Page 467 - Juta's Indirect Tax

IN 70 VaLue-added tax act: InterPretatIOn nOtes IN 70
tax previously deducted on bulk water and electricity purchased from other vendors for the purpose of making those supplies. Any consumption by paying customers above the ‘free’ amount is subject to VAT at the standard rate. Output tax is therefore only paid by the municipality on the actual price charged over and above any ‘free’ portion.
When a municipality outsources the supply of water, electricity, or any other taxable activity to a municipal entity, that municipal entity does not make a supply for no consideration to the municipality. As a municipal entity is a ‘designated entity’, any payment received from a municipality in respect of such supplies does not qualify as a zero-rated ‘grant’.* An example of this is when a municipality engages the services of a ‘water service provider’ (WSP) to supply water to customers in a particular water service area. Any payment by the municipality to the WSP constitutes consideration for the taxable supply of services and is taxable in full at the standard rate.
A further example to consider is the supply by municipalities of goods and services to the general public. Although it may seem that certain supplies such as public roads, parks and gardens, public recreation facilities and street lighting are supplies made for no consideration, this is not the case. From 1 July 2006, the policy is that the amount of municipal property rates charged to property owners constitutes the consideration for the provision of the public goods and services. The ‘municipal rate’ charged by a municipality is taxable at the zero rate† to the extent that it represents a charge for making taxable supplies of public amenities. This means that the municipality will be able to recover VAT to the extent that expenses are incurred for the purpose of making taxable supplies of public amenities (excluding any exempt supplies).‡ If an entrance fee is charged, or other consideration is payable for the use of those public facilities, the amount charged is subject to VAT at the standard rate.
5.2.8 Public authorities, public entities and designated entities
In terms of paragraph (b) (i) of the de nition of ‘enterprise’, public authorities are generally not regarded as enterprises and will not be vendors unless speci cally noti ed by the Minister to register. They will therefore not account for output tax or deduct input tax on any goods or services that they supply, whether a consideration is charged or not. To the extent that a public authority is noti ed by the Minister to register for VAT, it will be a ‘designated entity’ and will be regarded as a normal business as contemplated in paragraph (a) of the de nition of ‘enterprise’.
Major public entities listed in Schedule 2 of the PFMA, national or provincial government business enterprises listed in Parts B or D of Schedule 3 to the PFMA, and entities which are a party to any Public Private Partnership (PPP) are also designated entities, but they are not required to be noti ed to register for VAT. The funding that designated entities receive from National or Provincial Government is generally treated on the same basis as the consideration received by other vendors for making the same or similar taxable supplies (that is, subject to VAT at the standard rate).
To the extent that designated entities make supplies for no consideration, the general rules as discussed in 5.2.2 or in the speci c circumstances described elsewhere in this Note which are relevant to the situation will apply.§
5.2.9 Associations not for gain
One of the dif culties in establishing the correct VAT treatment of supplies made by associations not for gain is the different terminology and de nitions used in the Income Tax and VAT Acts. For example, the terms ‘recreational club’ and ‘public bene t organisation’ (PBO) are de ned for income tax purposes, but not for VAT purposes. The VAT Act, in turn, de nes the terms ‘association not for gain’ and ‘welfare organisation’. As a result, the VAT treatment of these organisations can be quite dif cult to understand.¶ An ‘association not for gain’ as de ned in the VAT Act means –
(i) any religious institution of a public character;
(ii) any other organisation (except an educational institution) which does not carry on its activities for the purposes
of pro t or gain to any owner, member or shareholder; and (iii) educational institutions of a public character.
The de nition covers a wide spectrum of different entities and may therefore include societies, such as those formed for the promotion of culture and arts, charities and public-interest groups. At one end of the spectrum are sports and recreational clubs which, although formed to promote the interests of a group of persons, they are mainly focused on satisfying the needs of their membership base. Typically, members join an association (club) to ful l their personal needs and pay for this by way of a membership fee or subscription. At the other end of the spectrum are PBOs and welfare organisations which are more focused on satisfying the needs of the general public, or a sector of the general public. Typically, these organisations are involved in charitable work or activities of a benevolent, philanthropic or altruistic nature.
Unlike ordinary businesses that further their objectives solely through commercial activities, associations not for gain have a complex variety of income sources including: donations, bequests, street collections, tithes, and fundraising activities such as fares and jumble sales. They will often also conduct some form of commercial activity which is similar to an ordinary business to generate additional income to ensure that the activities of the organisation can be sustained in the future. As the income streams are fairly complex and they often make supplies for no consideration, it is highly likely that there will be a mixture of business and non-business activities conducted.** Consequently, there may be a mixture of standard-rated and zero-rated taxable supplies, exempt supplies, and supplies which are outside the scope of VAT.
* Refer to section 8 (5) and the de nitions of ‘grant’ and ‘designated entity’ in section 1 (1).
† Refer to section 11 (2) (w).
‡ For more information on this topic refer to the VAT 419 Guide for Municipalities.
§ For more information on this topic refer to Interpretation Note No. 39 (Issue 2) ‘VAT Treatment of Public Au-
thorities, Grants and Transfer Payments’ (8 February 2013).
¶ For a detailed discussion on the relationship between associations not for gain, PBOs and welfare organizations,
refer to Chapter 3 of the VAT 414 - Guide for Associations not for Gain and Welfare Organisations. Refer also to the extracts from the VATCOM report in Annexure C for the policy framework and background.
** For a detailed analysis on the aims and objectives of associations not for gain and their ability to earn and retain pro ts, refer to Cuninghame v First Ready Development 249 (28 September 2009) (238/08) [2009] ZASCA.
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