Value-Added Tax

Week5&6
Introduction
VAT is an indirect system of taxation which came into effect on 30
September 1991, with tax being regarded as indirect since it not
assessed by SARS directly but through transactions.
VAT is a transactional tax (levied on supplies) thus if there is no
supply, there can be no VAT.
VAT is only made up of two parts, input tax (deducted on
expenditure paid to SARS) and output tax (paid to SARS)
VAT is levied by VAT vendors at 15% (standard rate) or 0%(zero
rated supplies)
The definitions contained in the VAT Act are thus essential.
Summary of computational VAT.
 Introduction- The VAT model

Output tax on supplies within a VAT period

At the standard rate of 15% R xxx xxx
At the zero rate of 0% R nil

Less: Input tax on all supplies made to the vendor (R xxx xxx)

VAT Payable to SARS R xx xxx

Introduction
The critical question is thus whether the supply is in the course or
furtherance of an enterprise:
If it is then VAT is chargeable either at 15%(standard rate) or 0%(zero
rate) provided both parties are vendors.
If it is not then the only other way VAT could be charged is if it is a
deemed supply. (Section 8)
If there is no deemed supply then the transaction is either a non-supply
or exempt supply. (No VAT will be charged here)
Exempt supplies are contained in section 12 of the VAT Act.
Sections and References
Schedules:

Schedule 1 – Exemption: Certain goods imported into the Republic- page

446
Schedule 2 (Part A & B) – Zero rate: Supply of goods used or consumed
for agricultural, pastoral, or other farming purposes and supply of goods
consisting of certain foodstuffs- page 475
 Section 1- Definitions
Enterprise -page 388
Exported- page 389
Goods -page 390
Input tax -page 391
Output tax -page 392
Person- page 392
Services- page 393
Supply- page 394
Taxable supply- page 394
Tax fraction- page 394
Vendor- page 394
 Section 2- Financial Services
Page 394
Exempt from VAT:
2(1)- Activities that are financial services
2(2)- Definitions
2(3)- “Debt security”, “equity security” and “participatory security”
exclude
2(4)- “Financial security” exclude
Section 3- Open Market Value
Page 395
Focus on section 3(2) to Section 3(4)
Section 3(2) - consideration in money which the supply would be able to
fetch being freely offered and made between unconnected persons
Section 3(3) - if cannot determine under section 3(2) then look at a
similar supply
Section 3(4) – where cannot determine under section 3(3) a method
approved by the Commissioner can be used
Section 7 – Charging section
Page 395
Note supply requires 2 people – (one providing a service or selling
the goods and another receiving the goods or service)
Provided there is a supply the next question is whether there is a
taxable supply in terms of section 7 of the Act
VAT is levied on –
◦ The supply by any vendor,
◦ Of goods and services,
◦ Supplied by him on or after the commencement date,
◦ In the course of or furtherance of any enterprise carried on by
him
Decisional Flowchart
VAT decision making can be summarised as
follows: Is there a supply?

Yes No

Is there a taxable Is there a deemed

supply? supply?

Yes- charge VAT at No – No VAT charged

0% or 15%
Output tax - diagram

Taxable supply Exempt supply

Zero rated 0%
Std rated 15% No VAT

Section 11 Section 7(1)

Section 12
 Section 8- Deemed supplies
Common deemed supplies:
Section 8(2) – Person ceasing to be a vendor
Section 8(8) – Indemnity payment
Section 8(9) – Branch outside SA
Section 8(14) – Non supplies
Section 8(15) – Composite supplies
Section 8(16)- Supply of good used partly for making taxable supplies
Section 8(27) – Excess payments
Section 18(3) – Fringe benefits
Note- the timing and valuation rules for all deemed supplies.
Section 8- Deemed supplies
Section 8(2)- Person ceasing to be a vendor (page 396)
Any goods (excluding those denied input tax under 17(2)) shall be
deemed to be supplied.
Time of supply
◦ Immediately before you cease to be a vendor

Value of supply
◦ Consideration = lower of cost vs OMV
Section 8- Deemed supplies
Section 8(8)- Indemnity Payments (page 397)

•Deemed supply arises when:

– Payment is received by the vendor OR
– Vendor is indemnified by the payment of money to another person EXCEPT

•No output tax liability where Indemnity payment received by the

vendor; for the total reinstatement of goods stolen or damaged beyond
economic repair; and vendor was denied input tax credits.
•Trading stock if stolen or damaged and replaced by the insurance
company (i.e. no payment of money) no deemed supply as no payment
of money.
Section 8- Deemed supplies
Section 8(8)- Indemnity Payments

Time of supply
◦ Tax period when the payment is received

Value of supply
◦ Apply tax fraction to payment
Section 8- Deemed supplies
Section 8(9)- Branch outside SA (page 398)

Branch outside SA – In terms of section 8(9) if a vendor sends goods to a

branch outside SA this is a deemed supply of goods in the course of an
enterprise.
Note the branch must be separately identifiable and maintain an
independent system of accounting
Section 8- Deemed supplies
Section 8(14)- Non supplies (page 398)
Section 8(14) - No output tax if input tax was denied on acquisition.
Non supplies – In terms of section 8(14)(a) if an input tax deduction
was prohibited in terms of section 17(2) of the Act, the subsequent
supply of the goods is not subject to output tax.
Game viewing vehicles or hearses – section 8(14)(b) states that where
any input tax is allowed in terms of section 18(9) in respect of hearses
the subsequent supply of the vehicle is subject to VAT.
 Section 8- Deemed supplies
Section 8(15)- Composite supplies (page 398)
Separated parts of a single supply
Section 8(15) states that if a single supply consists of both standard and zero rated
portions each part is deemed to be a separate supply. VAT will only be charged on the
standard rated portion.
Beware of agent principle transactions. Some of these principles can be found in
section 54 of the VAT Act. If a person is acting as agent he cannot claim input tax
deductions nor does he levy output tax deduction. Only the commission is vatable.
In SARS v British Airways, the issue was whether British Airways should levy VAT
output on “passenger service charge” which was charged by ACSA to BA and then
passed on to the customer. SARS agreed to the international fare flight being standard
rated.
SARS argued section 8(15) applied and therefore the supply should be standard rated.
The court held that the service was not performed by BA and therefore there was no
supply.
Section 8- Deemed supplies
Section 8(16)- Supply of good used partly for making taxable supplies (page 398)

Section 8(16) deems the supply of goods partly to make taxable supplies and partly
for other purposes such as private purposes to be made wholly in the course of the
vendors enterprise
An example would be a vendor who uses a part of a property for business purposes
and then sells the property at a profit. VAT output will be levied on the sale at
15/115 X by the consideration received.
The section does not apply to fixed property which is acquired prior 30 September
1991 and the vendor is a natural person who used the property mainly as his or her
private residence and claimed no VAT input on the property.
Section 16(3)(h)- gives a corresponding input tax deduction for the part of the cost
relating to the property which was not used by the enterprise prior to the sale. This
is to compensate for the fact that output tax is levied on the entire consideration
received.
Section 8- Deemed supplies
Section 8(27)- Excess payments (page 399)

Section 8(27) - where a vendor receives an amount in excess for the

consideration charged by the vendor in respect of a taxable supply. The
vendor must account for output tax on the excess portion provided the
excess portion has not been refunded to the customer within 4 months
of receipt of the consideration. The excess is deemed to be a
consideration for a supply of services performed by the vendor. The
vendor is deemed to have performed the service on the last day of the
tax period during with the 4 month period ends.
 Section 8- Deemed supplies
Section 18(3)- Fringe Benefits (page 418)
The following fringe benefits will constitute deemed supplies in terms of
section 18(3):
1)Asset given to employee for less than market value
2)Right of use of an asset (motor car)
3)Free or cheap services
EXCEPT –
– Tax-free
– Exempt supplies
– Zero-rated supplies
– Supply of food, accommodation or entertainment
 Section 8- Deemed supplies
Section 10(13) and Regulation 2835- Use of Motor vehicle (page 403 & 465)
1. Determine the value of the vehicle (excluding VAT and finance charges)

2. Determine the % to be applied. 0.3% if input was denied and 0.6% if not denied

3. Deduct R85 if employee bears the full cost of maintenance. Deduct all amount paid
by the employee to the employer excluding finance charges and fuel (if input was
claimed). Note that if input tax was not claimed you may deduct all amount paid by
employee to employer excluding finance charges , fuel and the portion of the
amount that relates to the fixed cost of the motor car.
4. Multiply by the tax fraction to determine output tax
5. Multiply by the percentage of taxable usage
Fuel cannot be deducted because it is zero rated and interest cannot be deducted because it
is exempt.
Note the determined value excludes VAT for VAT purposes but includes VAT for fringe
benefit purposes
Section 8- Deemed supplies
Time of supply
◦ End of the month when the benefit included in the employees’ GI

Value of supply determined in accordance with the seventh schedule

Asset given to employee for less then market value
◦ Consideration is deemed to be the cash equivalent determined as
per 7th Schedule (ordinarily cost to the employer less consideration
paid by employee)
◦ Output tax = Cash Equivalent x 15/115
Section 9- Time of Supply
Page 400
s9(1) General rule is earlier of -
◦ the time an invoice is issued OR
◦ The time of any payment of consideration

S9(2) In respect of connected persons at the time of removal (where goods are to be removed) or
when they are made available (if goods are not to be removed. For supply of services between
connected persons time of supply is at the time the services are performed
S9(3)(a) In respect of rental agreements timing is at the earlier of payment being made or due
S9(3)(c) In respect of an installment credit agreement the time of supply is the earlier of delivery of the
goods or payment of the first installment
S9(3)(d) In respect of fixed property the time of supply is the earlier of registration or payment of any
part of the purchase price
Where there is a contingent consideration (amount cannot be fully determined at the time goods are
taken) time of supply is earlier of invoice issue date and payment is due.
Where a supply is by a machine (parking machine etc) time of supply for the customer is when the
coin is put into the machine and for the supplier when the coin is taken out of the machine.
Section 10- Value of Supply
Page 400
General Rule
S10(2) Value = Consideration – VAT
S10(3) Consideration = money value (if in money) or OMV (if not
in money)
S10(4) Deemed Open market value-
◦ Deemed at OMV subject to 3 rules
◦ 1. The supplier and recipient are connected
◦ 2 The actual consideration is less then OMV
◦ 3 The recipient was unable to claim the full input of the supply
Section 10- Value of Supply
OMV equates to arms length price
In respect of commercial accommodation if domestic goods and
services (cleaning and maintenance) are provided for an
unbroken period exceeding 28 days the value of the supply is 60%
of the full value
In respect of entertainment the value is nil provided he is not
allowed to claim the input in terms of section 17 of the VAT Act
Deemed supplies in terms of section 8(27) are valued at the
excess amount in terms of section 10(26)
Where a person deregisters the vendor is deemed to supply all
the goods and services on hand at the lower of cost or market
value.
Section 11- Zero rated supplies
S11(1)(a)(i) Export of goods- (direct vs indirect exports and VAT
treatment)
Page 404 - Definition of “exported” para (a) and para (d)
Export of goods basically means consigned or delivered to an address in
an export country. If the customer receives the good within RSA and
takes the goods over the border himself this is not an export
Section 11- Zero-rated supplies
Section 11(1)(e) Supply of a going concern (page 405)
The agreement must be in writing and there must be an income earning
activity. The parties must agree in writing the going concern will be an
income earning activity on the date ownership is transferred to the
purchaser. Both parties are VAT vendors and both agree in writing to
apply VAT at the zero rate. In addition all assets necessary for carrying
on a business are disposed of by the supplier to the recipient.
 Section 11- Zero-rated supplies
S11(1)(h) Fuel levy goods
S11(1)(j) Basic foodstuffs - rice, milk powders, unprocessed fruit and
vegetables, raw hens eggs, edible legumes, government regulation brown
bread, unprocessed dried beans, lentils, pilchards or sardinella, unprocessed
samp or mealie rice, maize meal, brown wheaten meal, certain cultured milk,
milk powders and dairy powder blends. Part B Schedule 2 page 458
S11(1)(k) Sale of gold coins issued by the reserve bank.
S11(1)(l) Illuminating kerosene
S11(1)(q) Goods supplied by a vendor on behalf of a foreign company to
another vendor in SA can be zero-rated. The zero-rate will only be applicable
if the goods are used by the recipient wholly for the purposes of making
taxable supplies
Zero-rated services
S11(2) Contains a list of zero rated services. (page 406)
S11(2)((a)-(c) International transport services – passengers and goods to
and from the republic as well as
S11(2)(d) Insurance on above
S11(2)(e) Ancillary services to exported goods- transport & insurance
S11(2)(f) Services for land & improvements in export country
S11(2)(i) Services to a non-resident who is a non-vendor wrt certain
exports, foreign-going ships, foreign-going aircraft
S11(2)(k) Services rendered outside Republic or customs controlled area
S11(2)(l) Services to non-residents
Zero-rated services
S11(2)(o) Certain services rendered to a branch or head office of the
vendor, if the branch or head office is outside SA
S11(2)(r) Vocational training of employees of a non-resident employer
that is not a vendor
S11(2)(w) Municipal rates

S11(3) SARS has the power to decide on what documentation is

necessary in order to zero rate an export. (page 408)
 Section 12- Exempt supplies
Page 408
•S12(a) – financial services
– Fee-based financial services are taxable supplies
– However the following are exempt:
– Medical aid, Provident fund and RAF contributions are an exempt supply
– Provision of life insurance
– Exchange of currency
– Buying and selling of a derivative or granting of an option
– Cession of life insurance
– Charging of interest or any other provision of credit
– Issue ,payment, collection or transfer in ownership of cheques or letters of
credit
– Issue ,transfer or sale of shares in a company or members interest in a close
corporation
Section 12- Exempt supplies
S12(c) – supply of residential accommodation under a lease; lodging for
employees
S12(g) – transport by road or railway of fare-paying passengers & their
personal effects
S12(h) – educational services supplied by the State or any institution of
a public character
S12(i) – membership contributions to employee organisations
S12(j) – crèche or after-school care centre
 Section 13 – 14 Imported
goods/services
Page 409
Section 13 – VAT is payable to Customs on imported goods in accordance
with the following computation:
15% multiplied by the total of:
• Purchase price or customs value plus
• Customs duty plus
• 10% of customs value
Section 14 - Imported Service – Defined in section 1 of the Act as a non-
resident who supplies services to resident for purposes other than making
taxable supplies. Page 390
Refer also Schedule 1 – Exemption: Certain goods imported into the
Republic Refer to page 446
 Section 15- Accounting basis of
VAT
Page 411
VAT is accounted for on an accounting basis
Accounting bases can be two type:

• Payment basis or
• Invoice basis
The primary difference between the two is the timing of supply.
On the invoice basis the supply occurs at the earlier of invoice or payment
(the exception is fixed property-timing takes place when amounts are paid)
On the payment basis the time of supply for output and input is when
payment is made or received.
Section 16- Calculation of Tax
Payable
Page 412
Section 16(1) confirms that VAT payable will be computed in accordance
with this section.
Section 16(2) provides that no input tax deduction shall be made unless
there is a valid tax invoice. Documentary requirements in relation to tax
invoices are contained in section 20(4) of the Act.
Section 16(3) confirms the net VAT payable is determined by subtracting
input tax from output tax.
Section 16(3)(g) provides that the deduction of input tax which was
claimable in a previous VAT period (but not claimed due to not having a tax
invoice) can be claimed once the tax invoice is obtained.
Once a vendor has an tax invoice he has to claim input tax deduction within
5 years. (Link to prescription and income tax)
The determination of input tax is governed by section 17 of the Act.
Input Definition (a)- page 391
VAT charged to a vendor by another vendor, on the supply of goods or
services to him… OR
VAT paid on imported goods
PROVISO –
◦ Fixed property…
◦ Second-hand goods
Input Definition (b)- page 391
The output tax paid by the supplier on goods supplied to the vendor, OR
The tax paid by the vendor himself on importation of goods by him

Second-hand goods = “notional’ input tax

◦ A vendor
◦ Acquires second-hand goods (in RSA)
◦ From a non-vendor who is a resident
◦ Acquired wholly for the purposes of taxable supply (ELSE: Apportion!)

Value
◦ Based on lower of consideration vs OMV…
◦ Apply tax fraction… PROVISO
◦ Claimed to extent payment is made (ie limited ito (s16(3)(a)(ii)(aa))- page 413
Timing
◦ S9(3)(d) Earlier of registration or payment (slide 24)

Fixed property… valuation & timing subject to Transfer Duty if acquired from a non-vendor
Section 17– Permissible
deductions in respect of input tax
Page 416
In order to determine whether input tax is deductible it is important to
determine the purpose for which the goods were acquired.
If they were acquired to make wholly taxable supplies then input tax is fully
deductible
If they were acquired to make wholly exempt supplies then no input tax is
deductible
The question is where goods are acquired to make both taxable and exempt
supplies.
If goods are used for making 95% or more taxable supplies then 100% of the
input tax deduction may be claimed- De minimus rule
If goods are used for making less then 95% then the input tax deduction
must be apportioned in accordance with the percentage made for taxable
and non taxable supplies.
Section 17– Permissible
deductions in respect of input tax
The only method of apportionment approved by SARS is the turnover
method of apportionment.
The formulae is as follows: A = B X C/D
A is the deductible input tax
B is the total amount of input tax
C is the value of all taxable supplies
D is the value of all supplies (both taxable and non taxable)
Section 17(2)- Prohibition of
Input Tax
Input tax may NOT be claimed by the vendor on the following…

◦ s17(2)(a) Goods/services acquired for the purpose of ‘entertainment’

◦ s17(2)(b) Fees or subscriptions paid by the vendor iro any membership of
any club, association, society… of a sporting or recreational nature
◦ s17(2)(c) Motor cars
Section 17(2)(a)- Prohibition of
Input Tax: Entertainment
The provision of any food, beverages, accommodation, entertainment, amusement etc of
any kind by a vendor whether directly or indirectly to anyone in connection with an
enterprise carried on by him…
EXCEPT…
Vendor makes taxable supplies of entertainment (s17(2)(a)(i)(aa))
Welfare organisation - provided those goods and services are acquired in furtherance of
the aims of the organisation. (s17(2)(a)(vi))
Personal subsistence for vendor/employee being ‘out-of-town’ (s17(2)(a)(ii))
Meals as part of a transport service where he charges VAT (s17(2)(a)(iii))
Seminars or similar events where direct and direct costs have been passed to the client.
(s17(2)(a)(iv))
Entertainment goods and services by a local authority as part of a sporting or recreational
facility to the public. (s17(2)(a)(v))
Input credits are otherwise allowed!
Section 17(2)(c)- Prohibition of
Input Tax: Motor cars
“Motor car” Definition page 392
Includes a motor car, station wagon, minibus, double cab light delivery
vehicle normally used on public roads; 3 or more wheels; wholly or mainly
for the carriage of passengers… EXCLUDING
◦ Cars capable of carrying only 1 or > 16 persons
◦ Unladen mass > 3 500 kg
◦ Caravans and ambulances
◦ Hearses, game-viewing vehicles
Notwithstanding the definitions, the input tax will be allowed if:-
◦ Motor car supplier acquires it for the purpose of making a taxable supply
◦ ‘Demo’ vehicles acquired for temporary use prior to a taxable supply
Denial only affects ‘acquisition’ cost…
Section 20 and Section 21
Page 422
Refer to section 20(1) and 20(4)

Page 424
Refer to section 21

Note the documentary requirements for credit notes and debit notes
are the same as for invoices
Section 22– Irrecoverable
Debts
Page 425
In terms of section 22(1) a vendor can deduct input tax deduction on a bad
debt
The vendor must have made entries in his accounting system to record that
the debt is written of and have ceased recovery action taken by himself.
In terms of section 22(2) an amount is subsequently recovered , output tax
must be accounted for on the amount recovered
Section 22(3) provides that where a vendor deducted input tax on a supply
from a creditor and has not paid the creditor within 12 months he must
account for output tax on the supply after 12 months have passed.
Section 22(4) provides that where a vendor does pay the supplier at a later
stage he is allowed to deduct input tax on the tax fraction of the amount
paid.
Section 22– Irrecoverable
Debts MOVEMENTS

SECTION ACTION INPUT/OUTPUT

Sale Output
22(1) Bad debt Input
22(2) Recover Output
Purchase Input
22(3) No payment: > 12 months Output 
22(4) Pay creditor subsequently Input 
Section 23- Registration
Section 23 confirms that if a person carries on an enterprise in the
Republic it has to register as a vendor provided the value of the taxable
supplies exceeded R1million at the end of any 12 month period.
With effect from April 2014 businesses will be required to register if the
taxable supplies have exceeded R1million for the 12 month period or
existing or future business have a contractual commitment to make
taxable supplies in the next period of 12 months.
Note that if there are reasonable grounds to believe that turnover will
exceed R1million in the next 12 months then registration is also
necessary.
A person can also register voluntarily if turnover in a 12 month period
has exceeded R50000 or is likely to exceed R50000.
Section 24 - Cancellation of
registration & 27(1) - Tax periods
Page 428
Section 24 provides that a vendor shall cease to be liable to be
registered where the Commissioner is satisfied that the total value of
the vendor’s taxable supplies will not be more than the amount referred
to in section 23 of the Act.
Page 428
Section 27(1) refers to the categories of vendors with A and B being
two month periods (A starting in December and B starting in January) C
being one month, D being 6 months (ending February and August) E
being 1 year
Section 32– Objections
Page 431
Section 32- any decision given in writing by the Commissioner to refuse
registration of a person or to cancel registration of a person or refusing
to approve a method for determining the ratio contemplated in section
17(1) is subject to objection and appeal.
Section 64- Prices deemed to
include tax
Page 440
Any price charged by a vendor on a taxable supply is deemed to include
VAT regardless of whether or not vendor has charged VAT.
Deposits on returnable containers are deemed to include VAT.
Section 65- Prices advertised or
quoted to include tax
Page 440
Any price advertised or quoted by a vendor must state it includes VAT.
It cannot state it excludes VAT.
If both the inclusive and exclusive price are advertised- both shown with
equal prominence and impact.
Vendor may show price exclusive of VAT, plus VAT, plus price inclusive of
VAT.- Commissioner may approve other methods.
Price tickets need not state VAT is included if this is stated prominently
at entrance to premises.
Cases
Barter transactions- South Atlantic Jazz Festival (Pty) Ltd
Recoveries- British Airways PLC
Zero-rated services- Stellenbosch Farmers Winery Limited AND Master
Currency (Pty) Ltd
Imported services, enterprise and input tax- De Beers
Barter transactions- South
Atlantic Jazz Festival (Pty) Ltd
•“Supply” definition includes barter transactions
•Barter: Goods supplied for a non-monetary consideration
•Held: VAT had to accounted for on taxable supplies
•Values based on sponsorship agreements
Recoveries- British Airways PLC
•Issue: Whether British Airways should levy VAT output on “passenger
service charge” which was charged by ACSA to BA and then passed on
to the customer.
•SARS: Agreed to the international fare flight being standard rated. SARS
argued section 8(15) applied and therefore the supply should be
standard rated.
•Held: The service was not performed by BA and therefore there was no
supply.
•Fully zero-rated
Zero-rated services- Stellenbosch
Farmers Winery Limited AND Master
Currency (Pty) Ltd
STELLENBOSCH
•Surrendering of a right constitutes a supply of a service
•Service rendered to a non-resident
•Zero-rating applied
•MASTER CURRENCY
•Foreign exchange services supplied in the duty free area of an
international airport are subject to VAT at standard rate.
•Zero-rating is not applicable if non-resident is in Republic
•S72: Supply of goods subject to VAT at zero-rate
Imported services, enterprise and
input tax- De Beers
•De Beers (the vendor) paid local and foreign consultants to advise them
on restructuring of shareholding
•This was independent of the core business of mining and selling
diamonds
•Held: No input could be claimed on consulting fees paid