Page 463 - Juta's Indirect Tax

IN 70 VaLue-added tax act: InterPretatIOn nOtes IN 70
consumption or supply in the course of making exempt supplies or for other non-taxable purposes, no input tax may be deducted. If the expense is for both taxable and non-taxable purposes, an apportionment of input tax must be made.
The application of these rules is exactly the same whether it concerns supplies made for a consideration or not. It follows, that in determining the taxable or non-taxable nature of such supplies, the characterisation of the supplies should be carefully considered in accordance with the principles discussed in 3 and 5.1.1. This characterisation will, in turn, enable a vendor to decide whether the VAT incurred to make those supplies may be deducted as input tax in full, in part, or not at all.
5.1.4 De nition of ‘donation’ [section 1 (1)]
The word ‘donation’ is de ned to mean any payment in money or otherwise voluntarily made to an association not for gain and in respect of which no identi able direct valuable bene t arises in the form of a supply of goods or services to the person making the payment, or a connected person in relation to the donor. The de nition refers to a situation where a person makes a voluntary (cash) payment or a purely gratuitous disposal of goods or services to an association not for gain.* For a payment or a supply of donated goods or services to qualify as a ‘donation’, the donor must not receive anything more than mere acknowledgement by the recipient or a small token of gratitude.† The de nition intends to make it clear that such a payment or gratuitous disposal does not constitute consideration for a taxable supply by the association not for gain and is excluded from the de nition of the term ‘consideration’. The effect is that the recipient does not account for output tax on any donation received, and the donor may not deduct any input tax on any donation made.
The de nition does not, however, deal with situations where goods or services are ‘donated’ to persons other than associations not for gain. In such cases, one would have to consider the ordinary meaning of the term ‘donation’ and its application in tax law. In this regard, it is worth noting that in our law, there is a presumption against the making of a donation unless the facts and circumstances clearly indicate the contrary.‡ The common law de nition refers to a transaction whereby one person, without any legal obligation to do so, undertakes out of disinterested benevolence to give property to another person without receiving anything in return.§ When applying these principles, it is submitted that:
• If a vendor makes a truly gratuitous supply of goods or services, that supply will generally not be regarded as being in the course or furtherance of an enterprise, except where that vendor is a welfare organisation.¶ Consequently, as a general rule, input tax cannot be deducted on any goods or services which are acquired for the purpose of making supplies for no consideration. There are, however, a few exceptions as explained in the examples in 5.2.
• When a so-called ‘donation’ is made in circumstances other than that contemplated under the de ned term, the VAT consequences will depend on whether the payment or goods or services supplied to the recipient has been made completely gratuitously under the condition of ‘disinterested benevolence’, or whether it constitutes ‘consideration’ for a taxable supply in whole, or in part.
• If stock items or other enterprise assets on which the vendor has previously deducted input tax are donated, an output tax adjustment must be made.**
• When an enterprise makes a supply for no consideration which is integral to the promotion of its taxable supplies (for example, free samples, corporate gifts or special offers) these are not regarded as true donations. The reason is that the goods are not supplied gratuitously under the condition of ‘disinterested benevolence’. Rather, they are supplied under conditions which are inextricably linked to motives connected to the furtherance of the vendor’s taxable activities.
5.1.5 Value of supply [section 10 (23)]
This provision is made subject to any other value of supply rule which may apply in the circumstances. This means that if there is a possibility of two different valuation rules being applicable in respect of a particular supply, the nil value in terms of section 10 (23) will not apply. The following are examples of when section 10 (23) can apply:
• Taxable supplies made between connected persons where the recipient will apply the goods or services wholly for
taxable supplies and will be able to deduct the full amount of input tax, regardless of the consideration charged. (In
other words, when the open market value in terms of section 10 (4) does not apply.)
• Promotionalsuppliesmadefornoconsiderationtocustomersandpotentialcustomerswhoarenotconnectedpersons
in relation to the supplier.
The purpose of this provision is merely to provide a valuation rule which determines that the value of a supply will be nil in certain instances. The rule cannot be used to characterise a supply. In other words, the valuation rule does not have the effect of changing the character of a non-taxable supply for no consideration into a taxable supply for no consideration just because the person happens to be a vendor in respect of other (taxable) supplies made.††
* An association not for gain includes a wide range of non-pro t organisations, including a ‘welfare organisation’.
† The token of gratitude or acknowledgement or bene t should not be of signi cant value, otherwise it could constitute consideration for a taxable supply made by the recipient. Whether a bene t is an ‘identi able direct valuable bene t’ to the donor or a connected person in relation to the donor is a matter of fact, degree and circumstance.
‡ Refer for example, to Myers v Lesch 1954 (2) SA 487 (T) and Jepson NO v Lezar (6453/2007) [2009] ZAFSHC 49.
§ Refer also to paragraph 6.2.2 of the speci c proposals relating to the scal issues affecting non-pro t organisa- tions in the Ninth Interim Report of the Commission of Inquiry into certain Aspects of the Tax Structure of South Africa (Katz Commission). In the Report, it was recommended that in the context of donations tax, the statutory de ni- tion in the Income Tax Act should be amended to accord with that of the common law.
¶ There are special rules which apply in respect of welfare organisations which, as a bene t, are afforded the op- portunity to voluntarily register for VAT and to claim a deduction of input tax incurred in carrying out their welfare activities, even if supplies are made for no consideration. Refer to 5.2.11 for more details.
** Refer to section 18 (1) and 5.1.6. The adjustment is based on the open market value of the donated goods or services. †† Refer to case VAT 711.
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