Page 352 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
6.11 Section 11 (2) – Zero-rating – Services
See 4.7 for an explanation on the application of section 11 (2). 6.11.1 Section 11 (2) (p) – Zero-rated ‘transfer payment’ The provision was deleted. (See also 6.4 and 6.6.)
6.11.2 Section 11 (2) (t) – Zero-rated ‘grant’
‘the services are deemed to be supplied in terms of section 8(5A).”
Essentially, this provision will apply where a private vendor (not being a ‘designated entity’)*, receives some form of nancial assistance from the State or a municipality to enable that person to make taxable supplies. The zero-rating only applies where the amount is a ‘grant’ as de ned in section 1 (1), and where the deeming provisions of section 8 (5A) apply. (See also 6.4 and 6.9 above, particularly where the grantor makes payment on behalf of the grantee directly to a third person.)
The payment must not constitute the procurement of goods or services in terms of section 7 (1) (a) by a public authority, constitutional institution or municipality, or be a housing subsidy payment. (The latter payments being speci cally dealt with under sections 8 (23) and 11 (2) (s).)
6.11.3 Section 11 (2) (s) – Zero-rated housing subsidy payment
‘the services are deemed to be supplied to a public authority or municipality in terms of section 8 (23).’
The situation here is slightly different from the explanation on the application of section 11 (2) (t) in 6.11.2 above, as the subsidy bene ciary is generally a private individual (not registered for VAT). Secondly, the amount is normally paid directly to an intermediary (usually a vendor) who will supply the goods and services, and not to the bene ciary. Unlike section 11 (2) (t), this provision allows the public authority to make payment for a supply to the third party (the bene ciary) to qualify for the zero rate.
The provision is underpinned by the government policy that low cost housing subsidies should not bear VAT at the standard rate. The zero-rating only applies to the extent that the subsidy amount is used to pay for goods and services which relate to the acquisition of the low cost house itself, or essential services which pertain directly to the transfer of ownership and registration of the property in the bene ciary’s name. The payment of additional consideration to the service provider which is not covered by the housing subsidy amount will result in VAT at the standard rate being charged on that amount. (Refer also to the explanation in 6.10 relating to the application of section 8 (23) which must be read together with section 11 (2) (s).)
6.11.4 Section 11 (2) (n) – Zero-rated payments to welfare organisations
The amendment to section 11 (2) (n) is purely textual in nature. It was necessary because of the amendment to section 8 (5) and the inclusion of a welfare organisation in the de nition of ‘designated entity’. The effect is that although a welfare organisation is a ‘designated entity’, the zero-rating has been retained for the deemed supply which arises in respect of certain payments received for carrying on taxable welfare activities.
It should, however, be noted that where the constitutional institution, public authority or municipality procures goods or services through that welfare organisation, there may be an actual (standard-rated) taxable supply in terms of section 7 (1) (a). Such payments are therefore not zero-rated in terms of this provision. (See also 6.4 and 6.9, particularly where the grantor makes payment on behalf of the grantee directly to a third person who makes a taxable supply to the grantee.) 6.11.5 Section 11 (2) (u) – Zero-rated SETA training grants paid to designated entities
‘the services are deemed to be supplied in terms of section 8 (5) by a designated entity in respect of any payment made in terms of section 10 (1) (f) of the Skills Development Act, 1998 (Act 97 of 1998), to that designated entity.’
The amendments had the unintended effect that SETA grants payable to designated entities did not qualify for the application of the zero rate of VAT, as is the case for other vendors. Designated entities are also liable for SDL payments and are also entitled to receive training grants in terms of section 10 (1) (f) of the Skills Development Act, 1998, once they have submitted their workplace training plans to the Department of Labour. The Act was therefore amended further to ensure that SETA training grants paid to designated entities are zero-rated, otherwise it would have created an unfair result.
6.12 Section 18 (4) – Change in use adjustments (denial of input tax)
Section 18 (4) provides for input tax to be deducted in certain instances where there has been a change in the use or application of goods or services which were originally acquired for exempt, private, or other non-taxable purposes and subsequently applied wholly or partially for taxable use or application. This will apply, for example, where VAT was paid on the acquisition of dwellings used to generate exempt rental income, and subsequently those dwellings are converted into of ces or commercial accommodation and rented out as such.
Since the classi cation of public entities in terms of the PFMA is used as a basis for determining how an entity is treated for VAT purposes, any re-classi cation of that entity within those Schedules may have a VAT implication. Where an entity is not registered for VAT, as it is classi ed as a ‘public authority’ or a ‘constitutional institution’, the re- classi cation of that entity (or a part of its activities) may result in that entity becoming liable to register. If this occurs, proviso (iv) to section 18 (4) will prevent that entity from deducting any input tax on the adjustment which would otherwise have been allowed, for any assets brought into the ‘enterprise’ in respect of which it is now required to register.
* A ‘welfare organisation’ is also a ‘designated entity’, however, section 11 (2) (n) will apply in the case of a wel- fare organisation and not section 11 (2) (t). Refer to 6.11.4.
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Example 7 – Denial of input tax adjustment upon reclassi cation
If an entity in Schedule 3C of the PFMA (Provincial Public Entity) is re-classi ed under Schedule 3D of the PFMA (Provincial Government Business Enterprise), it will not be able to make an input tax adjustment on their existing assets which are now applied for taxable purposes as a result of the re-classi cation.