Page 349 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
The use of the words ‘or any other similar process’ in paragraph (a) (ii) of the de nition is intended to have a similar effect in the case of municipalities as was explained above with regard to the function of the word ‘including’ in paragraph (a) (i) with reference to procurements by public entities. In both cases the exclusions are intended to make it clear that all methods which involve the actual procurement of goods or services do not fall within the meaning of ‘grant’, whether the of cial procurement methods were used or not. This means that any form of quid pro quo (consideration) which can be linked to an actual supply of goods or services made to the public authority or municipality which makes the payment, or which has been paid for by that entity on behalf of a third party bene ciary, cannot constitute a ‘grant’ as de ned.
It should also be noted that provisions such as section 67 of the MFMA which allow municipalities to make gratuitous payments under certain circumstances, for example, to public bene t organisations, cannot be used as a way of circumventing the de nition of ‘grant’. For example, words such as ‘grant’, ‘subsidy’, ‘grant in aid’ or ‘intergovernmental grant’ are sometimes used in a contract to describe payments made to the contracting party to perform activities which have been outsourced by a municipality. Whether the supplies are contractually made to the municipality that makes the payment, or to a third party bene ciary, in either case, the payment is not gratuitous or unrequited and will not meet the de nition of ‘grant’. It follows that it cannot be assumed that a payment which is said to have been made in terms of section 67 of the MFMA is a zero-rated ‘grant’ for VAT purposes merely because it has been called a grant. Each case must be tested to establish whether the recipient is required to supply any goods or services in return for the payment. The same reasoning will apply to any outsourcing arrangement involving a public authority. Paragraph (b) of the de nition contains a further exclusion as follows:
‘...but does not include— (a) ...
(b) a payment contemplated in section 8 (23); .’
Housing subsidy payments are also excluded from the de nition of ‘grant’. However, these payments qualify for zero- rated VAT treatment under sections 8 (23) and 11 (2) (s). (See the application of these provisions in 6.10 and 6.11.3 below.)
6.5 De nition of ‘public authority’
As explained in 4.3, the terms ‘department’, ‘division of the public service’ and ‘provincial administration’ are not de ned for VAT purposes, and this introduced some doubt as to the VAT status of other government agencies. As a result of this uncertainty, some constitutional institutions and regulatory, administrative or statutory bodies registered for VAT in terms of paragraph (a) of the de nition of ‘enterprise’ as they did not regard themselves as public authorities. On the other hand, some of these entities regarded themselves as public authorities, and as they had not been noti ed to register as required in terms of paragraph (b) (i) of the de nition of ‘enterprise’, they did not register. The de nition of ‘public authority’ was amended to include –
• the entities listed in Parts A & C of Schedule 3 to the PFMA (including any subsidiary or entity under the ownership
control of that entity*); and
• all the national and provincial government departments listed in Schedules 1, 2 or 3 of the PSA (including any
branches, divisions, trading accounts, local of ces and other components of that department); and
• certain other entities which should be regarded as public authorities. This was introduced primarily to address
situations where –
• newly created public entities are in the process of being classi ed;
• entities are re-classi ed in terms of the PFMA as a result of changes to their functions and mandate from
government; and
• entities disagree with their classi cation in terms of the PFMA and intend to apply for re-classi cation (or
entities which have already applied to be re-classi ed). The de nition does not include –
• constitutional institutions listed in Schedule 1 to the PFMA;
• national or provincial government business entities listed in Parts B & D of Schedule 3 to the PFMA;
• major public entities listed in Schedule 2 to the PFMA;
• public private partnerships (PPPs);
• local authorities or municipalities (town councils, TLCs, RSCs, JSBs etc);or
• any institution of higher education.†
6.6 De nition of ‘transfer payment’
The de nition of ‘transfer payment’ was deleted as well as section 11 (2) (p) which was associated with that de nition. This was replaced with the de nition of ‘grant’ (see 6.4 above) and section 11 (2) (t) which was introduced to zero-rate the deemed supply which arises when a vendor receives a grant for taxable (enterprise) purposes. Although the term ‘grant’ includes a wider number of payments than the term ‘transfer payment’, it is more speci c so that it provides a greater degree of certainty in identifying the type of payments which are intended to qualify for zero-rated tax treatment. 6.7 Section 8 (2) proviso (iv) – Certain supplies of goods or services deemed to be made or not made upon ceasing
to be a vendor
Section 8 (2) deems a vendor to supply the assets used for enterprise purposes when ceasing the enterprise. It requires that output tax be declared on the lesser of cost or open market value of those assets at the standard rate. However, proviso (iv) was inserted under section 8 (2) to provide relief from the output tax which would otherwise have been
* The wording of the various schedules to the PFMA was subsequently amended so that they now include ‘all subsidiaries of the above ...’.
† Refer to section 47 (4) (c) of the PFMA. In terms of this provision, institutions of higher education such as uni- versities, universities of technology (previous technikons) or colleges contemplated in the Higher Education Act, 1997 may not be listed in Schedule 3 to the PFMA.
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