Page 466 - Juta's Indirect Tax

IN 70 VaLue-added tax act: InterPretatIOn nOtes IN 70
might qualify for a deduction under both income tax and VAT legislation. However, that same expense, if it were of a capital nature, might be deductible for VAT purposes, but not for income tax purposes.
In cases where expenditure is incurred for more than one purpose, the income tax provisions relating to the deductibility of expenditure provide that the amount may be disallowed ‘to the extent that it is not incurred for the purposes of trade’.* The VAT Act also contains similar provisions† and in such cases, the input tax may have to be apportioned if it cannot be directly attributed wholly for taxable, exempt, or other non-taxable purposes.
From the above, it is clear that there is no single test that can be applied, except for the general rules which have been identi ed in 5.2.2. Vendors should therefore be careful not to draw their conclusions on the deductibility of an expense under the VAT law with reference to income tax legislation and associated case law, as the result will not necessarily be the same. Factors such as the nature, type and purpose of the expense, the taxable nature or otherwise of the supplies to which the expense relates, and the facts and circumstances of the case must be carefully considered.
One principle that emerges is that if the expenditure is incurred for purely gratuitous purposes and cannot be attributed to the taxable enterprise activities of the vendor, for example, in the form of brand marketing, publicity, increased sales or advertising, it is unlikely that it will be deductible for VAT purposes.
5.2.6 Fringe bene ts
A fringe bene t arises when an employer makes a supply of enterprise assets (or the use thereof) to an employee for no charge, or for a charge which is less than the cash equivalent. As a general rule, a fringe bene t is regarded as a supply of goods or services made in the course or furtherance of a vendor’s enterprise (unless it is a loan of money or other exempt supply). Vendors that are employers must therefore account for output tax on the value of any bene t or advantage granted, as determined with reference to the Seventh Schedule to the Income Tax Act. Where the bene t consists of a right to use a motor vehicle, the consideration is determined in terms of Regulation No. 2835 dated 22 November 1991.
Input tax may be deducted on any goods or services acquired for the purpose of making a supply of a fringe bene t to an employee for no consideration, however, where the bene t or advantage constitutes the supply of “entertainment” or the use of a motor car, the input tax is generally denied.
If the bene t or advantage is an exempt supply‡ in terms of section 12 or a zero-rated supply in terms of section 11, no fringe bene t arises and the employer is not required to declare any output tax. Any VAT incurred by the employer to make a supply of a fringe bene t which is taxable at the zero rate may be deducted as input tax. Similarly, when the value of the bene t provided to the employee is nil in terms of the Seventh Schedule to the Income Tax Act, the employer will not declare any output tax.§ Usually when the value of the bene t is determined to be nil, this will relate to a general bene t provided to all employees. The employer may therefore deduct input tax in such cases to the extent that the associated expenses relate to the making of taxable supplies. If the employer supplies the fringe bene t to employees who are involved in both taxable and non-taxable activities, the input tax must be apportioned.
In the case of a long service award such as a gold watch awarded to an employee, the same principles apply as discussed in the preceding paragraph. If the award is in the form of a cash payment, no input tax may be deducted. 5.2.7 Municipalities
Municipalities are regarded as normal businesses as contemplated in paragraph (a) of the de nition of ‘enterprise’ with effect from 1 July 2006, and will be required to register and account for VAT. The general rules in 5.2.2 and as discussed elsewhere in this Note are therefore equally applicable to municipalities.
Municipalities are involved in supplying a wide variety of goods and services including water, electricity, refuse removal, sanitation services, public gardens, public roads and street lighting. Before 1 July 2006, only certain types of business activities were deemed to be taxable supplies made in the course or furtherance of the municipality’s enterprise. The supply of water, electricity, sanitation, refuse removal and similar supplies has always been taxable.
From 1 July 2006, amendments to the VAT Act were introduced to make the supplies which were previously out-of- scope to be taxable supplies so that output tax must be declared on any consideration charged.¶ The amendments also unlocked the VAT incurred on the costs of making those supplies so that input tax could be deducted by the municipality.
Municipalities supply water and electricity for a consideration to customers, but, as required in terms of the Constitution, they also supply a certain amount of ‘free’ water and electricity to domestic households, people in rural areas and indigent persons. This is usually referred to as ‘free basic services’ and is funded from equitable share grants received from government. Since the supply of water and electricity by a municipality constitutes taxable supplies, which are usually supplied for a consideration, the supply of any free basic services is regarded as part of the municipality’s taxable supplies. This means that a municipality is not required to make an adjustment under section 18 (1) for any input
utable to exempt supplies under the VAT Act, or the earning of exempt income under the Income Tax Act, no deduction will be allowed under the respective Acts.
* See for example, CIR v Pick ‘n Pay Wholesalers (Pty) Ltd 1987 (3) SA 453 (A), 49 SATC 132, and section 23 (g) of the Income Tax Act.
† Refer to section 17 (1) and the de nition of the term ‘input tax’ in section 1 (1).
‡ An example is where the employer supplies a dwelling to the employee. No fringe bene t arises in this case as the supply of a dwelling is exempt in terms of section 12 (c).
§ An example is a supply of hospitalisation services provided by the employer to its employees who are injured on duty.
¶ It should be noted that the purpose of the deletion of paragraph (c) of the de nition of ‘enterprise’, and the introduc- tion of other consequential amendments affecting the VAT treatment of municipalities was to re-characterise the supplies which were out-of-scope before 1 July 2006 to be taxable supplies after that date. One of the objectives was to simplify the administration of VAT within municipalities so that the normal rules applicable under paragraph (a) of the de ni- tion of ‘enterprise’ could also apply to municipalities. This re-characterisation does not apply to any supplies which are exempt in terms of section 12. Where a supply was exempt before 1 July 2006, it remains exempt after that date.
458 Juta’s IndIrect tax 2016