or the open market value of the unit.

SUBSEQUENT TAXABLE USE-SEC 18(4) 0% TAXABLE USE TO LESS THAN 100% TAXABLE USE q. In the case of goods or services acquired wholly for the purposes of making non-taxable supplies that are subsequently applied for making taxable supplies, an adjustment must be made to input tax.

SUBSEQUENT TAXABLE USE-SEC 18(4) q. Input Tax = A Tax Fraction (15/115) x B x Lesser of: ü Adjusted Cost(Inc. VAT) ü Market Value at the time of change C x D % increase in taxable use; An increase ≥ 95 = 100% - diminimus Rule Sec 18(4) adjustment is applicable only if the taxable use before the increase was 0%. If 2 nd hand: ü % payment made

SUBSEQUENT TAXABLE USE-SEC 18(4) q. Sec 18(4) is not applicable if the input has been denied in terms of the VAT Act (motor cars or entertainment assets). ü Eg: A vendor took a fridge from the flat he rented for residential purposes to the kitchen of his enterprise; although the fridge is now used for taxable purposes, it relates to the supply of entertainment, and no input tax deduction could be made.

SUBSEQUENT TAXABLE USE-SEC 18(4) q. Example: Mr Rakhadani, a VAT vendor on the invoice basis, did the following in January 2018: -He started to use his personal motor vehicle 100% for business purposes. His business entails only taxable supplies, and he is not a car dealer. The motor vehicle cost him R 66 000 (VAT inclusive) and on the date when he started to use it for business purposes, it had a market value of R 37 500. -He started to use his private computer 100% for business purposes. The computer cost him R 11 355 (VAT inclusive) and had a market value of R 7 300 when he started to use it for business purposes. -He started to use his private printer 97% for business purposes. The printer was bought from a nonvendor for R 2 500 and had a market value of R 1 500 on the date on which he started to use it for business purposes. The full purchase price had been paid. -He converted 80% of his private residence into offices. He bought his residence for R 500 000. He bought the residence on credit from the seller and has paid only R 300 000 up to date. At the date when he started to use 80% of the residence as offices, it had a market value of R 750 000. q. Calculate the VAT consequences of the above.

INCREASE AND DECREASE OF TAXABLE USE-SEC 18(2) & Sec 18(5) q[Increase, but not from 0%, or a Decrease, but not to 0%] ü Increase - sec 18(5) Eg; Taxable usage was 40% in Year 1 and 55% in Year 2 ü Decrease – sec 18(2) Eg: Taxable usage was 55% in Year 2 and 35% in Year 3 TAXABLE SUPPLIES Year 1 40% Year 2 Increase –Sec 18(5)- INPUT VAT 55% Year 3 Decrease –Sec 18(2)- OUTPUT VAT 35%

INCREASE AND DECREASE OF TAXABLE USE-SEC 18(2) & Sec 18(5) q. No adjustment needs to be made when: ü the adjusted cost of such capital goods or services is less than R 40 000 (excl- VAT) ü A Sec 18(4) had been made previously and the amount then represented by ‘B’ in the formula A × B × C × D was less than R 40 000 (excl- VAT) ü the increase or decrease is ≤ 10%, or ü Input has been denied – eg; motor cars or entertainment assets. q. This adjustment is usually only made at the end of a year of assessment Sec 18(6). If a vendor ceases to be a vendor prior to the end of a year of assessment, the adjustment is required immediately before that vendor ceases to be a vendor-proviso to s 18(6).

INCREASE AND DECREASE OF TAXABLE USE-SEC 18(2) & Sec 18(5) q. Value of the adjustment is calculated as follows-Sec 10(9) and 18(5): Input Tax = A Tax Fraction (15/115) x B x the lesser of; ü the adjusted cost (including VAT) of the goods or services, ü the OMV on the date that a previous increase or decrease was calculated if the OMV was lower than the adjusted cost ü the OMV at the time the change-of-use adjustment is required. ü B in Sec 18(4)- Value previous change occurring prior. C % change in taxable use

INCREASE AND DECREASE OF TAXABLE USE-SEC 18(2) & Sec 18(5) Example 1: Prof T (a VAT vendor) purchased a laptop for his business for R 18 000 (incl-VAT). 55% of the business relates to taxable supplies. At the end of 2016, Prof T determined that 35% of his business would now relate to taxable supplies. The market value of the computer on that date was R 15 000. At the end of 2017, Prof T determined that 75% of the business would now relate to taxable supplies and the market value of the computer on that date amounted to R 19 500. Advise Prof T on the VAT consequences of the transactions.

INCREASE AND DECREASE OF TAXABLE USE-SEC 18(2) & Sec 18(5) Example 2; A vendor acquires capital goods or services partly (65%) for the purposes of making taxable supplies for R 96 800 (incl-VAT). The openmarket value in all cases is R 112 700. ü Year 2015: The taxable percentage increases to 75% ü Year 2016: The taxable percentage reduces to 55% and ü Year 2017: The taxable percentage is 0%. Calculate the adjustments to be made by the vendor.

SPECIAL ADJUSTMENTS q 1. Game-viewing vehicles and hearses ü Motor car {Input denied-sec 17(2)c} to game-viewing vehicle or hearse, sec 18(9) could subsequently grant the input tax deduction. ü This converted game-viewing vehicle or hearse is deemed to be supplied to the vendor in that tax period. ü Input VAT = VAT fraction applied on lesser of: the adjusted cost, or the openmarket value.

GAME-VIEWING VEHICLES AND HEARSES ü The vendor would then be liable to declare output tax on the subsequent supply of the vehicle. It would be deemed to be a supply in the course or furtherance of the vendor’s enterprise-s 8(14)(b). ü The value of the supply = open-market value of that vehicle (s 10(24)). ü If game-viewing vehicle or hearse subsequently be applied for a purpose other than the purpose for which the input tax deduction was initially allowed, a supply at the standard rate is deemed to take place- s 8(14 A).

GAME-VIEWING VEHICLES AND HEARSES Time of supply ü is deemed to be the time that the game-viewing vehicle or hearse is supplied for other purposes -s 9(10). Example; A station-wagon (motor car) is purchased for R 115 000 (VAT included). The stationwagon is subsequently converted into a hearse for R 12 800 (VAT included). The market value on the date of the conversion was R 120 000. Discuss the VAT implications of the conversion of the motor vehicle.

SPECIAL ADJUSTMENTS q 2. Supplies of going concerns (s 18 A) ü a. 100% taxable usage (by both seller & purchaser) –zero rate applies. Seller: VAT @ 0% Purchaser: Pays R 0 VAT

SUPPLIES OF GOING CONCERNS (S 18 A) b. Mainly for taxable supplies; ü When the assets of the going concern were applied by the seller mainly (that is more than 50%) for the making of taxable supplies, but also partly for other purposes, all the assets are deemed to form part of the going concern disposed of and the full selling price is zero-rated.

SUPPLIES OF GOING CONCERNS (S 18 A) Effects of the above ; 1. Seller will be entitled to additional input claim -sec 16(3)(h). 2. Purchaser will pay Rnil input tax and may not claim any input tax on the transaction 3. The purchaser must raise output tax -sec 18 A, based on the percentage of nontaxable use of the purchaser (not that of the seller). 4. The purchaser must account for output tax on that portion of the ‘full cost’ of acquiring an enterprise that relates to its intended non-taxable use; (remember diminimus rule)

SUPPLIES OF GOING CONCERNS (S 18 A) q. Calculation of the s 18 A adjustment Step 1: Determine the total value of the going concern. Step 2: Reduce such value by the value of assets that specifically relate to 100% taxable supplies. Step 3: Reduce the value by all items for which input tax would have been denied. Step 4: Multiply the answer by the non-taxable use. Step 5: Multiply the answer by 15%.

CALCULATION OF THE S 18 A ADJUSTMENT Example; Dukes, a vendor, acquires a business as a going concern from Rubber at the zero rate for R 500 000. Dukes determines that three office desks, six chairs and two laptops will be used 100% to make taxable supplies. The value of these assets amounts to R 70 000. Included in the R 500 000 purchase price is a motor car to the value of R 95 000 and a coffee machine to the value of R 10 000. Except for the assets specifically mentioned, Dukes estimates that the rest of the assets will be used 65% for the making of taxable supplies. Rubber used the chairs, desks and laptops 70% for the purposes of making non-taxable supplies. The value of the above-mentioned items constitutes R 70 000 of the R 500 000 purchase price. The original cost of these items for Rubber amounted to R 114 000 (VAT inclusive). All the other items relating to the acquired concern were used 100% by Rubber for the purposes of making taxable supplies. Advise on all the VAT implications of the above transaction.

Supplies of going concerns (s 18 A) b. Not mainly for taxable supplies (<50%); If the goods or services of the enterprise were applied by the seller partially for the purposes of the going concern, but not mainly (thus less than 50%), only the portion of the selling price that relates to the going concern may be zero-rated.

Not Mainly for Taxable Supplies q. Effects of the above ü The seller should charge VAT at the zero rate on the going concern portion of the supply. ü The seller must charge VAT at the standard rate in respect of the non-going-concern portion. ü The seller can claim an input tax adjustment in respect of the assets used for non-taxable purposes (s 16(3)(h) of the VAT Act). ü The purchaser may claim input tax credits where the assets acquired at the standard rate will be applied for purposes of making taxable supplies. However, the purchaser will not be able to claim an input tax deduction in connection with the portion he is going to utilise for non-taxable purposes. ü The purchaser will be required to make a s 18 A adjustment where he does not apply the going concern portion only for taxable purposes.

Going Concern Example: (From Silke) A farm, together with crops and assets, that was used by B for taxable purposes (farming), exempt purposes (provision of accommodation to labourers) and private purposes (the farm house and game farm) is sold as a going concern to Z for R 2 million (excluding VAT). Only 40% of the selling price relates to the taxable supply of farming (going concern). The R 2 million does not include any assets in respect of which an input has been denied. Z estimates that he will also use only 40% of the farm for taxable purposes (going concern). The cost price of the concern for B amounted to R 900 000 when he originally bought it from a vendor. Explain and calculate the VAT consequences of the above.

IRRECOVERABLE DEBTS-Sec 22 q. On original sale - OUTPUT TAX q. Upon write off (irrecoverable) - INPUT TAX- sec 22(1). q. If the debt is wholly or partly recovered - OUTPUT TAX-sec 22(2). q. If vendor did not pay creditors within 12 months from the end of the tax period in which the input vat deduction was claimed. – OUTPUT TAX-sec 22(3). q. The input tax may again be deducted if the vendor subsequently pays the consideration in respect of the supply (s 22(4)).

IRRECOVERABLE DEBTS-Sec 22 q. Group Companies ü Debts between inter-group companies are not subject to the 12 -month unpaid creditor adjustment (s 22(3 A)). The creditor providing the supply to the indebted group company can also not claim an input deduction for a bad debt written of (s 22(6)(a)).

IRRECOVERABLE DEBTS-Sec 22 q. Key Notes; q. The amount of input tax deduction (on bad debts write off) relates to the full amount of VAT levied on the original supply in the same proportion as the amount of the irrecoverable consideration written off relates to the total consideration-sec 22(1). q. Study Interpretation Note No 49) for documents required and q. Define Group Companies - (s 22(6)(b)

IRRECOVERABLE DEBTS Example: Irrecoverable Debts (From Silke) Slow-Mo (Pty) Ltd owns 100% of the shares in Retro (Pty) Ltd supplied goods to the value of R 750 000 to Slow-Mo (Pty) on a loan account. After 15 months the amount in respect of the loan is still unpaid. Discuss the VAT consequences of the following scenarios: (a) Because Slow-Mo (Pty) Ltd had cash flow problems, Retro (Pty) Ltd decided to write-off the debt owed as bad debt. (b) 14 months after the date of the initial transaction Slow-Mo (Pty) Ltd sold 40% of its shares in Retro (Pty) Ltd to an unconnected third party.

AGENTS (S 54) General Rule q. If an agent acts on behalf of the principal; the underlying supplies to (or by) the agent will be deemed to be made to (or by) the principal for VAT purposes (ss 54(1) and 54(2)). q. The principal would thus be entitled to claim input tax and be liable to levy output tax. Goods imported will also deemed to have been imported by the principal (s 54(2 A)(a)).

AGENTS (Sec 54) q. If an agent is compensated (reimbursed)- No VAT consequences for the agent on receipt of such reimbursements-(British Airways). q. Agent will only have to account for VAT on commission/ fees charged q. Exceptions to Sec 54; (Agent will levy Output and claim Input in his capacity) ü Agent import goods on behalf of a principal that is not a vendor and not a residentsec 54(2 A)(b) ü International transport on behalf of a non-vendor principal sec 54(6)

VAT KILLED THE END “Food for thought” The pessimist complains about the amount of work in CTA; the optimist expects the workload to get less; the realist adjust to the environment and studies