Page 468 - Juta's Indirect Tax

IN 70 VaLue-added tax act: InterPretatIOn nOtes IN 70
Except for the exemption provided in section 12 (b), the VAT legislation does not contain a speci c exemption for the activities of associations not for gain. This means that if supplies are made for a consideration and the value of the supplies exceeds the compulsory VAT registration threshold of R1 million in any consecutive 12-month period, the entity will be required to register for VAT. The option of voluntary registration is also available if supplies are made in excess of the minimum voluntary registration threshold of R50 000* in any consecutive 12-month period.
To the extent that an association not for gain carries on ordinary business activities as contemplated in paragraph (a) of the de nition of ‘enterprise’, the general rule as set out in 5.2.2 will apply. A few other points to be noted in regard to associations not for gain:
• If an association not for gain supplies goods or services which it received as a donation, the supply is exempt in terms
of section 12 (b). The exemption applies whether the supply is made for a consideration or not.†
• An association not for gain is not a ‘PBO’ or a ‘welfare organisation’ unless it meets the requirements. If some of the activities are of the type listed in Part I of the Ninth Schedule to the Income Tax Act, and the association has been approved as a PBO under section 30 (3) of that Act, it will only be a PBO to that extent. To qualify as a ‘welfare organisation’ it must rstly be an approved PBO and it must also carry on ‘welfare activities’ as listed in Regulation No. 112 in the Government Gazette No. 27235 issued on 11 February 2005 (Regulation 112). (Refer to Annexure B.)
• An association not for gain must be formally established and have a written constitution, otherwise it is regarded as an ordinary business and will not be entitled to any of the bene ts which are available to an association not for gain under the VAT Act. Informal clubs and societies are not regarded as enterprises if the activities are essentially self- interest based and carried on in the manner of a hobby or private activity. For example, where a few individuals form
an informal club and get together each week to play cards and entertain themselves, no enterprise is conducted.
5.2.10 Welfare organisations
A welfare organisation is a special type of association not for gain. Therefore, if a provision of the VAT Act applies to an association not for gain, it will also apply to a welfare organisation.‡ To the extent that a welfare organisation carries on business activities, the same rules as set out in 5.2.9 for an association not for gain will apply. However, welfare organisations are also entitled to certain other bene ts which are not available to an association not for gain. For example, paragraph (b) (ii) of the de nition of ‘enterprise’ regards supplies made for no consideration to be taxable supplies to the extent that these are in connection with carrying on certain ‘welfare activities’ listed in Regulation 112.
Welfare organisations are therefore provided with an option to register voluntarily without having to meet the minimum threshold, or the requirement that supplies must be made for a consideration. This allows a welfare organisation the ability to claim a refund of input tax in respect of supplies made for no consideration in respect of welfare activities conducted. An additional bene t not available to other vendors is that it is entitled to deduct input tax in respect of soliciting donations as this activity is regarded as an integral part of conducting the ‘welfare activities’. Note, however, the explanation provided in 5.1.1. on paragraph (b) (ii) of the de nition of ‘enterprise’, that if a welfare organisation decides to register for VAT, this does not mean that exempt supplies, or supplies which are outside the scope of VAT qualify as taxable supplies conducted in the course or furtherance of the welfare organisation’s enterprise.
5.2.11 Public bene t organisations (PBOs)
A ‘PBO’’ is de ned in the Income Tax Act as any organisation which is a ‘non-pro t company’ as de ned in section 1 of the Companies Act, 2008,§ a trust formed in the Republic, or an association of persons established in the Republic which carries on a public bene t activity (PBA) listed in Part I of the Ninth Schedule to the Income Tax Act and complies with section 30 of the Income Tax Act.
As PBOs fall within the wider de nition of an ‘association not for gain’, the same rules as set out in 5.2.9 will apply to the extent that a PBO carries on business activities. A PBO will not automatically qualify as ‘welfare organisation’ but if it carries on ‘welfare activities’, 5.2.10 will apply to that extent. As the list of welfare activities for VAT purposes is derived from the PBAs listed in Part I of the Ninth Schedule to the Income Tax Act, in many cases a PBO will also qualify as a welfare organisation. This has resulted in some uncertainty with regard to the application of the law when it comes to certain PBOs that carry on what some might think of as charitable activities which are deserving of welfare status, but which are not listed in Regulation 112. Typical examples include: organisations that carry on activities whose aims are primarily of a cultural, religious, political, philanthropic, patriotic, philosophical or philanthropic nature, where supplies are generally made for no consideration.¶ Whilst such organisations may possibly qualify as PBOs for income tax purposes, they will not necessarily qualify as welfare organisations under the VAT Act.
Some of these organisations have claimed the bene ts applicable to welfare organisations under the VAT Act without meeting the requirements. This was demonstrated in an unreported case heard in August 2009 in the Johannesburg Tax Court** where the principle was con rmed that an association not for gain (including a PBO) is not permitted to deduct input tax on the costs incurred to make supplies for no consideration if those supplies are made in the course of carrying on non-taxable (non-enterprise) activities.
The case concerned a religious organisation which carried on activities in connection with its objective of ministering, promoting, and spreading its religious message. Teachings and messages were spread via various means such as radio and television broadcasts, conventions, the internet, personal correspondence, and by the distribution of certain magazines for no consideration. The association had also registered for VAT in respect of books, CDs, DVDs and other religious
* The threshold is R60 000 in the case of entities supplying ‘commercial accommodation’.
† Note, however, that that the exemption in section 12 (b) only applies to an ‘association not for gain’ which is not a ‘welfare organisation’.
‡ The exemption in section 12 (b) does not, however, apply to welfare organisations and is an exception to this rule. § Act No. 71 of 2008.
¶ Also excluded from the list of welfare activities are any supplies which are exempt in terms of section 12 (except
those which are of the type contemplated in section 12(b) when they are made by a welfare organisation). ** Case VAT 711.
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