Page 826 - SAIT Compendium 2016 Volume2

IN 39 (2) VALue-Added TAx ACT: InTeRpReTATIon noTeS IN 39 (2)
Any public entity or public authority which had an assessment to pay VAT as contemplated in sub-section (1) was allowed to apply in writing to the Commissioner to reduce the assessment for the tax period concerned. Provided all the conditions in the section were met, the Commissioner was required to reduce the assessment accordingly.
‘(2) ... to the extent that the amount of tax, additional tax or penalty arose as a result of that correction and was
not yet paid on that date.’
The speci c liability which could be reduced, was the total amount of tax, additional tax, penalty or interest which had arisen directly as a result of any assessment issued in respect of the supplies referred to in sections 40A (1) and (2), which were incorrectly regarded as being in respect of a zero-rated ‘transfer payment’. For example, the reduced assessment would not apply where –
• the VAT declared on the VAT 201 was merely not paid, or was paid late; or
• there was a failure to submit a return and as a result, an estimated assessment was issued in respect of that tax period; or • an assessment was issued because output tax was under-declared for any reason other than the one mentioned in
section 40A (2), or if the input tax was overstated in respect of any tax period.
The relief applied only to the net balance of any tax, additional tax, penalty or interest as at 31 March 2005 which remained payable in respect of the incorrectly treated payments referred to in sections 40A (1) and 40A (2). It did not apply to any amount assessed in this regard which had already been paid or otherwise recovered by SARS. This includes debt which was set off (or which could have been set off) against refund credits arising in another tax period.
‘(2) ... Provided that the reduced assessment will not result in a refund to that public authority or public entity’.
The application of the reduced assessment may not have the effect that the public authority or public entity obtains a refund of any tax (including additional tax, or any amount allocated to penalty or interest) for any period before 1 April 2005 to which the assessment relates.
Where a part of, or the entire debt had been paid or otherwise recovered by SARS, that amount was not added back before calculating the amount of the reduced assessment. This is because the proviso to this section clearly states that the application of this provision may not result in a refund to that public authority or public entity. This means that the balance of existing credits in any other tax periods had to rst be transferred to the tax period in which the debt existed so that it reduced the outstanding debt, before applying section 40A (2). This applied as follows:
• Vendors registered on Category A or C tax period – existing credits, and credits arising in any tax period ending on or before 31 March 2005; and
• Vendors registered on Category B, D or E tax period – existing credits, and credits arising in any tax period ending on or before 28 February 2005, plus any credits arising between the end of that tax period and 31 March 2005. [For example, the last tax period for a vendor on Category B was from the beginning of March 2005 to the end of April 2005. Credits arising from transactions with a time of supply between 1 March 2005 and 31 March 2005 in the last tax period had to be offset against the debt in this case before calculating the amount by which the assessment was to be reduced in terms of section 40A (2)]. (See Example 13 in Annexure D.)
‘(3) The Commissioner may not after 31 March 2005 make any assessment to correct a previous incorrect application of the zero per cent rate of tax in terms of section 11 (2) (p) in respect of any supply of goods or services contemplated in subsection (1).’
This provision applies to the same incorrectly treated payments as contemplated in sub section (2). However, under this sub-section, there would have been no assessment by SARS for the tax liability concerned, which would otherwise have been recoverable from the public authority or public entity (whether registered as a vendor or not). Under subsection (3), SARS may no longer raise an assessment in respect of the tax liability pertaining to those incorrectly treated payments with effect from 1 April 2005. This means that an assessment could only be raised by SARS on or after 1 April 2005 to recover the VAT payable on taxable supplies before 1 April 2005 in circumstances other than those covered by this provision. For example, an assessment could have been raised by SARS where –
• there was a failure to submit a return and as a result, an estimated assessment was issued in respect of that tax period; • the amount due was not connected to any dispute regarding a transfer payment; or
• an assessment was issued in respect of any tax period where the output tax was under-declared (other than in the
speci c circumstances provided for in section 40A (1)), or the input tax was overstated.
‘(4) If a public authority or public entity incorrectly charged tax at the rate referred to in section 7 (1) (a) instead of the zero per cent rate of tax in terms of section 11 (2) (p) in respect of any supply contemplated in subsection (1), the Commissioner may not refund any such tax or any penalty or interest that arose as a result of the late payment of such tax, paid by that public authority or public entity to the Commissioner.’
This provision deals with the situation where the public authority or public entity incorrectly treated a ‘transfer payment’ as consideration for a taxable supply and paid output tax to SARS at the standard rate in terms of section 7 (1) (a) instead of at the zero rate in terms of sections 8 (5) and 11 (2) (p). In such cases, section 40A (4) would override sections 44 (2) and (3) (which deal with refunds), so that the public authority or public entity was not able to claim a refund of the output tax which it may have considered as being overpaid.
Example 9 – Application of the relief in section 40A
A Schedule 3A public entity (registered for VAT before 1 April 2005) submitted a refund return for R50 000 for the October 2004 tax period. In the meantime, the SARS auditors raised an assessment for R60 000 in respect of a payment for services in the tax period ending December 2003 which the vendor had treated incorrectly as a zero-rated ‘transfer payment’. Assuming that the amount of R40 000 was the correct refund amount for the October 2004 period, that amount must rst be applied to reduce the tax, penalty and interest incurred in the December 2003 tax period. The vendor would have been able to apply for the assessment for the December 2003 tax period to be reduced by the amount of the unpaid tax, penalty and interest which remained after having set off the R40 000 credit [section 40A (2)]. SARS could not reduce the December 2003 tax period assessment to nil, plus refund the R40 000 for the October 2004, since this would have resulted in an incorrect application of the law and an incorrect refund to the vendor [section 40A (4)].
818 SAIT CompendIum oF TAx LegISLATIon VoLume 2