Page 372 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2) Annexure D – Examples
Example 1 – Low cost housing payment made to a developer with contribution by the bene ciary
The provincial Department of Human Settlement (DHS) (previously known as the Department of Housing) pays a low cost housing developer for developing houses for the poor. The recipients also agree to pay an additional R5 000 each for extra work performed on the houses which is not covered by the housing subsidy.
Before 1 April 2005
DHS enters into a contract with and pays a property developer R5 000 000 to develop 100 low cost housing units (R50 000 per bene ciary). When the developer received the R5 000 000 subsidy amount from DHS, that payment would have been treated as a ‘transfer payment’ which was zero-rated in terms of sections 8 (5) and 11 (2) (p). The balance of the consideration being R500 000 (R5 000 x 100) received for the houses supplied to the bene ciaries would have been subject to VAT at the standard rate.
The output tax to be declared by the developer in this example would therefore be calculated as follows:
Transfer payment Payment by recipients Total output tax
On or after 1 April 2005
R5 000 000 at 0% R500 000 × 14/114
R
nil
61 403,51 61 403,51
There is essentially no difference in the VAT treatment of the supplies concerned, except that the payments will now be zero-rated in terms of sections 8 (23) and 11 (2) (s) which cater speci cally for housing subsidy payments.
Example 2 – Payment to a municipality for an actual supply of land used for non-taxable purposes
Department of Rural Development and Reform (DRDLR) (previously known as Department. of Land Affairs (DLA)) pays a municipality an amount of money to transfer a piece of vacant land (commonage) belonging to the municipality to a tribe in the area. DRDLR also makes funds available to the tribe to build a community hall on the land.
Before 1 April 2005
Since the supply of the vacant land would not have constituted an actual taxable supply by the municipality there would have been no deemed supply by the municipality to the DLA. The supply would, however, have been non- taxable as the land was not used for ‘enterprise’ purposes at that time. The payment for the land would have been re ected as an out-of-scope receipt which would be re ected in Block 3 of the municipality’s VAT 201 return and not in Block 2 (zero-rated supplies). Since the tribe is not a vendor and is not making any taxable supplies, there is also no deemed supply to the DRDLR on receipt of the funds to build the community hall.
On or after1 April 2005
The supply by the municipality to a third person (the tribe) would be taxable at the standard rate as it is not a ‘grant’. No deemed supply arises as there is an actual supply in terms of section 7 (1) (a).
Example 3 – Low cost housing subsidy paid to a municipality
The Department of Human Settlement (DHS) (previously known as the Department of Housing) pays a municipality an amount as a subsidy to develop land for a township development project in the municipality’s jurisdiction as part of an urban planning initiative. It is projected that the houses will be sold for a small pro t.
Before 1 April 2005
Since township development was one of the taxable categories of businesses listed in Government Notice No. 2570 (21 October 1991), the acquisition and supply of the land and the houses would have been in the course or furtherance of the municipality’s ‘enterprise’. This is provided that the income (including the transfer payment or grant and a reasonable provision for depreciation) would be suf cient to cover the costs of the development. Therefore, in terms of section 8 (5), the municipality is deemed to have supplied a taxable service to DHS (public authority). The payment concerned was therefore regarded as ‘transfer payment’ which was subject to VAT at the zero rate in the hands of the municipality. This is because DHS (public authority) does not actually receive any goods or services in return for the payment. The taxable supply of land and houses is instead made by the municipality to the purchasers of the houses. Should the municipality be required to report to DHS from time to time on the progress made in respect of the development, this will be regarded as incidental, and will not be regarded as an actual supply of services to DHS as contemplated in section 7 (1) (a) in return for the payment.
If the municipality appoints a contractor to build the houses, the payment by the municipality to the contractor is subject to VAT at the standard rate since it is in respect of an actual supply of goods or services to the municipality. The municipality would deduct input tax on VAT expenses incurred in supplying the land and houses, as the township development is a taxable activity conducted by that municipality.
It should, however, be noted that if the municipality was appointed to merely receive and disburse the payments to the building contractor on behalf of the public authority (that is, as an agent of the public authority), the situation would be different. In that case the payments would be zero-rated in the hands of the building contractor and not the municipality. In such a case, the municipality will not re ect the payment at all on the VAT 201 return since it is not in respect of any supplies made by them.
364 Juta’s IndIrect tax 2016