Page 347 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
6.2 De nition of ‘enterprise’ [Proviso (viii)]
The de nition of ‘enterprise’ was amended by the insertion of proviso (viii) to exclude a constitutional institution. Constitutional institutions listed in Schedule 1 to the PFMA are treated similar to public authorities in that their activities are not enterprise activities. However, the difference in VAT treatment is that –
• a constitutional institution is not included in the de nition of ‘public authority’ in section 1 (1); and
• the activities of constitutional institutions are excluded entirely from the de nition of ‘enterprise’. Their activities can therefore never fall within the ambit of the Act, and they may not register for VAT.
Constitutional institutions which were registered before 1 April 2005 were therefore also deregistered from 1 April 2005. Relief from the output tax normally due on this taxable event would have been provided in terms of proviso (iv) to section 8 (2).
(See 6.7 below.)
6.3 De nition of ‘designated entity’
A designated entity is a speci c kind of vendor, namely –
• a ‘public authority’ which is registered for VAT in terms of paragraph (b) (i) of ‘enterprise’ (only to that extent); or
• a major public entity listed in Schedule 2 to the PFMA; or
• a national government business enterprise or provincial government business enterprise listed in either Part B or D of
Schedule 3 to the PFMA; or
• a ‘Public Private Partnership’ (PPP) as de ned in the PFMA and the Treasury Regulations; or
• a ‘welfare organisation’; or
• a ‘municipal entity’ (as de ned in section 1 of the Local Government: Municipal Systems Act 32 of 2000);or
• an entity which has powers similar to those of any water board listed in Part B of Schedule 3 of the PFMA, where that entity
would have also complied with the de nition of ‘local authority’ before the deletion of that de nition on 1 July 2006. These are entities in which government has an interest and may therefore assist them by funding their activities. For example, government may be the majority or sole shareholder, or the entity might be involved in delivering public goods and services. Designated entities are identi ed as service providers to government to the extent that the payment is in respect of taxable supplies made by them. (See application of section 8 (5) in 6.8 below.)
As the deeming provision in section 8 (5) was amended so that it only applies to designated entities, any payment to a designated entity by a public authority in respect of its enterprise activities is subject to VAT at the standard rate with effect from 1 April 2005. There are two exceptions in this regard, namely, where the designated entity –
• is a welfare organisation – in which case the zero rate in terms of section 11 (2) (n) will continue to apply; and
• receives a grant in terms of section 10 (1) (f) of the Skills Development Act 97 of 1998 for training its employees, that
payment is zero-rated [section 11 (2) (u)].
6.4 De nition of ‘grant’
A grant which is paid by a public authority to a private vendor (that is, not being a ‘designated entity’) will be zero-rated in the hands of the recipient in terms of sections 8 (5A) and 11 (2) (t).
The current law also allows such payments to qualify for zero-rated VAT treatment, as well as payments made under the DOR Act (mainly affecting municipalities). Before 1 April 2005 the receipt of such payments would not have quali ed for the zero rate since they would have been excluded from the de nition of ‘transfer payment’.
The term ‘grant’ which replaced the term ‘transfer payment’ in the Act is split into two main parts as described below. The rst part describes in general terms which type of payments will qualify as a ‘grant’ as follows:
‘[M]eans any appropriation, grant in aid, subsidy or contribution transferred, granted or paid to a vendor by a public
authority, municipality or constitutional institution... .’
The use of the words ‘appropriation’,
‘grant in aid’ and ‘subsidy’, indicate that the receipt constitutes assistance from the state (usually in the form of
money). In other words, it is a gratuitous or “unrequited” payment by the grantor, where no reciprocity is expected from the recipient in the form of a supply of goods or services of corresponding value.
Where the recipient is required to perform minor actions in regard to the grant, such as providing the grantor with information on how the funds were spent, or reporting on how goods or services granted were applied, these actions are not regarded as constituting a taxable supply of ‘services’ by the grantee to the grantor in terms of section 7 (1) (a). However, if a public authority engages a service provider to supply a speci c service in return for the payment, that payment is not a ‘grant’ as de ned.
A grant also excludes nancial assistance in the form of a loan where, and to the extent, that the amount must be repaid to the lender (grantor) either in the form of money, or in the form of a supply of goods or services.
Sometimes it can be quite dif cult to distinguish between a grant and a payment for goods or services supplied, as the perceptions of the parties are not always in alignment when there is no written document which attempts to address the duties and responsibilities of the parties. Even in the case where there is a written document, the parties should be careful not to form an opinion on this point based exclusively on the ordinary meaning of certain words used in the document. For example, if the word ‘grant’ is used to describe the payments to be made in terms of a ‘grant contract’, the word ‘grant’ might be interpreted to have different meanings, depending on the context of the contract, the deliverables which are required in terms of the contract (if any), and the perceptions of the parties regarding those deliverables. Furthermore, a ‘grant’ is speci cally de ned for VAT purposes. This de ned meaning is therefore more important than the ordinary meaning when determining the VAT consequences of any transaction (supply) which arises in terms of, or as a consequence of, the grant contract. The mere use of the word ‘grant’ in the contract does not necessarily mean that the payments concerned will qualify as such for VAT purposes.*
* Drafters of such contracts should therefore pay careful attention to the words used to describe the different kinds of payments made in terms of the contract. Also, caution should be exercised when using generic or template agree- ments which might not be appropriate in the circumstances.
Juta’s IndIrect tax 2016 339