Page 469 - Juta's Indirect Tax

IN 70 VaLue-added tax act: InterPretatIOn nOtes IN 70
material which it supplied for a consideration through its bookshop. The dispute concerned the disallowance of input tax which was attributable to the religious activities, including the VAT costs associated with the distribution of religious magazines for no consideration. Whilst the judgment in this case does not go into detail on many of the important principles underpinning the Court’s rationale for its decision, the following principles apply:
• Supplies made for no consideration in pursuance of philanthropic causes such as religious, philosophical or other belief systems, do not qualify as taxable supplies carried on in the course or furtherance of an enterprise as contemplated in paragraph (a) of the de nition of ‘enterprise’.* Consequently, the supplies are non-taxable and no input tax may be deducted on expenses incurred to make those supplies. Similarly, if an organisation makes exempt or other non- taxable supplies, those supplies are not re-characterised to be taxable supplies carried on in the course or furtherance of an ‘enterprise’ merely because that person registered voluntarily, or is liable to register for VAT in respect of other taxable supplies made.†
• When VAT is incurred for both taxable and non-taxable purposes, the input tax must be apportioned. Apportionment only applies where the expense cannot be directly (wholly) attributed to either taxable or non-taxable supplies.
• It cannot be concluded that a supply made by a vendor for no consideration is a taxable supply, merely because that person is registered for VAT. The taxable or non-taxable nature of the supply must be based on the characterisation of that supply in accordance with the de nition of ‘enterprise’. The valuation rule in section 10 (23) merely provides that the value of a supply is nil in certain circumstances. It cannot be used to characterise a supply as being taxable or non-taxable.
• There is a difference between supplies made for no consideration in promoting religious, philosophical or other belief systems (being supplies which are out-of-scope for VAT purposes), and supplies made for no consideration in carrying on ‘welfare activities’ (which qualify as taxable supplies).
• An approved PBO contemplated in section 30 (3) of the Income Tax Act which is exempt from income tax does not necessarily qualify as a ‘welfare organisation’. It may only claim the bene ts of a welfare organisation to the extent that it carries on any of the speci ed welfare activities set out in Regulation 112.
This case highlights one of the main differences in the VAT treatment of an association not for gain (or PBO) and a welfare organisation. The rationale behind the special treatment afforded to welfare organisations is to prevent the VAT on purchases from becoming trapped so that it forms part of the cost of providing welfare goods and services which are generally for the bene t of the poor and needy.
6. Conclusion
This Note explains the factors to consider when determining whether a supply for no consideration is a taxable or non- taxable supply, and consequently, whether there is a liability to declare output tax, or there is a right to deduct input tax on any goods or services acquired to make those supplies. Supplies made for no consideration can be made under many different circumstances and as it is not possible to cover every situation, the approach of the Note is to provide a general rule in 5.2.2 to illustrate the circumstances under which the VAT incurred in such cases may be deducted as input tax. Further speci c scenarios are also discussed in 5.2.3 to 5.2.11 to demonstrate how this rule works in practice within the context of the meaning of an ‘enterprise’ as de ned in section 1 (1). Further context is provided with reference to some of the generally accepted international principles upon which a VAT system of taxation is based. Of particular importance in this regard is the general requirement that supplies must be made for a consideration.
Most of the dif culties arise when supplies made for no consideration are made by associations not for gain, PBOs and welfare organisations, as they sometimes have a mixture of enterprise and non-enterprise activities. Such organisations may have dif culty in characterising the supplies correctly as taxable or non-taxable, or have dif culty in correctly allocating their expenses in this regard. When considering the VAT implications of supplies (including supplies made for no consideration), vendors should be careful to characterise the supply correctly in accordance with the de nition of ‘enterprise’ as de ned in section 1 (1). This requires a distinction to be made between taxable supplies made in the course or furtherance of an ‘enterprise’ and any exempt, out-of-scope or other non-taxable supplies.
A distinction must also be made between a situation where supplies are made for no consideration and a situation where no activity or ‘enterprise’ is conducted, because no supplies are made to any other person. In making this distinction it should be kept in mind that section 10 (23) is a valuation rule and cannot be used to characterise a supply as being taxable or non-taxable. Section 10 (23) merely provides that the valuation of a supply may be nil in certain circumstances.
Input tax and output tax are only accounted for on taxable supplies (standard-rated or the zero-rated supplies). Exempt supplies and any supplies which are outside the scope of VAT constitute non-taxable activities which are not carried on in the course or furtherance of an enterprise.
Activities conducted without giving rise to a supply of goods or services to another person, or which primarily involve the making of supplies for no consideration are generally not regarded as activities conducted in the course or furtherance of an enterprise. Consequently, the VAT incurred in conducting such activities is generally not deductible as input tax. However, where promotional supplies made for no consideration are attributable to the taxable activities conducted by the enterprise, the VAT incurred to make those supplies is generally allowed to the extent that the supplies are made with a commercial rationale in mind. This must be distinguished from a situation where the supplies concerned are purely benevolent in nature. In such a case, the supplies are not regarded as being made in the course or furtherance of an enterprise unless they are made by a “welfare organisation” in the course of conducting its ‘welfare activities’.
Should any person require further clarity on any of the matters dealt with in this Note, it is recommended that an application for a VAT ruling be made as envisaged in section 41B read with Chapter 7 of the Tax Administration Act 28 of 2011 (the TA Act).The application should be submitted to SARS by email to VATRulings@sars.gov.za or facsimile
* This principle applies no matter how benevolent or altruistic the objectives of the organisation may seem.
† This rule applies even in the case of a ‘welfare organisation’ which is registered for VAT in respect of ‘welfare activities’ carried on.
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