Page 462 - Juta's Indirect Tax

IN 70 VaLue-added tax act: InterPretatIOn nOtes IN 70
of taxable or non-taxable supplies. For example, a reciprocal supply of goods or services in a barter transaction will constitute consideration for each of the parties.
The consideration for a supply could therefore constitute a combination of monetary amounts, reciprocal supplies or acts of forbearance* In such cases a value must be attributed to each component of the consideration and aggregated to determine the nal VAT-inclusive amount. Other features of ‘consideration’ are as follows:
• When the term is used with reference to a taxable supply, it is a VAT-inclusive concept. This means that any payment
received by the supplier in respect of a supply of goods or services will include an element of VAT, whether payment
has been made in part, or in full.
• It includes pre-payments for supplies as well as any past payments in the form of instalments, current payments, or
payments which are still to be made in the future in respect of any supply.
• Payment of the consideration does not necessarily have to be made by the recipient of the supply. Consideration can
also include payments received from a third party on behalf of the recipient.
The term ‘consideration’ does not include the following:
• Donations received by associations not for gain (including PBOs and welfare organisations). This includes cash
payments as well as the open market value of any donated goods or services where the donor does not expect or receive
anything of value in return.†
• A deposit‡ (other than a deposit on a returnable container), whether refundable or not, which is given in respect of a
supply of goods or services. However, if the supplier applies the deposit as consideration for a taxable supply, or the
deposit is forfeited at a later date, only on the happening of that event will the amount constitute consideration.
The de nition of the term ‘consideration’ merely determines whether certain payments, acts or forbearances are regarded as consideration. It does not determine the taxable nature or otherwise of a supply for which the consideration is received, nor the amount to be regarded as the consideration. These facts are determined with reference to other provisions. For example, by referring to the de nition of ‘enterprise’ in section 1 (1) and sections 7, 8, 11 and 12, it can be established if the supply is a taxable supply, and consequently, whether the consideration to which it relates should include VAT or not. Section 10 establishes the value attributable to the supply which will be subject to VAT.
These factors must, therefore, be considered when it is claimed that a supply for no consideration has been made, as the factual position must be established before the VAT consequences of a supply can be determined. It does not mean that because there was no monetary payment that the supply was made for no consideration.
In this context, the rst step is to determine if there is indeed no consideration received by the supplier. In other words, in the absence of any monetary amounts paid, the understanding of the parties to the contract must be tested against the de nition. This is to con rm that the performance of certain acts or forbearances which are an integral part of the contract, have not been overlooked as a form of consideration. This aspect is of particular importance in complex contracts which involve a number of separate and distinct supplies that may be embedded in the contract.
The second step is to establish whether a nil value (or nil consideration) for each supply is acceptable for VAT purposes. This is done by referring to section 10 and its various subsections which determines the value of supply§ which is applicable for different types of supplies. The answer to this question will depend on the characterisation of the supply, as well as whether the supplier and the recipient are ‘connected persons’.
5.1.3 De nitions of ‘input tax’ and ‘taxable supply’ [section 1 (1)]
The South African VAT system follows the general international principles of input tax as set out in 3, and in terms of which, ‘input tax’ is de ned on the basis of a purpose test. A ‘taxable supply’ is a supply which is subject to tax in terms of the VAT Act. This includes standard-rated supplies in terms of section 7 (1) (a) and zero-rated supplies in terms of section 11, as well as other supplies which are deemed to be taxable, such as those mentioned in sections 8 and 18 (amongst others).
Input tax may only be deducted to the extent that the expenses incurred can be attributed to the actual use, consumption or supply in the course of making taxable supplies. Where the expenses can be regarded as incurred exclusively for taxable purposes, the input tax may be deducted in full.¶ Similarly if the expenses are incurred exclusively for use,
* The value attributable to the act of agreeing to do something, or not to do something, or to refrain from doing something can also constitute consideration for a supply.
† Refer to 5.1.4 where the term ‘donation’ is discussed in more detail.
‡ The kind of ‘deposit’ referred to in the VAT Act is the type generally referred to as a ‘security deposit’ which is lodged with the supplier to be held as security for the return of borrowed goods, or to secure a supply of goods or services in the future, where the payment will be held in trust until the happening of a future event. The implication is that the security deposit is not taxable at the time that it is lodged, as it does not constitute consideration for a taxable supply at that time. The de nition of the term ‘consideration’ also acknowledges that at a later date, that same amount (or a portion thereof) may be applied as consideration for a taxable supply, or be forfeited. A ‘deposit’ must also be distinguished from a pre-payment for a taxable supply which is taxable at the time that the payment is made, and does not qualify as a security deposit.
§ The term ‘value of supply’, is not de ned, but it refers to the amount upon which VAT must be levied. Stated differently, it is the price of goods or services charged by a vendor, before adding the VAT component. For a taxable supply which attracts VAT at the standard rate, the value of supply is determined by extracting the VAT component from the nal VAT-inclusive price. Although section 10 is called ‘value of supply’, in some cases a subsection of that provision actually determines the consideration for a supply and not the ‘value of supply’.
¶ In certain cases, input tax may also be deducted in respect of second-hand goods which are acquired under a non- taxable supply if they are acquired for taxable purposes. Certain other deductions are also allowed to a vendor under section 16 (3), but these do not constitute ‘input tax’ as de ned. Input tax is also denied in certain cases. For example, as a general rule any VAT incurred in respect of entertainment and motor cars may not be deducted.
454 Juta’s IndIrect tax 2016