Page 340 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2) 2006 when the new rules relating to the VAT treatment of municipalities were introduced. The relevant provision will be
followed by a note to indicate the effect of those further amendments.
4. Application of the law before 1 April 2005
The wording of the provisions quoted in Annexure A – Part 1 is analysed and interpreted below. Although the explanations provided in this paragraph are given in the past tense, they will continue to apply in the context of the amended law to the extent that the law retains its original wording. For example, paragraph (b) (i) of the de nition of ‘enterprise’ remains largely unchanged by the amendments, so the explanation of the law in 4.1 and 4.1.1 as it relates to public authorities remains largely the same after 1 April 2005, as will the explanations provided with regard to the de nition of the term ‘services’ and the application of section 11 (2) with regard to the zero-rating of services in general. Similarly, before 1 April 2005, section 8 (5) was a general deeming provision applicable to all vendors in regard to certain payments received from public or local authorities, but from 1 April 2005, the wording was amended so that it only applies to a ‘designated entity’. The interpretation of the wording of this provision is set out in 4.6.
4.1 De nition of ‘enterprise’ [Paragraph (b) (i) and (c)]
Paragraphs (b) (i) and (c) of ‘enterprise’ (before the deletion of paragraph (c) on 1 July 2006) referred to the supplies made by public authorities and local authorities respectively. These paragraphs identi ed the different types of supplies made by these entities which are similar to, or which compete equally with, supplies which would be made by any other vendor in terms of paragraph (a) of the de nition which should be regarded as taxable supplies. In the case of public authorities, this business rationale, or business test, forms an integral part of the thinking behind the noti cation process. However, in the case of municipalities, the business test was embedded in the wording of paragraph (c) of the de nition. The intention behind the wording of these provisions was that the activities concerned should be conducted as far as possible with normal business principles and motivations in mind. This will include, for example, the assumption that the activity will at least be self-sustaining so that that the costs incurred to conduct the activity will be less that the income generated once the business infrastructure is in place.
4.1.1 Paragraph (b) (i) – public authorities
These entities exist to carry out the work of national and provincial government. The supplies made are therefore not normally of the same type or nature found in the private sector, nor are they in competition with vendors in that sector. The supplies made are therefore usually in the context of carrying out a regulatory, administrative or stewardship function of government. In order for the supplies under this sub-paragraph to be treated as ‘enterprise’ activities, the public authority concerned had to be noti ed to register for VAT in that regard by the Commissioner, acting on instruction from the Minister. The Minister, in turn, had to be satis ed that the supplies (or certain of them) were of the same kind or similar to taxable supplies already being made, or which might be made by vendors in the private sector.
Certain public authorities and supplies made by them were identi ed and published in a media statement dated 27 September 1991. The entities listed in the media statement were the only public authorities that had been noti ed to register before the amendments in April 2005. However, as mentioned in 2, since 1994 the responsibility for performing certain functions of government has been taken over by other government agencies or public entities. Some of these entities were created by an Act of Parliament and others had their own enabling legislation. In some instances the work has been wholly or partially outsourced to private organisations.
This created some uncertainty as to whether public entities which performed functions on behalf of, or instead of a department would be liable to be registered in terms of the normal rules in terms of paragraph (a) of the de nition of ‘enterprise’, or if they were to be regarded as public authorities for VAT purposes, and therefore not be liable to register for VAT unless noti ed to that effect in terms of paragraph (b) (i) of the de nition of ‘enterprise’. It followed that some public entities registered for VAT without being noti ed, whilst others did not register. One of the objectives of this Note when it was rst published on 4 December 2007 was to provide some certainty in respect of the liability of those entities to register, and to deal with the consequences of their registration or non-registration for VAT purposes.
4.1.2 Paragraph (c) – local authorities
Local authorities exist to bring the resolution of governance issues as close as possible to the people of a particular community, and to ensure the provision of certain basic services and facilities. A ‘municipality’ as it is now called is part of local government which forms the third tier of government. Local government must strive within its nancial and administrative capacity to achieve the following objectives as set out in section 152 (1) of the Constitution:
‘...the objects of local government are—
(a) to provide democratic and accountable government for local communities;
(b) to ensure the provision of services to communities in a sustainable manner;
(c) to promote social and economic development;
(d) to promote a safe and healthy environment; and
(e) to encourage the involvement of communities and community organisations in the matters of local government.’ At this level of government, some of the goods and services provided are similar to goods and services supplied by other vendors. Local authorities were therefore sometimes regarded as being in competition with the private sector in respect of speci c types of supplies, but not so in respect of others. The following supplies by local authorities have always been treated as taxable, regardless of whether those supplies were made in competition with the private sector, or whether the activity was pro table or not:
(i) Electricity, gas or water;
(ii) Drainage, removal or disposal of sewage or garbage; and
(iii) Goods or services which are considered incidental to or necessary for making the supplies in items (i) and (ii) above.
When it came to any other types of supplies mentioned in paragraph (c) (iv) of the de nition as it read before being deleted, all of the following requirements had to be met before the supplies could be regarded as taxable:
• The supplies must be of the same kind or similar to taxable supplies made by any other vendor.
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