Page 336 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
Annexure D – Examples
Preamble
In this Note unless the context indicates otherwise –
• ‘the Act’ or ‘the VAT Act’ means the Value-Added Tax Act 89 of 1991;
• ‘the TA Act’ means the Tax Administration Act 28 of 2011;
• ‘the PFMA’ means the Public Finance Management Act 1 of 1999;
• ‘the MFMA’ means the Municipal Finance Management Act 56 of 2003;
• ‘the PSA’ means the Public Service Act, Proclamation 103 of 1994;
• ‘the DOR Act’ means the annual Division of Revenue Act;
• ‘the Constitution’ means the Constitution of the Republic of South Africa, Act 108 of 1996; • ‘Commissioner’ means the Commissioner for SARS as de ned in section 1 of the TA Act;
• ‘Minister’ means the Minister of Finance;
• ‘section’ means a section of the VAT Act;
• ‘SARS’ means the South African Revenue Service;
• ‘VAT’ means value-added tax; and
• any word or expression bears the meaning ascribed to it in the Act.
1. Purpose
This Note –
• sets out the VAT treatment of public authorities, grants and transfer payments and deals with the impact of the
amendments in this regard which came into effect on 1 April 2005; and
• withdraws the rst issue of Interpretation Note 39 dated 4 December 2007, as from 8 February 2013.
This Note intends to provide a clear framework for the application of the law, so that vendors who transact with government departments, public entities and municipalities will have clarity on the application of the Act before and after 1 April 2005 in respect of the following:
(a) The application of the zero rate in terms of section 11 (2) (p) as it read before being deleted, as well as sections
11 (2) (n), 11 (2) (s), 11 (2) (t) and 11 (2) (u) which deal with certain payments made by or to public authorities,
constitutional institutions and municipalities.
(b) The application of the deeming provisions in terms of sections 8 (5), 8 (5A) and 8 (23) in respect of certain supplies
and payments made by or to public authorities, designated entities and municipalities.
(c) The dif culties associated with the meaning of the term ‘transfer payment’ as it read before being deleted and the
rationale for introducing the de nition of a ‘grant’.
(d) Determining whether or not an entity is a ‘public authority’, and consequently, whether that entity must register and
account for VAT or not.
(e) Determining whether certain input tax and output tax adjustments are allowed to, or required by, public authorities.
Important note:
This Note is primarily about the VAT treatment of public authorities and public entities on or after 1 April 2005 as a result of a number of amendments which were made to the Act from that date. However, the Note also explains the pre- April 2005 period to highlight the nature of the issues concerning the application of the law at that time which had to be addressed by the amendments. Although many of the compliance issues relating to the pre-April 2005 period would have prescribed by now, the explanations relating to this period continue to form an integral part of this Note as they explain the rationale behind the current wording and application of the Act.
Extensive amendments to the Act were also made on 1 July 2006 with regard to the VAT treatment of municipalities, but these are only discussed to a limited extent.*
One of the amendments was that the term ‘local authority’ was substituted by the term ‘municipality’. Although there are some differences in meaning between these two terms, for the most part they can be used interchangeably for the purposes of this Note. However, to avoid any unnecessary repetition of the term ‘local authority’, the term ‘municipality’ is preferred with reference to the application of the law between 1 April 2005 and 1 July 2006, notwithstanding any technical differences in the meaning of those terms.
2. Introduction
2.1 Background
Before 1 April 2005, when a vendor received a ‘transfer payment’ from a ‘public authority’, the deemed supply which arose was subject to VAT at the zero rate in terms of section 11 (2) (p) if the payment was received for the purpose of making taxable supplies. This zero-rating provision was introduced as a temporary measure in 1991 when VAT was introduced to allow government departments suf cient time to effect the necessary adjustments to their budgets to take VAT into account. The zero-rating was therefore never intended to be a permanent feature of the Act.
With the rapid transformation of government structures from 1994, many of the functions previously performed by the national and provincial departments were transferred to public entities which had been speci cally created to carry on those activities. This meant that the number of payments made between national and provincial departments, municipalities and public entities became more frequent. These payments were also made for a variety of reasons which go beyond what was contemplated in the de nition of ‘transfer payment’. This resulted in many interpretation dif culties because of the different perceptions of the meaning of the term ‘transfer payment’, as well as the uncertainty around the VAT status of the different types of public entities which were being created at the time.
* The VAT treatment of municipalities is more fully explained in the VAT 419: Guide for Municipalities.
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