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Deductibility of Input VAT When An Asset Is Purchased By a CC

03 July 2012   (0 Comments)
Posted by: TaxFind™
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Deductibility of Input VAT When An Asset Is Purchased By a CC

The VAT Act and the SARS Guidelines on the input VAT deductibility outcomes of motor vehicles are very clearly detailed.The facts and circumstances of every situation differ so vastly that the input VAT deductibility outcomes cannot be predicted without a careful study of the transaction and a proper application of the VAT legislation.


A SAIPA member sketches the following scenario:
A CC wishes to purchase a bakkie financed in the names of the member of the CC, and later to be financed in the name of the CC.Is the CC permitted to claim VAT under the deemed input rule? Is it permissible to complete a VAT 264 and claim VAT through the CC once purchased and registered in the name of the CC?
The VAT was not claimed by the member, nor is he a VAT vendor.
The CC trades as a butchery and so uses the bakkie to make deliveries, to purchase stock and collect inventory goods (meat,fruit, vegetables etc.)

Follow-up investigations reveal the following:
The Buyer: The CC
The Seller: The member
Purchase price: The settlement amount owed to the bank.
This transaction does not relate to loan accounts.The CC will purchase a two-seat bakkie from the member, which means that the question is whether input VAT on the bakkie is deductible since the bakkie is used for purposes of deliveries by the CC only. This means that it is a private finance transaction with the bank.

Three items comes into consideration, and the sequence of these is crucial:
1. It is alleged that it is the intention of the CC to purchase the`bakkie’. We need to understand what constitutes a purchase of an asset in the above situation. You merely indicated that your client, the CC, would take over the monthly payments to the bank.This does not constitute a purchase. Since there is a written agreement between the Bank and the Member, not the CC.The CC is merely paying the bond on behalf of the Member.The ownership of the asset still resides with the Member of the CC.So this type of transaction is not a purchase in real terms. Moreover,in terms of the VAT legislation, the CC may claim a notional input VAT of a delivery vehicle only if the CC owns the asset. It is clear that the CC does not own the asset and therefore cannot claim the input VAT deduction in this situation.                        

2. Secondly, no mention is made of the status of the agreement between the `bank’ and the individual member. For this transaction to constitute a purchase the individual member would reasonably have to terminate the agreement with the bank and subsequently a new agreement would need to be concluded between the bank and the CC.There is no indication whether this has happened. It is only in this context that a `true’ purchase of the bakkie has occurred.

3. Thirdly, only after the issues identified in item 1 and item 2 have been settled can one consider the matter of the cost of the vehicle. If this transaction is a ‘true’ purchase, then the VAT Act is absolute in stating that any transaction between a vendor and a connected party (in this instance, the CC and the Member are a connected party) then the input VAT deductable is based on the lesser of the two: the market value of the bakkie and the consideration paid by the vendor.As per the facts supplied, the purchase price is the settlement amount owing to the bank.If the settlement price is higher than the market                                                               

As per the facts supplied, the purchase price is the settlement amount owing to the bank.If the settlement price is higher than the market value, then it is the market value that must be used to calculate the deduction of the input VAT.In this situation - the case of the delivery vehicle - it is often that the market value is less than the purchase price. In addition, it would be difficult for the CC (the vendor in this situation) to inflate the market price of the delivery vehicle.It addition, it is given that the bakkie will be used by the butchery in order to make deliveries and collect inventories.Given this situation,it is likely the same member would use the same bakkie to undertake these tasks.If this is correct, the CC would have to declare output VAT on the fringe benefit, since it is also likely that the member would use the bakkie for his own use and would also park the at his place of residence.    

Source: By  Mahomed Kamdar, Technical Advisor, SAIPA (Tax Professional)    



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