Page 375 - Juta's Indirect Tax

IN 39 (2) VaLue-added tax act: InterPretatIOn nOtes IN 39 (2)
On or after 1 July 2006
With effect from 1 July 2006, paragraph (c) of the de nition of ‘enterprise’ and the de nition of ‘local authority’ was deleted. The effect of this is that from 1 July 2006, most of the supplies by a municipality (formerly known as a local authority) became taxable at the standard rate under paragraph (a) of the de nition of ‘enterprise’. Therefore, the payment will be regarded as a zero-rated grant in terms of sections 8 (5A) and 11 (2) (t) as it is received for enterprise purposes by the municipality. It follows that the VAT incurred in providing those facilities may be deducted as input tax.
Example 11 – Transport subsidy paid partially for taxable purposes
Department of Transport (DoT), as part of its recapitalisation programme to scrap 10 000 old taxis makes a payment (scrapping allowance) of R50 000 to taxi owners for each legally-registered old minibus that was scrapped
Before 1 April 2005
No such payments were made before 1 April 2005.
On or after 1 April 2005
DoT is a public authority, but some of the recipients concerned may make both taxable supplies (zero-rated international transport) and exempt supplies (local fare-paying passenger transport) in terms of sections 11 (2) (a) and 12 (g) respectively. Each vendor is therefore deemed to make a supply to DoT in terms of section 8 (5A) only to the extent that it is in respect of the taxable part of that vendor’s business. For instance, assume the following facts regarding one of the recipients (vendor):
• Payment of R50 000 received to buy a new taxi.
• The new taxi costs R228 000 (including VAT).
• The vendor makes 70% taxable supplies (international bus transport) and 30% exempt supplies (local taxi transport). In this example, the vendor will zero-rate 70% of the payment (R35 000) in terms of section 11 (2) (t) as it will constitute a ‘grant’ (declared in Block 2 on the VAT 201 return). The balance (R15 000) is declared in Block 3 of the VAT 201 return as non-taxable (out-of-scope) income. The vendor will be allowed to deduct input tax on the expense relating to the new taxi as follows:
R228 000 × 14 / 114 × 70% = R19 600.
However, it should be noted that the most common situation will be that there will be no deemed supply at all, as the payment will in most cases relate exclusively to exempt activities (local passenger transport by road). The payment in most cases will therefore be out-of-scope for VAT purposes as the recipients will not be vendors.
Where the taxi owner does not make taxable supplies with the taxi, but that person is registered for VAT in respect of other taxable supplies, for example, if the taxi owner has a taxi business as well as a building supplies business, the entire receipt (R50 000) must be declared in Block 3 of the VAT 201 return as non-taxable (out-of-scope) income. The vendor will not be allowed to deduct input tax on the expenses incurred in buying the new taxi as the expense is not in the course or furtherance of the building supplies business to which the VAT registration applies.
Example 13 – Relief relating to the incorrect treatment of a ‘transfer payment’ – section 40A
A Schedule 3C PFMA public entity supplies management services to a Schedule 3A PFMA public entity. VAT should have been charged at 14% on the services in terms of section 7 (1) (a), but both parties were under the mistaken impression that the payment was a zero-rated ‘transfer payment.’
SARS raised an assessment against the Schedule 3C PFMA entity for an amount of R50 000 in the tax period ending March 2003. Since that date, SARS recovered R35 000 of that amount by offsetting refunds which were due to that entity. The Schedule 3C PFMA public entity was required to deregister on 1 April 2005, but it still has a VAT liability of R15 000 plus penalty and interest thereon.
If the conditions in section 40A (1) and (2) are met, the Commissioner was required to reduce the assessment for the tax period ending March 2003 by R15 000, plus the penalty and interest thereon, if written application was made by the vendor in this regard. The Commissioner could not reduce the assessment for that tax period by reversing the original assessment of R35 000, or any part of the tax, additional tax, penalty or interest which was already recovered, as this would have resulted in the vendor obtaining a refund [which would be in contravention of the proviso to section 40A (2)]. In terms section 40A (3), where an assessment had not been issued in regard to those supplies by 31 March 2005, SARS was prevented from raising an assessment to recover those amounts on or after 1 April 2005. In addition, if the vendor had incorrectly declared output tax at 14% on a ‘transfer payment’, the Commissioner could not refund the output tax, or any amount paid which had been applied to offset any penalty or interest in respect of that outstanding tax. (Section 40A (4).)
Example 14 – Non-liability for a failure to register before 1 April 2005 – proviso to section 23 (4)
Assume that the Schedule 3C PFMA entity in Example 13 above did not register for VAT in respect of the management services which it supplied. In such a case, with effect from 1 April 2005, the Commissioner will not be allowed to retrospectively register the that entity and make it account for the input tax and output tax for any period before1 April 2005. With effect from 1 April 2005, the Schedule 3C public entity is regarded as a ‘public authority’ and will therefore not be liable (or allowed) to register for VAT in respect of those management services, unless it is noti ed to register in terms of paragraph (b) (i) of the de nition of ‘enterprise’.
Juta’s IndIrect tax 2016 367