Tutorial Letter 103/0/2020 - Unisa · 2020. 2. 13. · Due to Unisa's print schedule, this tutorial letter had to be submitted by December 2019 so that you would receive it on time

TAX4861/103/0/2020 NTA4861/103/0/2020

Tutorial Letter 103/0/2020

Advanced Taxation

Year module

Department of Financial Intelligence

This tutorial letter contains learning units 2 and 3 as well as self-assessment questions.

TAX4861 NTA4861

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ORIENTATION ............................................................................................................................ 4

I. INTRODUCTION ............................................................................................................... 4

II. STUDY PROGRAMME AND TIME FRAME ..................................................................... 4

III. ABBREVIATIONS ............................................................................................................. 5

IV. BEANCOUNTER SCENARIOS ........................................................................................ 5

V. LECTURERS .................................................................................................................... 5

VI. IMPORTANT DATES FOR THIS TUTORIAL LETTER .................................................... 5

WORK PLAN FOR DAY 1 (19 FEBRUARY 2020) ...................................................................... 6

SECTION A ................................................................................................................................. 6

1 INTERPRETATION OF LEGISLATION ............................................................................ 6

2 DONATIONS TAX ............................................................................................................. 6

2.1 BACKGROUND ......................................................................................................................... 6

2.2 OUTCOMES OF THIS LEARNING UNIT ................................................................................... 7

2.3 BEANCOUNTER SCENARIO .................................................................................................... 7

2.4 CONTENT FOR LEARNING UNIT 2 .......................................................................................... 8

2.4.1 Study approach ................................................................................................................... 8

2.4.2 Table of Reference .............................................................................................................. 8

2.4.3 Sections in SILKE you may ignore ...................................................................................... 9

2.5 LAW AMENDMENTS ............................................................................................................... 10

2.6 ADDITIONAL NOTES .............................................................................................................. 12

2.6.1 Framework for the calculation of donations tax .................................................................. 12

2.6.2 Impact of donations on other taxes .................................................................................... 13

2.7 OUTCOMES OF THE BEANCOUNTER SCENARIO ............................................................... 14

WORK PLAN FOR DAYS 2 - 5 (20 – 23 FEBRUARY 2020) .................................................... 16

3 VALUE-ADDED TAX (VAT) ............................................................................................ 16

3.1 BACKGROUND ....................................................................................................................... 16

3.2 OUTCOMES OF THIS LEARNING UNIT ................................................................................. 16

3.3 BEANCOUNTER SCENARIO .................................................................................................. 17

3.4 CONTENT FOR LEARNING UNIT 3 ........................................................................................ 17

3.4.1 Study approach ................................................................................................................. 17

3.4.2 Table of Reference ............................................................................................................ 19

3.4.3 Sections in SILKE you may ignore .................................................................................... 22

3.5 LAW AMENDMENTS ............................................................................................................... 22

3.6 ADDITIONAL NOTES .............................................................................................................. 26

3.6.1 Mind map representing an overview of VAT ...................................................................... 26

3.6.2 Mind map of the supply of goods and services – OUTPUT TAX ........................................ 28

TABLE OF CONTENTS

file:///C:/Users/britsl/Dropbox/UNISA/Post-grad%20Taxation/Tut%20letters%204861/TL103/2020/MU%20review/TAX4861_2020_TL_103_V2.docx%23_Toc25839831

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3.6.3 Services - SILKE par 31.5.3 .............................................................................................. 28

3.6.4 Exempt supplies: Other (including transport of fare-paying passengers and their personal effects by road or rail) - SILKE par 31.11.4 ........................................................................ 29

3.6.5 Deemed supplies: Ceasing to be a vendor - SILKE par 31.12.1 ........................................ 30

3.6.6 Time and value of supply - SILKE par 31.15 and 31.16 ..................................................... 32

3.6.7 Basics of input tax - SILKE par 31.17 ................................................................................ 39

3.6.8 Input tax: Denial of input tax - SILKE par 31.21 ................................................................. 40

3.6.9 Input tax: Importation of goods - SILKE par 31.8 ............................................................... 41

3.6.10 Special rules: fixed property - SILKE par 31.24 ................................................................. 41

3.6.11 Adjustments arising from the change in the use of goods or services or supplies of going concerns or leasehold improvements - SILKE par 31.25 to 31.31 ..................................... 43

3.7 OUTCOMES OF THE BEANCOUNTER SCENARIO ............................................................... 48

WORK PLAN FOR DAYS 6 - 7 (24 – 25 FEBRUARY 2020) .................................................... 50

SECTION B – SELF-ASSESSMENT QUESTIONS .................................................................. 50

SECTION C – PRIOR YEAR TEST ......................................................................................... 100

Please note

Due to Unisa's print schedule, this tutorial letter had to be submitted by December 2019 so that you would receive it on time. The latest amendments had not yet been promulgated and this means that this tutorial letter was based on the Amendment Bills as of October 2019. This should not affect the content of this module. However, should there be any major changes between the Amendment Bills and the promulgated Amendment Acts, we will communicate these to you.

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I. INTRODUCTION This tutorial letter is divided into two learning units. Learning unit (LU) 2 deals with donations tax and LU 3 deals with VAT. The goal of this tutorial letter is to assist you in making the most of the time available to master the topics in this tutorial letter. Follow the guidelines and try to keep to the allocated time (remember that time allocations are based on the assumption that certain topics have already been covered in your undergraduate studies).

II. STUDY PROGRAMME AND TIME FRAME

Your time should be divided into two parts:

Obtaining the required knowledge (24 hours) This would entail working through this tutorial letter and the textbooks (SAICA Student Handbook and SILKE), underlining, making summaries and familiarising yourself with the VAT Act and the Income Tax Act (section A of this tutorial letter).

Application of knowledge and revision of difficult concepts (6 hours) This would entail the completion of the self-assessment questions (sections B and C of this tutorial letter).

We assume that you have three hours of study time on a weekday/night and 15 hours over a weekend. We have based the work plan in this tutorial letter on this assumption.

Day Date Topic Hours

1 Wednesday 19 February 2020 LU 1 – Interpretation and application of legislation in TL 102 (30 minutes)

3 LU 2 - Donations Tax in Section A (2 hours and 30 minutes)

Question 1 of Section B

2 & 3 Thursday & Friday

20 - 21 February 2020 LU 3 – VAT in Section A 6

4 & 5 Week-end 22 – 23 February 2020 LU 3 – VAT in Section A 15

6 & 7 Monday & Tuesday

24 – 25 February 2020 Section B: self-assessment questions (Questions 2 – 14)

6

30 hours

ORIENTATION

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III. ABBREVIATIONS

The list of abbreviations used in the tutorial letters is contained in TL 102. Please take note of the following additional abbreviation relevant to this tutorial letter:

Abbreviation Meaning of abbreviation

OMV Open market value

IV. BEANCOUNTER SCENARIOS Refer to TL 102 to meet the Beancounter family.

V. LECTURERS The following lecturers compiled this tutorial letter: Ms L Brits Ms A Heyns Ms M Ungerer Please contact any of the tax lecturers should you have questions regarding this tutorial letter. You may also send your queries (regarding administrative and academic matters) and comments via e-mail to [email protected] (note that e-mail correspondence is the preferred method of communication – refer to TL 101 in this regard). For queries regarding administrative matters, please contact the administrative officer at +27 12 429 2947. For queries regarding academic matters, you can contact any of the lecturers directly or you can contact the administrative officer. The administrative officer will put you in touch with the relevant lecturer on duty.

VI. IMPORTANT DATES FOR THIS TUTORIAL LETTER

Date of test 1: TUESDAY, 10 March 2020

The topics covered in both TL 103 and TL 104 as well as any relevant case law in TL 102 will be assessed in Test 1.

mailto:[email protected]

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WORK PLAN FOR DAY 1 (19 FEBRUARY 2020)

SECTION A

Time allocation for learning units 1 and 2 : Interpretation and application of legislation (LU 1) (TL 102) 0.5 hours

Donations tax (LU 2) 2.5 hours

Total 3 hours

Note that this is a lot of work to master in the allocated time, however most topics would have been covered in depth in your first year of postgraduate studies. You will probably not have time to study every section in detail again, but will have to rely on your prior knowledge. Where necessary, you should refresh your memory regarding sections you already know.

1 INTERPRETATION OF LEGISLATION The content of LU 1 is contained in TL 102. LU 1 will provide you with the skills on how to interpret legislation.

Work through LU 1: "Interpretation and application of legislation" in TL 102. This should assist you in the optimal use of the Student Handbook.

2 DONATIONS TAX

2.1 BACKGROUND Donations tax is, although levied in terms of PART V of the Income Tax Act (sections 54 to 64), a separate tax from income tax. It is payable on the transfer of assets from one person (not necessarily a taxpayer) to another. Take note that donations tax could also affect the calculation of capital gains tax, where an asset (as opposed to cash) is donated. You therefore also have to refer to the applicable paragraphs in the Eighth Schedule to the Income Tax Act.

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2.2 OUTCOMES OF THIS LEARNING UNIT

After studying LU 2, you should be able to achieve the following outcomes:

Achieve all the outcomes listed at the beginning of chapter 26 (Donations Tax) of SILKE.

Explain and calculate the capital gains tax implications in terms of the Eighth Schedule to the Income Tax Act in the event of a donation.

Before you start studying the detailed provisions of donations tax, you should first read the following scenario relating to the Beancounter family. As you study the applicable sections in the Income Tax Act, identify areas of concern that should be brought to the attention of the Beancounter family.

2.3 BEANCOUNTER SCENARIO Barry Beancounter is married in community of property to Bizzie Beancounter. Barry is a very charitable person, as he made a number of donations during the year.

He donated R40 000 cash to the Butterbean Family Trust, R20 000 cash to his lovely wife, Bizzie, and R20 000 cash to each of his children, Jelly and Soya Beancounter.

He also donated R5 000 to the B.E.A.N. political party.

Barry is considering whether or not to sell a property with a market value of R500 000 to the Butterbean Family Trust, funded by an interest-free loan account. This property is excluded from Barry and Bizzie’s joint estate. The journal entry will be recorded as follows in the financial records of the trust:

Dr Property R500 000 Cr Loan account: B Beancounter R500 000

He also is also considering whether he should make another donation to the trust utilising the rest of his R100 000 annual exemption (remember there is an existing loan [see above] that the trust owes Barry).

All cash donations (except for the donation to Bizzie) were made (and in future will be made) from funds available in an investment account. This investment is included in Barry and Bizzie’s joint estate.

Barry is, however, uncertain about the donations tax and capital gains tax implications (if any) that may arise from the above donations he made during the year, as well as those that he is considering and he has therefore asked you to assist him.

Before attempting to assist Barry with his donations tax and capital gains tax query, you should first work through and master the applicable sections in the Income Tax Act relating to donations tax.

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2.4 CONTENT FOR LEARNING UNIT 2

2.4.1 Study approach We provide you with a Table of Reference which contains the references to all the sections which must be studied in this learning unit together with a reference to the relevant paragraph in SILKE and a reference to additional notes provided (if any) in the tutorial letter, as well as an indication of whether a specific section is examinable or not. The Table of Reference is presented in such a way that you should use it to guide you through the content of the learning unit in this tutorial letter. You should therefore work your way through the content by starting at the top of the table and working your way through to the end. The ideal way to study tax is to first read the specific section in the Income Tax Act and then to study the relevant paragraph(s) in SILKE together with any additional notes on that section included in this tutorial letter. We recommend that you study any additional notes on the section first before working through the paragraph(s) in SILKE. Also work through the examples in SILKE, because the examples illustrate the application of the theory of a section. We are not ignorant of the fact that most of our students study part time. We therefore realise that you may not always have the time available to follow the above study approach fully, with specific reference to our recommendation that you first read a section in the Income Tax Act. However, you still need to flag and underline your Income Tax Act in order for you to benefit from the limited open book policy for the TAX4861 tests, the examination and the 2021 ITC. SILKE has a Table of provisions towards the back (just before the Subject index). This is a handy table to use if you have a specific section on which you need more information. The table provides the paragraphs in SILKE which contain information on a specific section.

2.4.2 Table of Reference

Reference to Income

Tax Act Topics

Reference to SILKE

Reference to notes in

the TL Examinable

Day 1: Wednesday 19 February 2020 (2.5 hours)

Sections 54 to 64

Donations tax

Framework for the calculation of donations tax 26.1 2.6.1 s 54 Levy of donations tax 26.1 – 26.2 Yes s 64 Rate of donations tax 26.2 2.5 Yes s 55 Definitions for purposes of this part 26.3 – 26.4 Yes s 58(1) Property disposed of under certain transactions

deemed to have been disposed of under a donation

26.5 Yes

s 58(2) No s 7C Loan or credit advanced to a trust by a

connected person (Effective 1 March 2017)

26.10 2.5 Yes (also

TL106)

s 7C(5)(a), (b), (c), (f) & (h) No

S 7D Calculation of amount of interest 26.10 Yes (also

TL106) s 56 Exemptions 26.6 2.6.2 Yes

s 56(1)(o) No

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Reference to Income

Tax Act Topics

Reference to SILKE

Reference to notes in

the TL Examinable

s 57A Donations by spouses married in community of property

26.7 Yes

s 57 Disposals by companies under donations at the instance of any person

26.8 Yes

s 62 Value of property disposed of under donations 26.9 – 26.9.1 Yes

s 62(1)(a)–(c): the value of limited interests in property and annuities will be given

26.9.2 – 26.9.4

s 59 Persons liable for the tax 26.11 Yes

s 60 Payment and assessment of the tax 26.11 Yes

s 61 Extension of scope of certain provisions of Act for purposes of donations tax

No

Other tax consequences of donations (refer below)

26.12

8th Sch Donations and Capital Gains Tax

Disposals and acquisitions

par 11(1) Disposals

17.7.1 Yes

Base cost

par 20 Base cost of asset (Only the basic principles)

Yes

par 22 Amount of donations tax to be included in base cost

17.8.7 Yes

Proceeds par 38 Disposal by way of donation, consideration not

measurable in money and transactions between connected persons not at an arm’s length price

17.9.5 Yes

Exclusions

par 62 Donations and bequests to public benefit organisations and exempt persons

17.10.2 Yes

Roll-overs

S 9HB Transfer of asset between spouses 17.10.3.3 Yes

Questions and examples

Work through Example 26.14 in SILKE 26.13

Do Question 10.1 in AQSAT

Do Question 1 in Section B of this TL

2.4.3 Sections in SILKE you may ignore

Note that regarding the calculation of the value of limited interests (SILKE – par 26.9.2 to 26.9.4) you need not know how to do the complex calculations (value of limited interests in property will be provided in questions). You will be required to determine which value to use for the limited interests taking the provisos of section 62 into account.

You must also be able to recognise and define the meaning of a fiduciary interest, usufruct and bare dominium, as described in the first few paragraphs of par 26.9.2 in SILKE.

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2.5 LAW AMENDMENTS The taxation laws are amended annually. These amendments are firstly published in the form of draft Bills and then as Bills. Only once the Bills have been passed through Parliament and once it is then assented to by the President, it is published as Acts. It is normally expected that the Bills will be enacted early in the following year. The study material in this tutorial letter is based on amendments as proposed in the Bills. The publishing of the Bills coincides with the Medium Term Budget Policy Statement (MTBPS) made by the Minister of Finance. The last MTBPS was made on 30 October 2019 and the following Bills, relevant to your studies, were published:

Rates and Monetary Amounts and Amendment of Revenue Laws Bill 17 of 2019;

Taxation Laws Amendment Bill 18 of 2019; and

Tax Administration Laws Amendment Bill 19 of 2019. The important proposed amendments which are applicable to this LU are summarised below. In some instances we repeat amendments from previous years which were enacted for your reference.

Relevant amendments contained in the Taxation Laws Amendment Bill 18 of 2019, are as follows:

Amendment of paragraph 38(1) of the 8th Schedule to the Income Tax Act:

Paragraph 38 stipulates that the transfer of assets by means of a donation, or for a consideration not in money, or to a connected person are deemed to be at market value.

However, paragraph 38 is subject to section 9HB. The wording of paragraph 38 has now been amended to correctly refer to section 9HB.

Words were further added to paragraph 38 that now refers to a connected person immediately prior to or immediately after that disposal.

Section 9HB deals with the roll-over provisions of assets between spouses and takes priority over paragraph 38. Therefore, assets transferred (donated) between spouses will not deemed to be at market value.

This amendment comes into operation on the date of promulgation of the Taxation Laws Amendment Act of 2019.

Amendment of paragraph 38(1)(b) of the 8th Schedule to the Income Tax Act:

The base cost of an asset received as a donation is also deemed to be the market value. This market value must be treated as “an amount of expenditure actually incurred” for the purposes of par 20(1)(a). Previously the paragraph stipulated “incurred and paid”. The words “and paid” have now been deleted.

This amendment comes into operation on the date of promulgation of the Taxation Laws Amendment Act of 2019.

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Relevant amendments contained in the Rates and Monetary Amounts and Amendment of Revenue Laws Bill 37 of 2018 and the Taxation Laws Amendment Bill 38 of 2018, are as follows:

Amendment to section 7C:

The provision that section 7C also applies to a loan made to a company in which the trust or a beneficiary of the trust holds at least 20 percent of the equity shares or voting rights (section 7C(1)(b)(ii)) has been amended so that the provision will apply where 20 percent of the equity shares are held by a trust alone or jointly with any person that is a beneficiary of that trust or the spouse of a beneficiary or any person related to that beneficiary or that spouse within the second degree of consanguinity.

This amendment will apply retrospectively and is deemed to have come into operation on 19 July 2017 and applies to a loan, advance or credit provided before, on or after that date.

Amendment to section 7D:

Section 7D that overrides the application of common law principles and the statutory law in duplum rule in the calculation of deemed interest (and thus applies to the deeming provisions of section 7C), has been amended to provide that the interest will be equal to simple interest calculated on the amount of the debt on a daily basis.

Section 7D applies from 1 January 2018.

See SILKE par 26.10 for more information.

Amendment of section 64:

Section 64 levies donations tax at 20% on the value of property donated. The donations tax rate has been amended to provide for 2 different rates, namely:

- 20% of the value where the aggregate of that value and the value of any other property donated until the date of that donation (thus all prior donations are taken into account) does not exceed R30 million; and

- 25% of the value where the aggregate value (i.e. the value of the current donation + the value of all prior donations up to that point) exceeds R30 million.

This amendment is deemed to have come into operation on 1 March 2018.

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2.6 ADDITIONAL NOTES 2.6.1 Framework for the calculation of donations tax

References to the Income Tax

Act

NO

DID A RESIDENT DISPOSE OF THE PROPERTY?

Sections 1 and

54

YES

NO

WAS THIS PROPERTY DISPOSED OF UNDER ANY

DONATION OR DEEMED DONATION?

Sections 54, 55,

58 and 7C

YES

YES

IS THE DONATION EXEMPT FROM DONATIONS

TAX?

Section 56(1) and 56(2)(c)

NO

CALCULATE THE VALUE OF THE DONATION.

Section 62

CALCULATE THE TAXABLE DONATION

= VALUE OF DONATION LESS BALANCE OF EXEMPTION (not a natural person: R10 000 per

annum for casual gifts; natural person: R100 000 per annum)

(exemption applied in order that donations take effect)

Section 56(2)(a), (b) and section

60(2)

NO DONATIONS

TAX PAYABLE

CALCULATE DONATIONS TAX

TAXABLE DONATION x 20% or 25% (where the aggregate of donations exceed R30 million)

Section 64

Notes to the framework

1. Donations tax is payable on the fair market value of any property disposed of gratuitously or for less

than the fair market value by a South African resident. 2. Donations tax must be calculated separately on each donation as and when the donation takes place

and not at the end of the year of assessment (except for deemed donations in terms of section 7C).

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The R100 000 exemption, applicable to natural persons, and the R10 000, applicable to persons who are not natural persons, must therefore be applied in the order that the donations take place.

3. The R100 000 exemption, applicable to natural persons, applies to all property donated and is not

apportioned where the period of assessment is less than a full year. The R10 000 exemption, on the other hand, applicable to a donor that is not a natural person, only applies to casual gifts and it must be apportioned where the period in question exceeds or is less than 12 months.

Donations tax does not apply to non-residents, even if they donate South African assets.

Donations tax is payable by the end of the month following the month during which the donation takes effect (i.e. if a donation is made in January, the donations tax is payable by the end of February.

Do not confuse the section 18A deduction (deductible donations to certain organisations) from taxable income with the donations tax provisions. Even if no donations tax is payable on a specific donation, it does not mean that the specific donation may be deducted for normal tax purposes. Consider the provisions of section 18A to determine the deductibility for normal income tax purposes.

2.6.2 Impact of donations on other taxes A donation may affect many more items than merely donations tax. You may be required to consider the capital gains tax or normal tax (including income tax and capital gains tax) implications of a donation. Donations tax may therefore be combined/integrated with topics that will only be addressed in future tutorial letters, for example:

Meaning of “resident” – TL 104

Capital gains tax – TL 104

Trusts (section 7) – TL 107

Income tax (section 18A – deduction of donations to certain organisations) – TL 105 and TL 107.

With the amendment to the donations tax rate from 20% to 25% in the instance where a donation is made and the aggregate value exceeds R30 million, the question in a test or the exam will contain the necessary information to determine whether the higher donations tax rate of 25% applies. If no such information is given, the assumption is that the aggregate value does not exceed R30 million and the 20% donations tax rate is applicable.

In the questions contained in this tutorial letter the assumption is that the aggregate value of donations made, does not exceed R30 million. However, please take note that either of the rates can be tested in a test or the exam.

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Read the Beancounter scenario again and make a rough summary of what your solution would be. Now read the outcomes of the scenario to determine if your answer is correct.

2.7 OUTCOMES OF THE BEANCOUNTER SCENARIO After you have studied donations tax, you should be able to answer Barry Beancounter’s query on donations tax. In formulating your advice, you should have considered the following:

For persons married in community of property, it is important to establish if the property falls in the joint estate or if it is excluded from the joint estate. The effect is explained in section 57A (refer to SILKE, par 26.7).

Section 56(1) exemptions from donations tax must be considered, for example, donations to the spouse (section 56(1)(b)) or to any political party (section 56(1)(h)).

Barry may be taxed on some of the income from the trust (donations in terms of section 7 – refer to TL 107).

Also, note the order of donations in the case of multiple donations (section 60(2)).

Donations tax payable R

Donation of R40 000 to the Butterbean Family Trust (R100 000 ([section 56(2)(b) exemption] – R40 000 / 2 [donation out of joint estate] = R80 000 [remaining balance of exemption])

-

Donation to his wife, Bizzie – exempt (section 56(1)(b)) -

Donation of R20 000 to Jelly (R80 000 [balance of section 56(2)(b) exemption] – R20 000/2 [donation out of joint estate] = R70 000 [new balance of exemption])

-

Donation of R20 000 to Soya (R70 000 [balance of section 56(2)(b) exemption] – R20 000/2 [donation out of joint estate] = R60 000 [new balance of exemption])

-

Donation to B.E.A.N. political party – exempt (section 56(1)(h)) -

All of the above taxable donations will be exempt from donations tax, as the first R100 000 of donations made by a natural person during a year of assessment are exempt from donations tax (section 56(2)). The R100 000 must be applied in the order that the donations take place, as donations tax must be calculated separately on each of the donations as and when they take place. Donations tax is payable by the end of the month following the month in which the donation takes effect.

If Barry sells the property at the market value of R500 000 to the Butterbean Family Trust and the purchase price is settled with an interest-free loan from himself, he is deemed to have made a continuing donation in terms of section 7C (with effect from 1 March 2017) and donations tax may be payable. The deemed donation is NOT the amount of the selling price, but is rather equal to the foregone interest during the year (i.e. the difference between interest incurred at the official interest rate on the last day of the trust’s year of assessment and the actual interest incurred). The donation is deemed to have been made by Barry to the Butterbean Family Trust on 28 February 2020 (in terms of the provisions of section 7C). Donations tax is payable by Barry by 31 March 2020.

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Also, for income tax purposes, a low-interest or interest-free loan is a continuing donation in terms of section 7. Both sections 7 and 7C will further be dealt with in TL 107.

If Barry decides to make a further donation to the trust, you will have to establish if he has made a cash donation or if he has waived a portion of the loan owed by the trust. Waiving part of a loan is often done by utilising the R100 000 (or portion thereof – the remaining balance, if any) annual exemption from donations tax. If this is the case, the waiver of the loan will have capital gains tax implications for the trust (paragraph 12A of the Eighth Schedule), or it might have section 19 implications. Note that, if it constitutes a donation or a deemed donation, neither paragraph 12A of the Eighth Schedule nor section 19 of the Income Tax Act will be applicable. Capital gains tax will be discussed in TL 104 and section 19 is dealt with in TL 105. If he makes a cash donation after the previous donations have been made, but before 28 February 2020 (the end of the year of assessment, i.e. the date of the deemed donation in terms of section 7C), he can make a donation of R120 000 without paying any donations tax, as it will be paid out of the joint estate. Therefore, his donation will be R60 000 and he will still have a section 56(2)(b) exemption of R60 000 that he may utilise. Bizzie, on the other hand, might have to pay donations tax if she has no portion of the section 56(2)(b) exemption available. If this is the case and he has utilised the entire R100 000 annual exemption, he will pay donations tax on the full value of the deemed donation in terms of section 7C (refer to previous bullet).

Whenever there is a “donation, settlement or other disposition” in terms of section 7, the sub-sections of section 7 will be applicable on the income received by or accrued to a beneficiary from a donated asset. This section will be dealt with in TL 107.

An interest-free loan is a continuing donation for purposes of section 7 (income tax), as well as for purposes of section 7C (donations tax).

___________________________

END OF LEARNING UNIT 2

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WORK PLAN FOR DAYS 2 - 5 (20 – 23 FEBRUARY 2020)

Time allocation for learning unit 3 – VAT – 21 hours

3 VALUE-ADDED TAX (VAT) 3.1 BACKGROUND

After the completion of the first year of your postgraduate studies, you should have a basic knowledge of VAT. In this learning unit, you should concentrate on those areas that were not covered in your previous studies and master complex issues. While studying, ensure that you can also apply the theory to a practical situation. When you plan your study time, bear in mind the sections that are examinable in terms of the syllabus and those sections that are excluded from the syllabus (reflected in the Table of Reference (below) in this learning unit).

3.2 OUTCOMES OF THIS LEARNING UNIT

After studying LU 3, you should be able to meet all the outcomes listed at the beginning of chapter 31 of SILKE.

Before you start studying the detailed provisions of the VAT Act, read the following scenario relating to the Beancounter family. The scenario provided requires that you first carefully read the information provided. Then, as you study the different VAT provisions, identify areas of concern that should be brought to the attention of the Beancounter family.

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3.3 BEANCOUNTER SCENARIO Bizzie Beancounter has decided to start her own business venture as a sole proprietor. She has located the perfect premises that is currently available for letting. She will start a dry cleaning business in her own name (recognised as a process of manufacture by the Commissioner) on 1 May 2019 (with a February year-end). She will employ four permanent staff members (non-connected persons) and she herself will take care of the day-to-day management of the business. Bizzie will import two dry-cleaning machines from Europe, which will have arrived by 1 May 2019.

Bizzie has signed contracts with a few local restaurants to render dry-cleaning services to them with effect from May 2019. Her monthly turnover in terms of these agreements will be R85 000 for the first six months, increasing by 10% for every consecutive six-month-period.

However, Bizzie is uncertain about what (if any) VAT implications might arise from her business venture and she has asked you to identify all the VAT areas which may affect her business.

Six months have passed since your first meeting with Bizzie when she phones you to set a date for a second meeting. The dry-cleaning business is operating very successfully and Bizzie feels that it is time for one or two changes:

The rented premises has become too small for Bizzie’s business venture and she wants to buy a house in Justice Mahomed Street, Pretoria, from where she will operate the business. She will buy the house from Ancient Eve, a 72-year-old woman who can no longer manage the old residence on her own (Ancient Eve is not a VAT vendor). The house has a separate, one-bedroom flat, which Ancient Eve wants to rent from Bizzie after the sale. The flat occupies 10% of the floor space of the residence.

Bizzie wants to incorporate a collect-and-deliver dry-cleaning service into the business and she will need to buy a delivery truck for this purpose. Peter a current employee will do all the driving for business purposes. He will also be able to use the vehicle for private purposes during evenings and over weekends. All expenses relating to the delivery truck will be paid by the business.

3.4 CONTENT FOR LEARNING UNIT 3

3.4.1 Study approach In this learning unit, we again provide you with a Table of Reference (below); however, we recommend that you study VAT in the sequence as set out in SILKE. We therefore provide you with this table, which divides the content of the SILKE chapter into the time available, together with references to additional notes in this tutorial letter. You should use this table to guide you through the content of this learning unit. Also, refer to the prescribed cases (indicated in the table) to be studied (refer to the relevant summaries in TL102).

Par in SILKE

Topic Additional

notes in the TL

Day 2: Thursday 20 February 2020 (3 hours)

31.1 Overview of VAT 3.6.1

31.2 Calculation of VAT

31.3 The accounting basis (s 15)

31.4 Tax periods (s 27)

31.5 Output tax (supply of goods and services) (s 7(1)) 3.6.2 & 3.6.3

18 TAX4861/103/2020

Par in SILKE

Topic Additional

notes in the TL

31.6 Vendor (ss 23, 50, 50A, 51(2) and 22 of the TAA)

31.7 Output tax (in the course or furtherance of an enterprise) (s 7(1)(a))

31.8 VAT levied – importation of goods (ss 7(1)(b) and 13) 3.6.9

31.9 VAT levied – imported services

CSARS v De Beers Consolidated Mines Ltd (74 SATC 330) TL 102

31.10 Output tax (zero rated supplies)

Interpretation note: No. 103 – The Value-added tax treatment of supplies of international and ancillary transport services

Stellenbosch Farmers’ Winery Ltd v CSARS [2012] (77 SATC 235) TL 102

Master Currency (Pty) Ltd v C: SARS [2013] 3 All SA 135 (SCA) TL 102

Interpretation note: No. 85 – The Master Currency case and the zero-rating of supplies made to non-residents

Interpretation note: No. 57 – Sale of an enterprise or part thereof as a going concern

31.11 The taxable supply of commercial accommodation & exempt supplies 3.6.4

Day 3: Friday 21 February 2020 (3 hours)

31.12 Output tax (deemed supplies) (ss 8 and 18(3)) 3.6.5

CSARS v British Airways PLC [2005] JOL 14066 (SCA) TL 102

31.13 Output tax (non-supplies) (ss 8(3), (4), (14), (25), 9(2)(b) and (c) and 10(11))

31.14 Output tax (no apportionment) (s 8(16))

31.15 Time of supply (s 9) 3.6.6

31.16 Value of supply (s 10(2)) 3.6.6

Interpretation note: No. 70 - Supplies made for no consideration

Day 4 and 5: Week-end 22 – 23 February 2020 (15 hours)

31.17 Basics of input tax (ss 16 and 17) 3.6.7

31.18 Tax invoices (ss 16(2) and 20)

31.19 Debit and credit notes (s 21)

31.20 The determination of input tax (s 17)

CSARS v De Beers Consolidated Mines Ltd [2012] (74 SATC 330) TL 102

31.21 Input tax (denial of input tax) (s 17(2)) 3.6.8

Interpretation note: No. 82 – Input tax on motor cars

31.22 Input tax (second-hand goods) (ss 1, 18(8) and 20(8))

31.23 Special rules – instalment credit agreements

31.24 Special rules – fixed property 3.6.10

31.25 – 31.31

Adjustments 3.6.11

31.32.1 Pre-incorporation expenses (s 19)

31.32.2 Agents (ss 8(20), 16(2) and 54)

31.33 Foreign electronic services (s 1 definition of enterprise, ss 23(1) and 54(2B))

31.34 The influence of VAT on income tax calculations

Work through examples 31.60 & 31.61 in SILKE.

19 TAX4861/103/2020

3.4.2 Table of Reference The Table of Reference contains the references to all the sections in the VAT Act and TAA which must be studied in this learning unit as well as an indication of whether a specific section is examinable or not.

Reference to the

VAT Act Topics

Reference to SILKE

Examinable

Sections of the VAT Act

s 1 All definitions, except for the following: Various Yes

(It will be stated if a service is an “electronic service” or a person is an “intermediary”.) “association not for gain”, “Controller”, “customs authority”, “customs controlled area”, “customs controlled area enterprise”, “designated entity”, par (b)(i) – (v) of the definition of “enterprise”, proviso (vi), (viii), (x), (xi) & (xii) to the definition of “enterprise”, paragraph (d) of the definition of “exported”, “foreign donor funded project”, “grant”, “inbound insurance policy”, “international journey”, “licenced customs and excise storage warehouse”, “outbound insurance policy”, “public authority”, “SEZ”, “SEZ operator”, “share block company”, “Share Blocks Control Act”, “Special Economic Zones Act”, “storage warehouse”, “welfare organisation”

No

s 2 Financial services

31.11.1 Yes

Debt security s 2(1)(c), issue, allotment or transfer of ownership of an equity security (d), provision of credit (f), provision of long-term insurance (i) and the issue, acquisition, collection, buying or selling or transfer of ownership of any cryptocurrency (o).

Rest of the section No

s 3 Determination of "open market value" Yes

s 4 Administration of VAT Act No

s 5 Exercise of powers and performance of duties No

s 6 Secrecy No

s 7 Imposition of VAT 31.5, 31.7, 31.8 & 31.9

Yes

Sub-section 7(3) No

s 8 Certain supplies of goods or services deemed to be made or not made

31.12, 31.13 & 31.14

Yes

Sub-sections (2A) – (2G), (5), (5A), (5B), (6), (13), (13A), 14(b), (14A), (17) – (20), (22) – (24), (26) & (28)

No

s 8A Sharia-compliant financing arrangements No

s 9 Time of supply 31.15 Yes

Sub-sections (2)(d), (3)(e), (3)(f), (9), (10) & (11) No

s 10 Value of supply of goods or services 31.16 Yes

Sub-sections (4A), (8), (14), (17), (17A), (21A), (22A&B), (24), (25) & (27)

No

s 11 Zero-rating 31.10 Yes

s 11(1) Supply of goods 31.10.1 Yes

Sub-sections (1)(a)(ii), (b) - (d), (f), (g), (hA), (m), (mA), (n), (p), (r) - (v)

No

s 11(2) Supply of services 31.10.2 Yes

Sub-sections (2)(g), (h), (j), (m), (n), (q), (s), (t), (u), (v), (x) No

20 TAX4861/103/2020

Reference to the

VAT Act Topics

Reference to SILKE

Examinable

s 11(3) Principle 31.10.2 Yes

s 12 Exempt supplies 31.11 Yes

Sub-sections (b), (d), (e),(f), (k), (l) & (m) No

s 13 Collection of tax on importation of goods, determination of value thereof and exemptions from tax 31.8 Yes s 13(2B) – value will be provided

Sub-sections (5) & (6) No

s 14 Collection of VAT on imported services, determination of value thereof and exemptions from tax

31.9 Yes

Sub-section (4) No

s 15 Accounting basis 31.3 Yes

Sub-sections (2)(a), (2A), (3) – (9) No

s 16 Calculation of tax payable 31.2 & 31.17 Yes

(excluding broad area exclusions, e.g. prizes and gambling) No

s 17 Permissible deductions in respect of input tax 31.20 & 31.21 Yes

Sub-section (2)(ix) No

s 18 Change in use adjustments 31.12, 31.25 – 31.28

Yes

Excluding turnover tax provisions & s 18(4)(a), (4)(b), (9), & 18(10)

No

s 18A Adjustments in consequence of acquisition of going concern wholly or partly for purposes other than making taxable supplies

31.29 Yes

s 18B Temporary letting of residential fixed property No

s 18C Adjustments for leasehold improvements 31.30 Yes

s 19 Goods or services acquired before incorporation 31.32.1 Yes

s 20 Tax invoices 31.18 Yes

s 21 Credit and debit notes 31.19 Yes

s 22 Irrecoverable debts 31.31 Yes

s 23 Registration of persons making supplies in the course of enterprises

31.6 & 31.33 Yes

Sub-section (3)(b)(ii)(AA), (3A) & (5) No

s 24 Cancellation of registration 31.6 Yes

s 25 Vendor to notify change of status No

s 26 Liabilities not affected by person ceasing to be vendor 31.6.1 No

s 27 Tax period (category will be given) 31.4 Yes

Sub-section (2) – (5) No

s 28 Returns and payments of tax No

s 29 Special returns No

s 31 Assessments No

s 32 Objections to certain decisions or assessments Yes

s 38 Manner in which tax shall be paid No

s 39 Penalty for failure to pay tax when due No

s 40C Liability of bargaining councils or political parties for tax and limitations of refunds

No

s 40D Liability for tax and limitations of refunds in respect of National Housing Programmes

No

s 41 Liability for tax in respect of certain past supplies or importations

No

s 41B VAT class rulings and VAT rulings No

s 44 Refunds No

21 TAX4861/103/2020

Reference to the

VAT Act Topics

Reference to SILKE

Examinable

s 45 Interest on delayed refunds No

s 46 Persons acting in a representative capacity No

s 50 Separate enterprises, branches and divisions 31.6 Yes

Proviso to section 50(1) No

s 50A Separate persons carrying on same enterprise under certain circumstances deemed to be single person

31.6 Yes

s 51 Bodies of persons, corporate or unincorporated (other than companies)

No

s 52 Pooling arrangements No

s 53 Death of vendor Yes

Insolvency of vendor No

s 54 Agents (excluding auctioneers) (It will be clear from the information that there is an agent/principal relationship)

31.32.2 Yes

Intermediaries (s 54(2B)) 31.33 Yes

Sub-section (2A)(b) No

s 55 Records No

s 58 Offences No

s 61 Recovery of tax from recipient No

s 64 Prices deemed to include tax Yes

s 65 Prices advertised or quoted to include tax Yes

s 66 Rounding-off of the tax No

s 67 Contract price or consideration may be varied according to rate of VAT

No

s 67A Application of increased or reduced tax rate No

s 67B Registration of motor vehicles prohibited in certain circumstances

No

s 68 Tax relief allowable to certain diplomats and diplomatic and consular missions

No

s 72 Arrangements and directions to overcome difficulties, anomalies or incongruities

No

s 73 Schemes for obtaining undue tax benefits No

s 74 Schedules and regulations No

s 75 Tax agreements No

s 78 Transitional matters No

s 78A Transitional matters: Turnover tax No

s 85 Repeal of laws No

s 86 Act binding on State, and effect of certain exemptions from taxes

No

s 86A Provisions relating to special economic zones No

s 87 Short title No Schedules to the VAT Act 1 Exemption: Certain Goods Imported in the Republic No 2 Part A No 2 Part B: Zero rate: Supply of goods consisting of certain

foodstuffs 31.10.4 Yes

2 Part C: Section 11(1)(w) of this Act 31.10.4 Yes

22 TAX4861/103/2020

Interpretation notes Silke par

Interpretation Notes will no longer be included in the SAICA Student Handbook, but to the extent that an Interpretation Note creates a practice generally prevailing (refer to section 5 of the Tax Administration Act), the relevant extract will be provided in the test or exam. Interpretation Notes are available at https://www.sars.gov.za/Legal/Interpretation-Rulings/Interpretation-Notes/Pages/Numbers_1-20.aspx

Interpretation note: No. 30. Date: 5 May 2014 – The supply of moveable goods as contemplated in section 11(1)(a)(i) read with paragraph (a) of the definition of “exported” and the corresponding documentary proof (Section 1(1), par (a) of the definition of exported”, sections 11(a)(i) and 11(3))

31.10.1.1

Interpretation note: No. 31. (Issue 4) Date: 9 March 2016 – Documentary proof required for the zero-rating of goods and services (Section 11(3) read with section 11(1) and (2))

31.10.2 & 31.10.4

Interpretation note: No. 42. (Issue 2) Date: 12 December 2016 – The supply of goods and services by the travel and tourism industry (Section 7(1)(a), 11(1)(a) and 11(2)(l))

31.10.2.3

Interpretation note: No. 56. (Issue 2) Date 31 March 2014 – Recipient created tax invoices; credit and debit notes (Sections 20(2) and 21(4)) See BGR 15 (Issue 2)

31.18

Interpretation note: No. 57. Date: 31 March 2010 – Sale of an enterprise or part thereof as a going concern (sections 8(7), 8(16), 11(1)(e) & 18A)

31.10.3.1 & 31.10.3.2

Interpretation note: No. 70. Date: 14 March 2013 – Supplies made for no consideration (sections 1(1) definition of ‘enterprise’, ‘taxable supply’ ‘input tax’ and ‘consideration’, (sections 10(4), 10(23))

31.16.7

Interpretation note: No. 82. Date: 25 March 2015 – Input tax on motor cars (sections 1(1), 17(2)(c) & 18)

31.21.3

Interpretation note: No. 83. (Issue 2) Date 9 April 2015 – Application of sections 20(7) and 21(5) (Sections 20(4), (5), (7), 21(1) and (5)) See BGR 27

31.18

Interpretation note: No. 85. Date: 27 March 2015 – The Master Currency case and the zero-rating of supplies made to non-residents (section 11(2)(l))

31.10.2.3

Interpretation note: No. 92. Date: 24 October 2016 – Documentary proof prescribed by the commissioner (Sections 16(2)(f) and 16(3)(c) to (n))

31.17 & 31.18

Interpretation note: No. 103. Date: 14 September 2018 – The Value-added tax treatment of supplies of international and ancillary transport services (Section 11(2)(a), (b), (c), (d) & (e))

31.10.2.1

3.4.3 Sections in SILKE you may ignore

When working through chapter 31 in SILKE, you may IGNORE all paragraphs of the text with shaded headings. The following broad area exclusions from the SAICA syllabus relates to VAT: Special Economic Zones; Custom Controlled Areas; Municipalities, municipal entities, welfare organisations and organisations not for gain; and Donor funded projects.

3.5 LAW AMENDMENTS The important proposed amendments which are applicable to this LU are summarised below. In some instances we repeat amendments from previous years which were enacted for your convenience.

https://www.sars.gov.za/Legal/Interpretation-Rulings/Interpretation-Notes/Pages/Numbers_1-20.aspxhttps://www.sars.gov.za/Legal/Interpretation-Rulings/Interpretation-Notes/Pages/Numbers_1-20.aspx

23 TAX4861/103/2020

Relevant proposed amendments to the VAT Act contained in the Rates and Monetary Amounts and Amendment of Revenue Laws Bill 17 of 2019, the Taxation Laws Amendment Bill 18 of 2019 and the Tax Administration Laws Amendment Bill 99 of 2019 respectively, are as follows:

Amendment of section 11(1)(w) and Schedule 2 of the VAT Act:

Paragraph (w) has been added to section 11(1). This paragraph stipulates that sanitary towels (pads) as set out in Part C of Schedule 2 are now exempt supplies.

Part C was added to Schedule 2 and lists the type of sanitary towels that are zero rated.

This amendment is deemed to have come into operation on 1 April 2019

Amendment of section 24(1) of the VAT Act:

The section has been amended to now also include foreign electronic services providers. Therefore, a foreign electronic services provider shall cease to be liable to register where the total value of the vendor’s taxable supplies in the period 12 months commencing at the beginning of any tax period will not be more than R1 million.

This amendment is deemed to have come into operation on 1 April 2019.

Amendments to the VAT Act contained in the Rates and Monetary Amounts and Amendment of Revenue Laws Bill 37 of 2018, the Taxation Laws Amendment Bill 38 of 2018 and the Tax Administration Laws Amendment Bill 39 of 2018 respectively, are as follows:

Amendment of section 1 (definition of “enterprise” and new definition of “intermediary”): The activities of an “intermediary” have been added to the definition of an enterprise (par (b)(vii)). The definition of an “intermediary” has been inserted and refers to a person who facilitates the supply of electronic services supplied by the electronic services supplier and who is responsible for the issue of invoices and collection of payment for the supply. The inclusion of an “intermediary” further broadens the VAT-net.

These amendments come into operation on 1 April 2019.

Amendment to section 2: The financial services listed in section 2(1) are exempt. Cryptocurrencies have now been added to this list (section 2(1)(o). The issue, acquisition, collection, buying or selling or transfer of ownership of any cryptocurrency will be an exempt supply. Similar to the other activities listed as financial services under section 2(1), the proviso to section 2(1) has been amended to exclude any fee, commission, or similar charge relating to cryptocurrencies from constituting financial services.

These amendments come into operation on 1 April 2019.

Amendment of section 7: Section 7 has been amended to provide for the increased VAT rate of 15%.

The amendment is deemed to have come into operation on 1 April 2018.

24 TAX4861/103/2020


Amendment of section 8: The reference to the rate of 14% has been deleted in section 8(27) and replaced by the wording “specified in section 7(1)” to provide for the increase in the VAT rate. Section 8(27) provides for a deemed supply where an excess payment has been received and not repaid within four months.

The amendment is deemed to have come into operation on 1 April 2018.

Amendment of section 20: An new subsection (1B) has been inserted and provides that the supplier of a tax invoice that contains an error must correct the tax invoice within 21 days from the date of the request to correct it and the supplier must obtain and retain information sufficient to identify the transaction to which the original tax invoice and the correct tax invoice refers. The time of supply remains as provided for in section 9 and is not altered by this correction.

This amendment comes into operation on the date of promulgation of the Tax Administration Laws Amendment Act of 2018.

Amendment of section 21: Section 21 provides for the issuing of debit and credit notes. Section 21(1) lists the instances when a debit note or credit note can be issued. Section 21(1)(d) has been amended to include and clarify that, where an enterprise is sold as a going concern, the purchaser of the enterprise is allowed to issue a credit note in respect of goods that were supplied by the seller of the enterprise but are returned by the purchaser. The proposed amendment will ease compliance for purchasing vendors and there will be no VAT cost to the business.


Amendment of section 22: In terms of section 22(1), a vendor is entitled to an input tax deduction in respect of irrecoverable debt, i.e. where the vendor accounted for output tax in respect of a taxable supply provided on credit and the consideration (all or part thereof) subsequently becomes irrecoverable, the vendor can claim input tax on the debt written off. In order to address an anomaly that existed and the possibility of a double input tax deduction where debt (an account receivable) is transferred at face value, a definition of “face value” has been inserted (section 22(7)). For purposes of section 22(1), the “face value” of a debt transferred means the net value of the account receivable at the time of transfer, after adjustments have been made for debit and credit notes and less the input tax claimed on the bad debt that has already been written off by the vendor. Refer to Example 31.57 in SILKE.

This amendment comes into operation on 1 April 2019.

25 TAX4861/103/2020



In terms of the current section 23(1A) a foreign supplier of electronic services must register as a VAT vendor at the end of any month where the total value of taxable supplies made, has exceeded R50 000. Subsection (1A) has been amended to now also apply to an intermediary and the requirement of R50 000 has been replaced by a requirement that, if the total value of taxable supplies has exceeded R1 million in any consecutive 12-month period, such person must register as a VAT vendor. This amendment results in an increased registration threshold requirement for a foreign supplier of electronic services, as well as an “intermediary”, which is in line with local suppliers.

The amendment comes into operation on 1 April 2019.


Subsection 7 has been inserted and provides that SARS can set off any VAT refund due to a vendor against any outstanding tax debt of the vendor where such vendor carries on separate enterprises or carries on an enterprise in branches or divisions that are separately registered for VAT.



A new subsection (2B) has been inserted to provide for the scenario where an intermediary acts as a facilitator to a foreign supplier of electronic services. In terms of this provision, if the intermediary acts on behalf of the foreign supplier (i.e. the principal) where the intermediary is a vendor and the principal is a non-resident and not a registered vendor and the electronic services are supplied to a person in the Republic by the principal, the supply shall be deemed to be made by the intermediary and not by the principal.

This amendment comes into operation on 1 April 2019.

Amendment to Schedule 2: Foodstuffs as listed in Part B of Schedule 2 are zero-rated in terms of section 11(1)(j). The following items have been added to the list: - Whole wheat brown bread - Cake wheat flour - Sanitary towels (pads) (more detail of what constitutes sanitary towels has been added and

moved into a new Part C of Schedule 2, see the latest proposed amendments above)

Whole wheat brown bread is deemed to be zero-rated from 1 April 2018, whereas the amendment that includes cake wheat flour and sanitary pads comes into operation on 1 April 2019.

26 TAX4861/103/2020

3.6 ADDITIONAL NOTES

3.6.1 Mind map representing an overview of VAT

In order to provide you with an overview of VAT and as a useful study tool, we include a mind map of the output and input tax provisions in the VAT Act on the following page.

27 TAX4861/103/0/2019

Mind map with overview of VAT

Person carrying on an enterprise NO

Final consumer YES Supply goods and services

Exempt supplies (sections 12 and 2)

No output tax levied

Taxable supplies (sections 1 and 7)

Standard rated supplies (15%) (section 7(1)(a))

Zero-rated supplies (0%) (section 11)

OUTPUT TAX

(section 7(1)(a))

LESS

INPUT TAX (section 7(1)

& section 1)

AMOUNT DUE TO OR

BY SARS

Adjustments (sections 18(1), 18(2), 18A, 18B, 18C and 22(2)

– (3A))

Deemed supplies (sections 8 and 18(3))

Time and value of supplies (sections 9 and 10) Mixed supplies (section 17(1))

Apportionment Adjustments (sections 18(4), 18(5), 18(9), 16(3)(h), 22(1), 22(1A), 22(4), 22(6) and 22(7))

Imported goods and services (sections 7(1)(b), 13 & 14))

Input tax deduction denied (section 17(2))

Notional input tax – second-hand goods (also fixed property) (section 1, definition of “input tax”, sub-par (b))

28 TAX4861/103/2019

3.6.2 Mind map of the supply of goods and services – OUTPUT TAX

3.6.3 Services - SILKE par 31.5.3 The definition of services is very broad and the supply of services typically include (without being limited to) the following:

royalties – granting the right to use intellectual property, that is, patents, trademarks and copyrights

sale of intellectual property

assignment, waiver or abandonment of a right to someone else, including the right of legal action

acceptance of a restraint, including agreeing not to act or to act in a particular way

acceptance of damages or compensation, including the cancellation of agreements

provision of professional services, including construction, legal, accounting and other similar services

provision of facilities by clubs, churches, charities and other non-profit organisations Please note that this does not mean that all of the above services are taxable supplies; merely that they will constitute services for the purposes of the VAT Act. The exclusion of “money” from the definitions of “goods” and “services” means that no VAT implications will arise in respect of its supply. This is important because it means that when goods are purchased from a vendor, the initial supply of the item will attract VAT, whereas the subsequent payment will not attract VAT.

OUTPUT TAX

(section 7(1)(a))

Adjustments (sections 18(1), 18(2), 18A, 18B, 18C and 22(2)–(3A))

Time and value of supplies (sections 9 and 10)

Supply of goods and services by a

vendor

Exempt supplies (sections 12 and 2)

No output tax charged

Taxable supplies (sections 1 and 7)

Standard rated supplies (15%) (section 7(1)(a))

Zero-rated supplies (0%) (section 11)

Deemed supplies (sections 8 and 18(3))

29 TAX4861/103/2019

3.6.4 Exempt supplies: Other (including transport of fare-paying passengers and their personal effects by road or rail) - SILKE par 31.11.4

Study section 12(g). Note that where transport services were taxed at 0% (in terms of section 11(2)(a)), this will take preference over the exemption (if it is transport by road or rail; transport by aircraft or boat is in any case a taxable supply). The information below is summarised from VAT Practice Note 7/1992. Available at: https://www.sars.gov.za/Legal/Interpretation-Rulings/Pages/Find-a-Practice-Note.aspx

For the exemption to apply, the following criteria must be met:

Passengers (travelling by road or rail) must pay a fare.

The supplier of the transport service must operate the vehicle himself (not a courier).

These two requirements will be discussed in more detail. Fare-paying passengers Where the operator of the vehicle (in which passengers are transported) charges a consideration for the service, the passengers will be regarded as fare-paying. The passengers themselves, or a third party, may pay a specified fare either on boarding the vehicle or on purchasing a ticket prior to travel. The exemption does not apply where passengers are not charged a fare. If, for example, a mine were to provide transport by road for its miners from their lodgings to the mine, the mine would be entitled to claim the input tax paid in connection with the supply. This is because it will not constitute an exempt supply, as the miners do not pay a fee. Operation of a transport business In order to qualify for the exemption, the supplier of the transport service must be the operator of the vehicle in which the passengers are transported. The supplier need not necessarily be the owner of the vehicle or even the employer of the driver, but must be commercially responsible for the transporting of the passengers. Where the supplier of the vehicle does not operate it himself, but rents or hires it to a third party, who uses it for the transport of passengers, the exemption does not apply. The reason for this is that the supply constitutes the hire of the vehicle and not that of a transport service, and is therefore standard rated. Should the supplier also provide the services of a driver, however, the supply will constitute an exempt supply in most cases, and not a standard-rated supply. Each situation must be judged on its own facts and the use of the words “hire” or “charter” in an agreement is not conclusive as to the nature of the transaction. The decisive factor in determining whether an exempt transport service or a taxable rental transaction is supplied will usually be to whom the driver is ultimately accountable. If the driver were accountable to the owner of the vehicle, an exempt transport service would be supplied in the absence of factors to the contrary. By contrast, if the driver were accountable to the recipient, the supply would be taxable in most instances. In practice, SARS interprets this provision in a broad manner.

https://www.sars.gov.za/Legal/Interpretation-Rulings/Pages/Find-a-Practice-Note.aspx

30 TAX4861/103/2019

Examples of exempt transport services

Scheduled commuter bus services, intercity bus services and tourist bus transport – The distance covered or duration of the service is irrelevant.

Ambulance services – This is transport of patients in an ambulance for a consideration.

Tour buses or trains – The transport of passengers by a tour operator, irrespective of whether a specific fee is charged for transport or whether it is incorporated into the total fee for the tour. In the latter case, the total fee will have to be apportioned between the taxable supplies and the exempt passenger transport service. If the fee is not apportioned, the full amount of the fee is subject to VAT at the standard rate.

Airport/hotel transfers – This involves the transport of patrons to and from an airport by a hotel or equivalent supplier, provided a specific fee is charged for the service. Where, however, the service is provided as a courtesy to patrons without a specific amount being charged, the hotel will not be regarded as supplying exempt passenger transport.

Transport of employees or pupils – This is the transport of employees or pupils on behalf of an employer or school, irrespective of whether the consideration charged by the operator is a fixed or variable amount based on the number of employees actually transported. This, however, does not include the case where the employer hires the vehicle and undertakes the transport of the employees himself, for no consideration.

Examples of taxable transport services (not exempt)

Passenger transport by air or sea

Courier services and the transportation of parcels by road, rail or sea

Game viewing excursions

Passenger transport, where no fare is charged, for example, where an employer provides transportation to and from the place of work to employees and no consideration is charged

Passenger transport, where the transport fee is incorporated into the total charge for a composite supply and the total charge is not apportioned between taxable and exempt supplies

Transport rental and hiring services, if the services of a driver are not included

Zero-rated transport services, for example, passenger transport by road or rail to an export country

3.6.5 Deemed supplies: Ceasing to be a vendor - SILKE par 31.12.1 If the delivery vehicle in SILKE example 31.16 (Mr Filemon Balewa) were used to make 40% taxable supplies, Filemon would only have claimed input tax on purchase of the delivery vehicle (assume purchase was on/after 1 April 2018) of R180 000 x 15/115 x 40% = R9 391. Filemon would still have to account for output tax, however, when ceasing to be a vendor on 100% of the lesser of cost (including VAT) (R180 000) or open market value (R118 000), although the asset was only used 40% for taxable purposes, due to section 8(16). Section 8(16) provides that, if a vendor acquires goods only partly for the making of taxable supplies and then subsequently supplies the goods, the vendor will be deemed to make a 100% taxable supply of the goods. In the SILKE example, the output tax payable would thus be (R118 000 – R3 000) x 15/115 = R15 000, but the vendor would be able to make an input tax adjustment for the exempt portion under section 16(3)(h). Therefore, R118 000 (lower of adjusted cost and open market value) x 15/115 x 60% = R9 235 input tax will be claimable. If a person (who ceases to be a vendor) disposes of any goods or rights after the cancellation of his/her registration (and thus after the deemed supply has been accounted for), the person will not carry on an enterprise for VAT purposes and no VAT will be due on the supply of the goods or rights. Where the assets, forming part of a vendor’s enterprise, are, prior to cessation of registration, distributed to shareholders as a dividend in specie, no VAT will be payable, as the supply will be made for no consideration. Should the recipient, however, be a connected person in respect of the vendor and not be entitled to a full input tax credit had VAT been payable, VAT will have to be levied on the open market value of the dividend in specie (i.e. the value of supply rule for connected persons). The distribution of assets by a person in the form of a dividend in specie subsequent to the cessation of registration has no

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VAT implication, as the supply has not been made in the course or furtherance of an enterprise, the enterprise having ceased. The supply will therefore not be a taxable supply. The general rules for deregistration (for VAT purposes) will not apply where a person ceases to be a vendor because of death or insolvency, provided the enterprise is thereafter continued by or on behalf of his/her executor or trustee.

A deemed disposal for VAT purposes arises when a person ceases to be a VAT vendor (section 8(2)). Output tax is calculated by multiplying the lesser of the cost (including VAT) and the open market value by the tax fraction. However, section 8(2)(v) provides that this shall not apply to assets where output tax has already been accounted for in terms of section 22(3). In terms of section 22(3), when ceasing to be a vendor, outstanding creditor balances, on which input tax were claimed, are treated as follows:

Outstanding for longer than 12 months: No adjustment for VAT on these balances is made when ceasing to be a vendor, since section 22(3) stipulates that a VAT vendor be required to account for output tax if he/she has not paid the full consideration for a supply within 12 months. This liability for output tax is therefore due to the non-payment of the creditor for 12 months and not because of the cessation of the enterprise. However, if the vendor has not yet accounted for the output tax on cessation, the adjustment should be made at that time.

Outstanding for less than 12 months: At the date of the cessation of the enterprise, output tax is payable on outstanding creditor balances that are not older than 12 months. The value of these supplies is the outstanding balance of the creditor (section 22(3) (proviso (ii)(bb)).

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3.6.6 Time and value of supply - SILKE par 31.15 and 31.16 The word “value” used in section 10 is confusing as the amount actually described in section 10 is “consideration”. It is important to understand the difference between value and consideration. Value excludes VAT. Consideration includes VAT. As the amount described in section 10 is actually consideration, the amount given in the table below should be multiplied by 15/115 in order to obtain the VAT amount.

We provide you with a concise summary of the Time and Value of supply rules below. Note that a separate table is provided later in this learning unit for the time and value of supply adjustments (sections 18, 18Aand 18C).

Supply Time Amount of the consideration

General rule Invoice basis The earlier of

the date an invoice is issued, or

the time of payment / consideration received by the supplier

(section 9(1)) Payment basis The time of payment / consideration received by the supplier (To claim an input tax deduction, the vendor must be in possession of a valid tax invoice – see SILKE, par 31.18.)

Consideration = Value + VAT, or

Value = Consideration – VAT Consideration will be

consideration in money = money value

consideration not in money = open market value (section 10(2) & (3))

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Connected persons Goods removed – time of removal Goods not removed – time made available to recipient Services – time services performed If payment is received or an invoice is issued before the day on which a return is submitted for the tax period in which goods were removed, made available or services performed, the general rule (section 9(1)) will apply (section 9(2)(a)) If the recipient vendor would have been entitled to make a deduction of the full input tax in respect of that supply and the consideration cannot be determined at the time the supply is deemed to be made the general rule (section 9(1)) will apply and not section 9(2)(a).

Open market value if a supply is made by a vendor for no consideration or for a consideration less than open market value or if the whole of the consideration cannot be determined at the time of the supply and the recipient would not have been able to claim the full input tax deduction (fringe benefits excluded) (section 10(4)) (The recipient will not be able to claim a full input tax deduction if the recipient is not a vendor or if the recipient is a vendor, but does not make 100% taxable supplies.)

Fringe benefits (included in gross income (par (i) of the definition), read with the Seventh Schedule excluding: - exempt supplies - zero rated supplies - entertainment

The time at which the benefits become liable to employees’ tax in terms of the Income Tax Act (it is the month in which employees’ tax is payable on the benefit or the month that it is included as part of remuneration) (section 9(7))

The cash equivalent (which excludes finance charges and VAT) of the benefit, for normal tax purposes, except were the benefit is the right of use of a motor vehicle. Then: if input tax deduction was denied: 0.3% of determined value (excluding VAT) of motor vehicle per month if input tax deduction was not denied: 0.6% of determined value (excluding VAT) of motor vehicle per month (Refer to SILKE par 31.12.4.2 for additional information.) (section 10(13) and Government Gazette 22 Nov 1991)

Game viewing vehicle or hearse, where input was claimed on conversion and then supplied or used for another purpose (section 8(14)(b) or 8(14A))

When supplied or utilised for another purpose (section 9(10))

Consideration in money equal to the open market value (section 10(24))

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Credit agreements Day after the last day at which the recipient may exercise his right to terminate the agreement (after cool-off period of 5 days) (section 9(2)(b))

General rule (section 10(2) & (3))

Instalment credit agreement (suspensive sale agreement and a lease)

Earlier of

time of delivery, or

time of payment received (section 9(3)(c))

Cash value, as defined in section 1 (including VAT and excluding finance cost) (section 10(6))

Rental agreement or services supplied under any agreement which provides for periodic payments

Deemed successive supplies Each successive supply deemed to take place at the earliest of when

payment becomes due, or

payment is received (section (9(3)(a))


Goods supplied progressively or periodically or directly in the construction, repair, improvement, erection or manufacture under any agree-ment where consideration is paid in instalments or pe-riodically

Deemed successive supplies Each successive supply deemed to take place at the earliest of whenever

any payment in respect of any supply becomes due and is received, or

any invoice relating only to that payment is issued

(section (9(3)(b))


Instalment credit agreements, repossessions and surrender of goods

Day at which goods are repossessed or surrendered (section 9(8))

Cash value of outstanding debts on goods repossessed or surrendered (excluding finance cost) (section 10(16))

Goods supplied under an agreement other than an instal-ment credit agreement or rental agreement and consideration is contingent on a future event

Deemed successive supplies – Each successive supply deemed to take place at the earliest of when

any payment in respect of the supply is due or received and claim to the extent that any payment has been made, or

an invoice relating to the supply is issued (section (9(4)(a))


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Services supplied under an agreement and consideration is contingent on future event

Deemed successive supplies – Each successive supply deemed to take place at the earliest of when

any payment in respect of the supply is due or received and claim to the extent that any payment has been made, or

an invoice relating to the supply is issued (section (9(4)(b))


Supplies to foreign branches Date at which goods are delivered to independent branch, or service is performed (section 9(2)(e))

Lesser of

cost to vendor (including VAT) of acquisition, manufacture, assembly, construction or production, or

open market value of supply (section 10(5))

Ceases to be a vendor Immediately before the person ceased to be a vendor (sections 8(2) and 9(5))

Lesser of

cost to vendor (including VAT) of acquisition, manufacture, assembly, construction or production of goods or services, or

open market value of supply (section 10(5))

Indemnity payments The date of receipt of payment by the vendor or date paid to another person (section 8(8))

Apply the tax fraction to consideration received in money (section 8(8))

Second-hand goods acquired from a vendor (excluding fixed property)

General rule (section 9(1))


Notional input tax in respect of second-hand goods (excluding fixed property) situated in the Republic of South Africa and acquired from a non-vendor

Claim to the extent that payment has been made (section 16(3)(a)(ii)(aa) & 16(3)(b)(i))

The lesser of

consideration in money, or

open market value (irrespective of whether the supply takes place at arm’s length or between connected persons) (section 1 – definition of input tax, sub-paragraph b(i))

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Export of second-hand goods where a notional input tax had been claimed


Consideration limited to the purchase price of the goods to the exporter. Note that the purchase price is not reduced by the notional input tax which has been claimed (section 10(12))

Imports of goods Vendors registered on the invoice or payment basis can only claim the input tax once the imported goods are released in terms of the Customs and Excise Act (thus, no longer at the date of payment). (sections 16(3)(a)(iv) and 16(3)(b)(ii)) VAT charged and collected by Customs and Excise at designated border post (point of entry into the RSA. (section 13(1))

Imports of goods from BLNS countries for home consumption Value for customs duty purposes Imports from other countries for local consumption Value for customs duty purposes Plus: 10% of value for customs duty purposes Plus: Any duty levied in terms of the Customs and Excise Act These amounts are the only ones in this table which represent "VALUE" and not "CONSIDERATION" and they should therefore be multiplied by 15% to get the VAT amount (section 13(2))

Imported services (Services supplied by a director are excluded, as they entail remuneration and are not a supply.)

The imported service is deemed to take place at the earlier of

the date at which an invoice is issued, or

when payment is made The recipient must declare the imported service and pay the VAT to the Commissioner within 30 days of the receipt of the imported service. (section 14(2)) Note that VAT is only payable on imported services if the imported service is made to a resident of RSA and only to the extent that such services are utilised or consumed otherwise than for the making of taxable supplies. No VAT is payable on exempt or zero-rated supplies or supplies where the value does not exceed R100 per invoice.

The greater of

the value of the consideration, or

open market value (section 14(3))

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Fixed property acquired from a vendor

The earlier of the

date of registration in the deeds office, or

date of any payment for supply (section 9(3)(d))

General rule (section 10(2) & (3)) (Input tax should only be accounted for to the extent that payment of the consideration has been made or received. (section 16(3)(a)(iiA)) (Note: Output tax of the seller will also be limited to the extent of payment received (section 16(4)(a)(ii)).)

Fixed property (second-hand goods) acquired from a non-vendor

The earlier of the

date of registration in the deeds office, or

date of any payment for supply (section 9(3)(d))

Claim notional input tax by applying a tax fraction to the lesser of

consideration given in money, or

open market value x % taxable supplies (section 1 – definition of input tax, sub-paragraph (b)) However, notional input tax may only be claimed once the fixed property has been registered in the name of the vendor and it is then limited to the extent of payment of the purchase consideration. (section 16(3)(a)(ii)(aa) read with section 16(3)(a)(ii)(bb)(A))

Commercial accommodation (Refer to SILKE par 31.11.3)


Domestic goods and services supplied at an all-inclusive charge for an unbroken period exceeding 28 days attract VAT at 15% on 60% of the value of the supply. If the period is not more than 28 days, VAT is payable at 15% on the full value (100%). Domestic goods and services or other goods and services not included in the all-inclusive charge will attract VAT at 15% on the full value (100%) of the supply (section 10(10)).

Entertainment General rule (section 9(1))

Where a vendor makes any supply of entertainment and an input tax deduction was denied in terms of section 17(2), the value of such supply shall be deemed nil. (section 10(21))

Nil-value supplies General rule (section 9(1))

Where any supply is made for no consideration, the value of that supply shall be deemed nil. (section 10(23))

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Excess payments received and not refunded within four months of receipt (section 8(27))

Deemed to be the last day of the tax period during which the four-month period ends. (section 8(27))

Output tax payable: Excess portion x 15/115 (section 10(26)) Note: If the excess payment is refunded at a date after the output tax has been accounted for, the vendor will become entitled to claim an additional input tax credit in the tax period refunded. (section 16(3)(m))

Leasehold improvements (section 8(29))

On the date of completion of the leasehold improvements. (section 9(12))

The value is deemed to be nil. (section 10(28))

Prizes or winnings on betting transactions

The tax period in which the prize or winnings are paid out

The input tax claimable will be an amount equal to 15/115 x any amount paid as a prize or winnings. Note: If, however, the prize or winnings constitute goods or services, the input tax must be limited to the tax initially incurred when acquiring the goods or services. (section 16(3)(d) and 10(17))

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3.6.7 Basics of input tax - SILKE par 31.17

Framework for input tax References to the VAT

Act

NO

WAS A VENDOR CHARGED VAT ON THE SUPPLY OF GOODS OR SERVICES BY A SUPPLIER?

Section 1

YES

NO

WILL THE GOODS OR SERVICES BE CONSUMED, USED OR SUPPLIED IN THE COURSE OF MAKING TAXABLE SUPPLIES?

Section 17(1)

YES

YES

IS THE DEDUCTION OF THE INPUT TAX DENIED?

Section 17(2)

NO

WILL THE GOODS OR SERVICES BE CONSUMED, USED OR SUPPLIED 100% IN THE COURSE OF MAKING TAXABLE SUPPLIES?

Section 17(1)

NO

YES

DETERMINE THE PORTION OF USE IN THE COURSE OF MAKING TAXABLE SUPPLIES.

IS ITS INTENDED USE TO MAKE TAXABLE SUPPLIES 95% OR MORE?

Section 17(1)(i)

YES

NO

NO AMOUNT OF INPUT TAX MAY BE CLAIMED.

APPORTION AND CLAIM ONLY THE AMOUNT OF INPUT TAX THAT RELATES TO INTENDED TAXABLE USE.

CLAIM FULL AMOUNT OF INPUT TAX.

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3.6.8 Input tax: Denial of input tax - SILKE par 31.21

Goods or services acquired by a vendor for purposes of entertainment The following is a list of goods or services, which would be classified as being acquired for the purposes of entertainment (and therefore, an input tax deduction will be denied), provided the vendor is not in the business supplying entertainment (i.e. restaurant):

staff refreshments such as tea, coffee, other beverages and snacks and the utensils re

Documents

Tutorial Letter 103/0/2020 - Unisa · 2020. 2. 13. · Due to Unisa's print schedule, this tutorial letter had to be submitted by December 2019 so that you would receive it on time