Page 461 - Juta's Indirect Tax

IN 70 VaLue-added tax act: InterPretatIOn nOtes IN 70
which the literature can be attributed. In such a case, the vendor will be conducting taxable and non-taxable activities and will not be able to recover input tax to the extent that the expenditure is associated with the non-taxable supplies. Input tax may also not be recovered if the vendor carries on activities of a private or recreational nature such as a hobby, or if the activities do not give rise to, or are not in connection with, a supply of goods or services to any other person.
The words ‘whether or not for pro t’ indicates that the test for an ‘enterprise’ in terms of paragraph (a) is not, as a general rule, concerned with whether the consideration charged by the person for the goods or services supplied is suf cient to cover the costs of conducting the activity.* In other words, if an activity does not turn out to be pro table, it does not mean that no ‘enterprise’ is conducted. A further implication is that the general test for an ‘enterprise’ will apply to associations not for gain, even though they are generally not focussed on making a “pro t” except for the purposes of sustaining the organisation’s existence. It should be noted, however, that an association not for gain does not qualify as an enterprise to the extent that it makes supplies for no consideration, except to the extent that it quali es as a ‘welfare organisation’ carrying on ‘welfare activities’, or the supplies are integral to its taxable supplies which are made for a consideration in a business context as described in 5.2 of this Note.
Paragraph (b)
Paragraph (b) of the de nition deals with some special cases and clari es the circumstances under which certain entities are regarded as enterprises. This provision commences with the words ‘...without limiting the applicability of paragraph (a) in respect of any activity carried in the form of a commercial...or professional concern—‘. This means that the general rules and the test for business type activities as per the wording of paragraph (a) will still be applicable in the case of the speci c entities mentioned in paragraph (b) for it to constitute an enterprise. However, speci c additional factors must to be taken into account in this regard.
Paragraph (b) (i)
Public authorities such as government departments and public entities listed in parts A and C of Schedule 3 to the PFMA are dealt with in paragraph (b) (i). As a general rule, public authorities are not regarded as enterprises as they are mainly engaged in carrying out the functions of Government. In certain cases, these entities may be engaged in carrying on business activities which compete with other vendors in the economy. Where this occurs, the Minister of Finance (the Minister) may decide that the entity should be noti ed to register and account for VAT to the extent that it carries on those business activities.
If the level of business activity is relatively insigni cant so that it does not warrant a noti cation by the Minister, the activities are not regarded as being an enterprise and any supplies made (including those made for no consideration) are out-of-scope for VAT purposes.†
Paragraph (b) (ii)
Paragraph (b) (ii) deals with welfare organisations and provides that these entities are regarded as enterprises to the extent that they carry on any of the welfare activities listed in Government Notice No. 112 dated 11 February 2005. This is despite the fact that some, or all, of the supplies made in connection with its welfare activities might be made for no consideration. The intention of this paragraph is, therefore, to provide welfare organisations with speci c tax relief within the VAT system by overriding the general requirement in paragraph (a) that goods or services must be supplied ‘... for a consideration...’.‡ However, if a welfare organisation chooses to register in terms of this provision, it does not mean that it will be able to regard non-taxable supplies as taxable supplies. For example, if a welfare organisation makes exempt supplies as contemplated in section 12, those supplies remain exempt.§ Similarly, whether a welfare organisation registers for VAT or not, it does not change the principle that a supply made for no consideration (not being in the course of carrying on a welfare activity) generally falls outside the scope of VAT.¶
In other words, exercising the option to register as contemplated in paragraph (b) (ii) does not re-characterise non-taxable supplies and other non-enterprise activities to be carried on in the course or furtherance of an ‘enterprise’. The provision is limited in its effect in that it only allows supplies made for no consideration by a welfare organisation in the context of conducting welfare activities to be regarded as enterprise activities. Furthermore, to the extent that normal business activities are carried on involving the supply of goods or services for a consideration as contemplated in paragraph (a) of the de nition of ‘enterprise’, the normal rules with regard to the liability to register and account for VAT will apply.
5.1.2 De nition of the term ‘consideration’ [section 1 (1)]
The concept of ‘consideration’ is one of the cornerstones of VAT and is de ned in relation to the supply of goods or services. It contemplates the making of payments, the performance of certain acts, and the carrying out of forbearances in relation to a supply. Although the de nition is very wide and includes any payment which is in respect of, in response to, or for the inducement of the supply of any goods or services, there must be a suf cient nexus between the supply and the payment for the supply to constitute consideration.
In an ordinary business transaction, the consideration is usually determined with reference to an amount of money. However, consideration includes payment in any form and could be in money or in-kind. It could also be in respect
* There is an exception in the case of ‘entertainment’ supplied in certain circumstances. Refer to section 17 (2) (a).
† Refer to 5.2.8 for more details in this regard as well as Interpretation Note No 39 (issue 2) ‘VAT Treatment of Public Authorities, Grants and Transfer Payments’ (8 February 2013).
‡ Refer to 5.2.9 to 5.2.11 as well as Annexure C for more details in this regard.
§ Refer also to the discussion in 5.2.9 on the exemption in terms of section 12 (b) for associations not for gain.
¶ This means that a welfare organisation must distinguish between supplies made for no consideration which are
made in the course of conducting its welfare activities (being taxable supplies) and supplies made for no consideration which are exempt or out-of-scope.
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