Page 337 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
The de nition of ‘transfer payment’ had been amended three times since the inception of VAT to try and clarify the VAT treatment, but differences of opinion remained. In addition, dif culties were experienced with the VAT treatment of equitable share grant payments made to municipalities in terms of the DOR Act, as these did not fall within the de nition of ‘transfer payment’, but were generally perceived to be subject to VAT at the zero rate.
When a public authority or municipality acquires goods from a vendor, it is normally quite clear that an actual taxable supply is made in terms of section 7 (1) (a) and there is no need to apply any deeming provision. However, when a third party becomes involved, the position becomes unclear. For example, when a public authority pays for a speci c supply of goods or services made by a vendor to a third party, a question arises as to whether the supply is made to the person making payment, or the person receiving the supply. Also, the question arises as to whether there are two supplies to consider for VAT purposes, or only one. This, in turn, created further uncertainty as to the circumstances under which the zero-rating in section 11 (2) (p) applied, as it was questionable whether such a payment could ever be regarded as a ‘transfer payment’ as de ned. Furthermore, with the intangible nature of services, it is often dif cult to establish whether an actual supply of services has occurred or not. This added to the uncertainty as to whether a zero-rated deemed supply arose in relation to a particular payment on the basis that it quali ed as a ‘transfer payment’, or if the receipt constituted payment for an actual supply of services which was taxable at the standard rate.
This uncertainty resulted in an inconsistent application of the law in respect of certain payments made by public authorities. An investigation was therefore undertaken by National Treasury and SARS to determine what the best practices were in regard to the VAT treatment of public bodies and the grants, subsidies or transfers of funds which they make to other vendors.
Following the investigation, a number of legislative amendments were made with effect from 1 April 2005 to clarify the VAT treatment of public authorities, public entities and the payments which they make or receive.* These changes included, amongst others, the withdrawal of the zero-rating of transfer payments in terms of section 11 (2) (p); the introduction of new deeming provisions and de nitions; the de nition of ‘public authority’ was amended to clarify which listed public entities qualify as public authorities; and the de nition of ‘transfer payment’ was deleted. The deleted provisions were replaced by the de nition of ‘grant’ and sections 11 (2) (s) and 11 (2) (t) (among others) were inserted to provide clarity on which payments from government qualify to be subject to VAT at the zero rate.†
A summary of these amendments and the general underlying VAT principles upon which they are based is set out in 2.2 to 2.10 to indicate how they affected various entities.
2.2 General principles
The South African VAT system is based on the premise that government is the nal consumer of goods and services if it uses those inputs to provide goods and services on a non-commercial basis. In addition, the classi cation of public entities under the Schedules to the Public Finance Management Act No. 1 of 1999 (PFMA) is now used as a basis for determining whether the entity concerned should be regarded as an enterprise or not. Since most of the supplies made by departments and certain government agencies are generally outside the scope of VAT, it follows that those departments and government agencies will generally not be entitled to register for VAT or to deduct input tax in respect of the VAT incurred on the acquisition of goods and services. Accordingly, VAT is generally not charged by government on the goods and services it supplies to the public.
Certain public entities which conduct enterprises, as well as welfare organisations and public private partnerships (PPPs) which make taxable supplies, fall within the de nition of ‘designated entity’. If a designated entity receives any payment from a public authority, municipality or constitutional institution, it is deemed to supply a taxable service in terms of section 8 (5) to that entity (provided that there is no actual supply in terms of section 7 (1) (a) to which that payment relates). The deemed supply is generally taxable at the standard rate, unless the payment is in respect of exempt supplies (e.g. nancial services). This is to ensure that entities in which government has an interest do not have an unfair competitive advantage over other vendors participating in the market for the goods or services concerned. However, where a designated entity receives a training grant from a Sectoral Education Training Authority (SETA), or where the grant recipient is a ‘welfare organisation’, the deemed supply to which that payment relates is taxed at the zero rate.
As discussed later in this Note, a ‘grant’ means any appropriation, grant in aid, subsidy or contribution transferred, granted or paid to a vendor by a public authority, municipality or constitutional institution. A grant is zero-rated in the hands of the recipient (not being a ‘designated entity’), unless the payment concerned is in respect of an actual supply of goods or services procured directly, or paid for on behalf of a third person by that public authority, municipality or constitutional institution.
* The bulk of the amendments on this topic are contained in the Revenue Laws Amendment Act 45 of 2003 and the Revenue Laws Amendment Act 32 of 2004. However, amendments on some of the aspects relating to the topics dealt with in this note are included in the following amendment acts:
(i) the Taxation Laws Amendment Act 9 of 2005;
(ii) the Taxation Laws Second Amendment Act 10 of 2005;
(iii) the Revenue Laws Amendment Act 31 of 2005; and
(iv) the Second Small Business Tax Amnesty and Amendment of Taxations Laws Act 10 of 2006.
† The legislative amendments were wide-ranging and affected not only aspects which related to the VAT treatment
of public entities and public authorities, but also municipalities and municipal entities. However, for practical reasons not all of these changes could be made simultaneously. The legislative amendments were therefore split into two main batches. The rst batch affecting mainly public authorities and public entities came into effect on 1 April 2005 whereas the second batch affecting mainly municipalities and municipal entities came into effect from 1 July 2006. Further changes regarding public authorities and public entities dealt with in the 2005 amendments were also included in the 2006 amendments.
Juta’s IndIrect tax 2016 329