Page 356 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
and other administrative matters were resolved. Whilst in suspense mode, no further VAT 201 returns were issued. On page 31 of the 2005/6 Budget Tax Proposals booklet issued by SARS, the following was stated in this regard:
‘Public authorities/entities: SARS raised assessments against many public authorities and entities due to ongoing confusion about the VAT implications of transfer payments. In 2003 and 2004, Government introduced a whole new set of VAT legislation to eliminate this confusion. In order to bring full nality to this matter, Government will write off outstanding assessments raised against public authorities and entities to the extent these assessments stem from this longstanding confusion.’
Any dispute regarding an assessment in respect of payments which were apparently treated as zero-rated transfer payments in terms of sections 8 (5) and 11 (2) (p), should therefore have been resolved in the light of the explanations and interpretations put forward in this note.
Where it was established that the amount owing was in fact properly payable because the payment was incorrectly treated as a zero-rated ‘transfer payment’ instead of a standard-rated payment in terms of section 7 (1) (a), the vendor was allowed to apply in writing to SARS for the assessment to be reduced to the extent that the conditions in terms of section 40A were applicable. (See 6.14 for details.)
7.6 ‘Ring-fencing’ of trading activities
Public authorities, as a general rule, are not able to register for VAT unless they are noti ed as required in paragraph (b) (i) of the de nition of ‘enterprise’. Any decision to register a public authority that comes forward to request that their trading activities should be regarded as taxable is determined as set out in 7.1.
In order for a public authority to qualify as an ‘enterprise’, the activity which is sought to be treated as taxable must be ‘ring-fenced’ and moved out of mainstream non-enterprise activities of that department or Schedule 3A or 3C PFMA entity, and conducted under a separate legal entity (unless all of the activities conducted by that public authority are regarded as taxable).
Alternatively, where it is not possible to conduct the taxable activities under a separate legal entity due to other rules and regulations with which that public authority must comply, the taxable activity must be ‘ring-fenced’ and conducted under a separate trading account, branch or division of that public authority. The separate entity or taxable trading account, branch or division must then be noti ed to register or apply for registration as mentioned in 7.1. Any transfer of funds or assets from the main public authority (non-vendor) to its taxable trading account or deemed Schedule 3B or 3D ‘designated entity’ (vendor) will have the following VAT implications:
(i) Transfer of funds – Output tax must be declared by the recipient as the amount constitutes consideration for a taxable supply (section 8 (5)). When the taxable trading account or deemed Schedule 3B or 3D designated entity incurs VAT inclusive expenses, it is allowed to deduct input tax thereon to the extent that it makes taxable supplies if it meets all the other requirements for deducting input tax (e.g. sections 16 (2), 16 (3), 17 (1), 20, etc).
(ii) Transfer of existing assets and other goods and services held before 1 April 2005 – No input tax adjustment is allowed to the separate taxable trading account or deemed Schedule 3B or 3D designated entity when it receives those goods or services for taxable application in the enterprise. (Section 18 (4) proviso (iv).) If the transaction occurs on or after 1 April 2005, the main public authority must not declare output tax thereon, as it will no longer be a vendor. Where the transfer occurred before 1 April 2005, the transfer of the asset would have been regarded as consideration for a taxable supply of services by the recipient (barter transaction), and input tax and output tax on that transaction must be accounted for by the parties respectively.
(iii) Purchase and transfer of goods or services acquired on or after 1 April 2005 – If the main public authority acquires goods or services on or after 1 April 2005 on its budget (as principal) and these are subsequently transferred to its separate taxable trading account or deemed Schedule 3B or 3D designated entity, neither the main public authority (non-vendor), nor the recipient is able to deduct input tax thereon (Section 18 (4) proviso (iv).)
(iv) Subsequent sale of goods or services where input tax was denied in terms of Section 18 (4) proviso (iv) – Where goods or services were acquired as discussed in (ii) and (iii) above, and those things are subsequently supplied in the course of an enterprise by that separate taxable trading account or deemed Schedule 3B or 3D designated entity, output tax must be charged at the standard rate. No input tax is allowed in terms of section 16 (3) (h) in respect of that subsequent supply.
7.7 Classi cation of new entities and re-classi cation of existing entities in terms of the PFMA
The VAT treatment of new public entities which were in the process of being classi ed and existing public entities which were re-classi ed in terms of the PFMA as at 1 April 2005 were decided upon by National Treasury in consultation with SARS, based upon the policy principles discussed in this document as well as the circumstances of the particular case and similar cases encountered. This approach is also followed for any current re-classi cation cases. The possible VAT consequences of the transfer of funds or assets from public authorities to newly created entities or to separate trading accounts, as set out in 7.6 above should be noted in this regard.
7.8 SETA grants & SDL payments
The amendments ensured that SETA grants received and SDL payments made by vendors on or after 1 April 2005 were treated on a tax-neutral basis. The effect is that input tax on SDL payments made by vendors can no longer be deducted for any SDL tax period ending after March 2005 (the last payment being due for that period on 7 April 2005). Vendors were allowed to deduct input tax in respect of any arrear SDL payments for SDL tax periods ending no later than 31 March 2005, if that arrear amount was paid on or before 7 April 2005.
The National Skills Fund and SETAs were not able to deduct input tax on training grants paid to vendors on or after 1 April 2005, since they are no longer vendors and did not account for supplies on or after 1 April 2005.
No output tax must be declared by a vendor (including a ‘designated entity’) on any SETA training grants received on or after 1 April 2005, as the zero rate in terms of sections 11 (2) (t) or 11 (2) (u) will apply (as the case may be).
7.9 Duties, levies and similar charges by regulatory, statutory or administrative authorities
Where any levy, duty or similar charge was paid to any statutory, regulatory, administrative, or other authority (being a ‘public authority’ on or after 1 April 2005), which was registered for VAT before 1 April 2005, that payment did not include VAT.
348 Juta’s IndIrect tax 2016