Page 339 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
Example 1 – Deemed supplies vs actual supplies made by a municipality
If a department (public authority) pays a municipality for the supply of electricity and water used in the course of conducting that department’s operations, the amount paid is not a grant, as it is in respect of an actual supply of goods or services by the municipality to that department. However, if that same municipality receives an ‘equitable share’ payment in terms of the annual DOR Act, to partly cover the cost of providing free water and electricity to certain domestic consumers, that part of the payment will constitute a ‘grant’ in the hands of the municipality. This is because the department does not receive a supply of goods or services in return for the payment which it makes to the municipality.
The effect is that the supply of water by the municipality to domestic consumers (which is a taxable supply), is partly subsidised by the ‘equitable share’ paid by the government. Therefore, to the extent that the ‘equitable share’ is paid to the municipality to enable or assist it to make taxable supplies, the payment will constitute a ‘grant’ and will be subject to VAT at the zero rate.
2.11 Other private sector vendors (not being designated entities)
It has always been a requirement that a ‘transfer payment’ can only qualify as a zero-rated receipt in the hands of the recipient vendor if the amount received does not constitute ‘consideration’ for an actual supply of goods or services made by that vendor in terms of section 7 (1) (a). A similar rule applies on or after 1 April 2005 in regard to the receipt of a grant. Grants can, however, be made by public authorities, constitutional institutions and municipalities. The amendments to the Act therefore did not have a substantial effect on private sector vendors except to clarify further that payment for any actual supplies procured directly by the person making the payment, or which are paid for on behalf of a third person are subject to the standard rate, and cannot qualify as being in respect of zero-rated deemed supplies.
Example 2 – Deemed supplies vs actual supplies – research
The Department of Trade and Industry (DTI) allocates a certain amount of public funds each year to the National Research Foundation (NRF), for the funding of innovation and other initiatives. The NRF is listed in Schedule 3A of the PFMA, and therefore it is a ‘public authority’ in terms of the amended de nition of that term. A payment received by vendor (not being a “designated entity”) from the NRF, is deemed to be a supply in terms of section 8 (5A) and will qualify as a zero-rated ‘grant’ in terms of 11 (2) (t). This is provided that the NRF or the DTI does not acquire the ownership of any assets (including intellectual property rights) and does not receive any other goods or services (for example, actual research outputs) in return for the payment to that vendor. In other words, the receipt can only constitute a zero-rated grant if it does not constitute payment of consideration to that vendor for the reciprocal taxable supply of actual research services.
2.12 Special cases (unlisted entities)
Section 47 of the PFMA reads as follows regarding unlisted public entities:
(1) The Minister, by notice in the national Government Gazette—
(a) must amend Schedule 3 to include in the list all public entities that are not listed; and (b) may make technical changes to the list.
(2) The accounting authority for a public entity that is not listed in either Schedule 2 or 3 must, without delay, notify the National Treasury, in writing, that the public entity is not listed.
(3) Subsection (2) does not apply to an unlisted public entity that is a subsidiary of a public entity, whether the latter entity is listed or not.
(4) The Minister may not list the following institutions in Schedule 3:
(a) A constitutional institution, the South African Reserve Bank and the Auditor-General;
(b) any public institution which functions outside the sphere of national or provincial government; and (c) any institution of higher education.
This means that the following are special cases which do not fall naturally into any of the categories dealt with in 2.3 to 2.9 –
(i) the South African Reserve Bank (SARB) and the Auditor-General (AG); (ii) entities in the process of being created and listed (see 7.7 for more details);
(iii) any public institution which functions outside the sphere of national or provincial government; and (iv) any institution of higher education.
It follows that the SARB and the AG will be regarded as normal enterprises under paragraph (a) of the de nition of ‘enterprise’. The same principle will apply to the entities in (ii), (iii) and (iv) above, to the extent that they may be regarded as making taxable supplies (unless the Minister decides otherwise).
3. The law before 1 April 2005
The wording of the relevant provisions which had to be considered in regard to the zero-rating of transfer payments made by public authorities is quoted in Annexure A – Part 1. The provisions are quoted as they read immediately before being amended or deleted on 1 April 2005.* Note, however, that subsequent amendments were also introduced on 1 July
* As the law is quoted as it read at the time, the de nitions continue to be quoted under section 1 and not section 1 (1) which is the current reference as a result of the amendments which became effective on 1 October 2012 with the introduction of the TA Act.
Juta’s IndIrect tax 2016 331