Page 484 - Juta's Indirect Tax

IN 82 VaLue-added tax act: InterPretatIOn nOtes IN 82
As a result, such vendor is deemed to supply such services (i.e. the portion of the running expenses yet to be consumed) in the course or furtherance of its enterprise and must account for output tax, under section 18(1) read with section 9(6) in the tax period in which the motor car was applied for a purpose other than making taxable supplies.
In terms of section 10(8) the consideration for the aforementioned deemed supply shall be equal to the cost incurred by the vendor of acquiring such goods or services.
In the event that the vendor has no record or does not maintain suf cient data to accurately calculate the costs incurred in respect of the aforementioned goods or services, the value of the supply shall be calculated in the manner prescribed by the Minister of Finance in Regulation No. 2835 dated 22 November 1991 (see Annexure B).
Example 1 – Running expenses of a motor car initially acquired for a taxable purpose and subsequently applied for an exempt purpose
Facts:
On 1 February 2014, ABC Property Rental Company (ABC) acquired a motor car for purposes of transporting clients to view commercial properties. It insured the motor car and pays an annual premium of R11 400 (including VAT). On 1 August 2014 it used that same motor car exclusively for the purpose of transporting clients to view residential properties.
Result:
ABC may deduct input tax of R1 400 (14 / 114 × R11 400) on the running expenses incurred when acquiring the motor car for its taxable commercial rental activities under section 16(3), in its February 2014 VAT return.
On 1 August 2014 ABC Property Rental Company applied the motor vehicle wholly to its exempt residential activities and, under section 18(1), is deemed to supply the insurance services in the course or furtherance of its enterprise and must declare output tax of R700 (14 / 114 × R11 400 × 6 / 12) in its August 2014 VAT return.
3.8 The exceptions under the provisos to section 17(2)(c)
The provisos to section 17(2)(c) set out those instances when input tax may in fact be deducted on the acquisition of a motor car. These instances are discussed below.
3.8.1 Motor dealers
The rst proviso to section 17(2)(c) allows for an input tax deduction when a motor car is acquired by a vendor exclusively for the purpose of making taxable supplies in the ordinary course of an enterprise that continuously or regularly supplies motor cars and would generally apply to motor dealers.
The term ‘motor dealer’ is not de ned in the VAT Act. For purposes of this Note, a motor dealer would be a vendor that in the ordinary course of its enterprise activity acquires motor cars exclusively for the purpose of resale or rental to third parties, and is not limited to persons that are formally set up in the trading style of a motor dealership.
The application of the rst proviso to section 17(2)(c) requires that each motor car must be acquired by a motor dealer, as de ned above, for purposes of resale or rental. If the motor car is acquired for either of the aforementioned purposes, the vendor will be entitled to an input tax deduction. In the event that the motor dealer acquired the motor car for a purpose other than resale or rental, an input tax deduction will be denied. For instance, a motor dealer that acquires a motor car for the purpose of making deliveries, will be denied an input tax deduction under section 17(2)(c)(i). The subsequent sale of the aforementioned motor car is, under section 8(14)(a), not regarded as a supply made in the course or furtherance of the motor dealer’s enterprise and such motor dealer is therefore not required to account for output tax under section 7(1)(a) on that sale.
3.8.2 Demonstration vehicles
The second proviso to section 17(2)(c) deems a motor car that is acquired by a motor dealer for demonstration purposes or for temporary use before making a taxable supply of that motor car, to be acquired exclusively for the purpose of making a taxable supply. The intention to apply the motor car for the abovementioned purpose could, for example, be evidenced by an accounting entry that moves such motor car from ‘stock’ to ‘demonstration vehicles’ or ‘assets.’ Therefore, provided the motor car is not used for an exempt or private purpose before making a taxable supply, a motor dealer may deduct input tax on such motor car acquired for demonstration purposes or used temporarily for other purposes in the enterprise before being sold or leased to a third party. This proviso will not apply if the motor car is used for an exempt purpose before making a taxable supply as the de nition of ‘input tax’ provides that a motor dealer will only be entitled to deduct input tax on a motor car that is used, consumed or supplied in the course of making taxable supplies. Refer to 3.10.2 for the treatment of a motor car, initially acquired for an exempt purpose and subsequently sold as stock (taxable purpose).
3.8.3 Motor cars awarded as prizes
A vendor is entitled to deduct input tax on the acquisition of a motor car that is acquired for the purpose of being awarded as a prize under proviso (iii)(aa) to section 17(2)(c). The motor car awarded as a prize must be as a result of a bet being
476 Juta’s IndIrect tax 2016
Example 2 – Motor cars acquired for a taxable purpose but used as a demonstration vehicle before making a taxable supply
Facts:
A motor dealer purchases a motor car for R136 800 (VAT inclusive) with the intention of selling it to X, but decides to use the motor car for a few months to take customers for a test drive before selling it.
Result:
In light of the fact that the motor dealer acquires the motor car for the purpose of resale, it is entitled to deduct input tax of R16 800 (14 / 114 × R136 800) under section 16(3) read with section 17(2)(c)(ii), despite the fact that the motor dealer would initially be applying the motor car for another purpose immediately after acquiring it.