Page 458 - Juta's Indirect Tax

IN 70 VaLue-added tax act: InterPretatIOn nOtes IN 70
• Ifapersononlyconductsactivitieswhichdonotresultinanysuppliesbeingmadetoanotherpersonforaconsideration, the person conducting those activities may not register for VAT or deduct input tax. For example, when conducting a hobby, or merely holding shares as an investment.
• When VAT is incurred both for enterprise and non-enterprise purposes, an apportionment of input tax must be made, and only the part that relates to the taxable business activities may be deducted. For example, input tax in respect of general overheads* such as audit fees, advertising, rent, telephone and stationery for a business that makes both taxable and non-taxable supplies may only be deducted to the extent that they can be attributed to the taxable part of the business.
• Typically, input tax is speci cally denied for certain goods or services acquired, where there is a risk of abuse, or a possibility of a substantial element of private consumption, for example, entertainment and passenger vehicles.
4. The law
For ease of reference, the relevant sections of the VAT Act are quoted in Annexure A.
5. Application of the law
5.1 De nitions, concepts and valuation rules
5.1.1 De nition of ‘enterprise’ [section 1 (1)]
General rules – paragraph (a)
The concept of an enterprise is central to VAT. Registration is required (or available on a voluntary basis) only when a person carries on, or intends to carry on, an ‘enterprise’ as de ned. VAT must be charged only on taxable supplies which are made in the course or furtherance of an ‘enterprise’ and ‘input tax’ may only be deducted to the extent that VAT is incurred for the purpose of making taxable supplies. Paragraph (a) of the de nition contains the general test for an enterprise and refers to any business activity in the broadest sense and reads as follows:
‘(a) in the case of any vendor, any enterprise or activity which is carried on continuously or regularly by any person in the Republic or partly in the Republic and in the course or furtherance of which goods or services are supplied to any other person for a consideration, whether or not for pro t, including any enterprise or activity carried on in the form of a commercial, nancial, industrial, mining, farming, shing, municipal or professional concern or any other concern of a continuing nature or in the form of an association or club;’
As a general interpretation matter, the wording that follows the word ‘including...’ in paragraph (a) is illustrative of the words that precede it, and does not indicate that two separate categories of ‘enterprise’ are envisaged.† For the purposes of this Note, the wording of paragraph (a) can be summarised as any enterprise or activity carried on –
• continuously or regularly;
• by any person;
• in or partly in the Republic;
• in the course of which goods or services are supplied for a consideration (that is, some form of payment);
• whether or not for pro t.
Speci cally included in paragraph (a) are the activities of municipalities,‡ clubs and associations. Public entities that are listed in Schedule 2 and Parts B and D to Schedule 3 of the Public Finance Management Act, 1999 (the PFMA) are also treated as normal businesses under this paragraph.
Provisos (i) to (x) to the de nition clarify whether certain activities are regarded as being in the course or furtherance of an enterprise or not. For example, anything done in connection with the commencement or termination of an enterprise is carried out in the course or furtherance of an enterprise, but the following are examples of supplies and activities which are excluded:
• Services rendered by an employee to an employer and in respect of which remuneration is earned. This must, however,
be distinguished from an independent contractor that charges a fee for services rendered.
* Note that the classi cation of expenses as being of a ‘general’ nature from an accounting perspective by an enterprise that makes both taxable and non-taxable supplies does not necessarily mean that the expense will be apportioned for VAT purposes. When considering if input tax may be deducted, the actual purpose of the acquisition must still be established. Certain expenses may, on the face of it, appear to be of a general nature, but these might turn out to be incurred speci cally for taxable or non-taxable purposes and not for mixed purposes. For example, in the case of the Commissioner: South Afri- can Revenue Service vs De Beers Consolidated Mines Limited (503/11) 2012 ZASCA 103 (the De Beers case) it was held that certain expenses related to a complicated share transaction were not part of the general overheads of its mining enterprise for VAT purposes. Instead, the court ruled that the expenses were wholly incurred for speci c purposes relating to the share transaction, and that this was not a taxable purpose. Consequently, the vendor could not deduct any input tax in that regard.
† Refer to paragraph 36 of the judgment in the De Beers case. In this case, the appellant argued that there were two categories of enterprise encapsulated in paragraph (a) of the de nition. The rst being the part which concludes with the word ‘pro t’, and the second, that part commencing with the word ‘including’. It was argued that once a vendor falls within the ambit of the de nition of an ‘enterprise’ (regardless of whether in the rst or second category), any activity whatsoever of that enterprise forms an integral part and parcel of the enterprise, unless it is excluded in terms of proviso (v) of the de nition. This interpretation was found to be incorrect.
‡ From 1 July 2006, paragraph (a) speci cally includes the activities of municipalities which, before that date, were dealt with in terms of the now deleted paragraph (c) of the de nition. For more information in this regard, refer to 5.2.7 as well as the VAT 419 - Guide for Municipalities.
450 Juta’s IndIrect tax 2016