Page 353 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
The terms ‘re-classi ed’ and ‘applies’ in the context of proviso (iv) to section 18 (4), refers to the extent of the change in the taxable status of the entity’s activities as a result of the re-classi cation in terms of the PFMA (and hence the change in application of certain assets for that purpose). This re-classi cation may have required the entity to be noti ed to register to the extent that the supplies are regarded as taxable in terms of paragraph (b) (i) of the de nition of ‘enterprise’. Whether wholly or partially taxable, an input tax adjustment is denied to the extent that the assets are subsequently applied for enterprise purposes as a result of the re-classi cation.
Example 8 – Denial of input tax adjustment upon transfer of non-enterprise assets to a taxable entity or separate taxable trading account
• Where a Schedule 3A PFMA entity (public authority) transfers assets used for out-of-scope ‘public authority’
activities into a separate ‘ring-fenced’ trading account in order to carry on a taxable business activity in respect of which it has been (or will be) noti ed to register for VAT in terms of paragraph (b) (i) of the de nition of ‘enterprise’.
• Where a Schedule 3C PFMA entity (public authority) provides funds and/or assets for the purposes of conducting a business activity under a separate legal entity formed (or to be formed) for that purpose. For example, where the entity transfers existing funds or assets originally received for exempt or out-of-scope ‘public authority’ activities to a Schedule 3D PFMA entity (vendor), which it controls, for the purposes of making taxable supplies.
6.13 Section 23 (4) proviso – Registration of persons making supplies in the course of enterprises where the public entity should have registered before 1 April 2005
Section 23(4) provides that where any person has applied for registration within the required 21-day period after becoming liable, or otherwise quali es for voluntary registration, the Commissioner may determine the date that the person shall be a vendor for VAT purposes. A person who is required to register for VAT and did not apply within the 21-day period allowed is regarded as a vendor from the date that they were rst liable to register. However, having regard to what is considered equitable in the circumstances of the case, the Commissioner may determine a later liability date for that person.
As from 1 April 2005 all public entities listed in Schedule 1 and most of the entities listed in Part A or C of Schedule 3 to the PFMA, which were registered as vendors before that date were required to deregister. Only in very limited circumstances were these entities required to register as vendors or remain on the VAT register if they had already registered.
The proviso to section 23 (4) provides that with effect from 1 April 2005, the Commissioner may not register such public entity in respect of any enterprise activities carried on before 1 April 2005. By preventing the Commissioner from registering the public entities concerned, those entities were, in effect, not held liable for the output tax which would otherwise have been payable, nor were they entitled to deduct any input tax incurred in respect of any period before 1 April 2005.
The intended effect of this amendment was that public entities who failed to register before 1 April 2005 were not required or permitted to register for the VAT on their past transactions, as they would have subsequently had to deregister as a result of amendments to the law with effect from 1 April 2005. This applied whether the public entity concerned was liable to register, or if it could have registered voluntarily. The reason for this was that these entities have always been funded largely by government and if there were unbudgeted ows of funds to these entities, their allocations of funds would have to be adjusted.
6.14 Section 40A – Liability of public authorities and certain public entities for tax and limitation of refunds
Section 40A deals with the issues pertaining to the recovery of tax from any public entity listed in Schedules 1, 3A or 3C of the PFMA where that entity was registered for VAT by the Commissioner in respect of any period before 1 April 2005. The section basically provided that where certain payments from government were treated incorrectly for VAT purposes before 1 April 2005, the tax would not be recoverable or refundable (as the case may be). Further, that where an assessment had been raised and not yet paid in respect of such amounts, application could be made to reduce the assessment. The provision is analysed and discussed in detail below.
‘(1) This section applies in respect of the supply of goods or services on or before 31 March 2005 by any public authority or public entity listed in Schedule 1 or Part A or C of Schedule 3 to the Public Finance Management Act, 1999 (Act 1 of 1999).’
Sub-section (1) sets the framework for the scope of application of sub-sections (2) to (4). The provision was necessary so that the VAT consequences of the incorrect treatment of certain payments for supplies made by public authorities and certain public entities before 1 April 2005 could be dealt with. As with some of the other amendments, the underlying reason for the provision is to reduce the circular ow of funds within government departments and various government agencies.
To qualify for the relief provided in this section, the supplier had to be a ‘public authority’ or a constitutional institution listed in Schedule 1 to the PFMA, or a national or provincial public entity listed in Part A or C of Schedule 3 to the PFMA before 1 April 2005. The entity had to have an existing or potential liability for VAT at the time in accordance with the speci c conditions contained in sub-paragraphs (2) to (4), which are discussed below.
‘(2) Where the Commissioner on or before 31 March 2005 issued an assessment ... contemplated in subsection (1), to correct a prior incorrect application of the zero per cent rate of tax in terms of section 11 (2) (p) in respect of that supply,...’
The rst part of sub-section (2) deals with the situation where on or before 31 March 2005 the Commissioner had raised an assessment for the VAT which should have been charged by the vendor at the standard rate in terms of section 7 (1) (a) on a payment for a taxable supply, but instead, the vendor incorrectly applied the zero rate in terms of sections 8 (5) and 11 (2) (p), on the assumption that the payment was a ‘transfer payment’ as de ned in section 1 as it read at the time.
‘(2) ...the Commissioner must, on written application, reduce that assessment...’
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