Page 341 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
• The income derived from the activity (including any grant or subsidy for conducting the business activity) should be suf cient to cover all the costs of conducting that activity (including a reasonable provision for depreciation, but excluding capital expenditure).
• The business activity must fall within the category of businesses determined by the Minister published in Government Notice No. 2570 – 21 October 1991; or, if the activity is not on that list, the Minister must advise the speci c local authority that it shall treat the business activity concerned as an enterprise activity.
Government Notice No. 2570 (21 October 1991) listed the categories of businesses for the purposes of item (cc) (A) of paragraph (c) (iv) of the de nition of ‘enterprise’ as it read at the time. Government Notice No. 2570 was later withdrawn when various amendments to the Act came into effect on 1 July 2006 with regard to the VAT treatment of municipalities (including the deletion of paragraph (c) of the de nition of ‘enterprise’).*
4.2 De nition of ‘local authority’
As mentioned in 4.1, a ‘local authority’ was regarded as part of local government being the third tier of government. The purpose of local government is essentially to decentralise certain functions of government so that the local community can have more control over the governance issues which impact on their daily lives in the regions in which they live. The term ‘local authority’ as it was de ned at the time included –
• various councils and boards which had authority or jurisdiction over the administration of the affairs of a particular
town, city, village, municipality or other area where people live;
• other bodies, committees and institutions which were similar to the above entities which under any law carry out
similar functions and which were allowed to levy rates on certain immovable property within its area or receive
payments for services rendered or to be rendered;
• any water board or regional water services corporation or any other institution which had powers similar to those of
any such boards or corporations;
• Joint Services Boards (JSBs) and Regional Services Councils (RSCs) which were entitled to raise levies at the time,
payable by certain persons (normally businesses) in the area; and
• Transitional Metropolitan Councils (TMCs) where several local authorities had either merged with, or been taken over
by another local authority.†
As can be seen from the aforementioned, the number of different entities that could qualify as a local authority was fairly wide. Only some of these would qualify as a ‘municipality’ which is a much narrower term.‡
4.3 De nition of ‘public authority’
This term was de ned as –
‘any department or division of the public service (including a provincial administration, the South African
National Defence Force, the South African Police Service and Correctional Services)’.
As the de ning line between public authorities and public entities became somewhat blurred over the years, uncertainty was created as to the VAT status of certain public entities (i.e. the distinction between government ‘departments’ and other government ‘agencies’ was unclear).
Since the terms, ‘department’, ‘division of the public service’, and ‘provincial administration’ were not de ned for VAT purposes, it was important to explore other legislation to determine the intended meaning. Whether a particular entity could be regarded as a public authority for VAT purposes was essential for two main reasons, namely –
• a ‘public authority’ must be noti ed to register for VAT in terms of paragraph (b) (i) of the de nition of ‘enterprise’.
If the entity did not fall within the ambit of the de nition of a ‘public authority’, either paragraph (a) or (c) of the
de nition of ‘enterprise’ could apply (that is, no noti cation would have been required); and
• only a ‘public authority’ could make a ‘transfer payment’. It follows that the zero rate in terms of section 11 (2) (p) could
only apply where the deemed supply in section 8 (5) arose as a result of a payment received from a public authority.
To determine if an entity was a ‘public authority’ as de ned, one had to examine the aims of the Act in terms of which the entity was established (if any), the nature, functions, powers and funding of operations, the reporting structures and responsibilities of the organisation, and so on. However, even after conducting this exercise, there was still uncertainty, and in some cases, it became necessary to consult other legislative sources for guidance in this regard. In terms of section 40 (1) of the Constitution, ‘government’ is described as being ‘constituted as national, provincial and local spheres of government which are distinctive, interdependent and interrelated’.
It can therefore be concluded that the term ‘public authority’ referred to the rst two tiers of government (that is, national and provincial spheres), whereas the term ‘local authority’ referred to the third tier of government. The PSA and the PFMA were also referred to for guidance for the following reasons:
• The public service established by section 197 (1) of the Constitution is structured and organised as provided for in
section 7 of the PSA.
• The PFMA classi es public entities into two broad categories which are useful for VAT purposes, namely, business
and non-business§ In addition, it sets out government’s expectations with regard to the nancial and functional accountability of the different types of public entities.
* Municipalities now fall within paragraph (a) of the de nition of ‘enterprise’.
† For VAT purposes, the disestablished local authority and the new local authority were treated as one and the same entity.
‡ The Municipal Demarcation Board established by section 3 of The Local Government: Municipal Demarcation Act, 1998 is responsible for determining municipal boundaries and district management areas.
§ The PFMA promotes the objective of good nancial management within the public sector to maximise service delivery through the effective and ef cient use of the government’s limited resources. The PFMA came into effect from 1 April 2000 and gives effect to sections 213 and 215 to 219 of the Constitution which applies to the national and provincial spheres of government.
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