Nasty VAT Blow For Associations Not For Gain
01 November 2009
Posted by: Author: Gerhard Badenhorst
Nasty VAT Blow For Associations Not For Gain
Recent court judgement curtails the claiming of input VAT on goods supplied for no consideration
The Tax Court handed down judgement on 14 August 2009 in Case No: VAT 711, which could have a major impact on the ability of associations not for gain to claim Value-Added Tax (VAT) on their operating expenses. It could even have a negative impact on profit making vendors who make certain supplies for no consideration as well.
The dispute in the case concerned the entitlement of an association not for gain, KCM, a religious organisation, to claim input tax on the printing costs of a magazine which it distributes free of charge. KCM is an international inter denominational Christian ministry with its sole aim the objective to promote, minister and spread the Word of God and proclaim the gospel of Jesus Christ.It has established branches in several countries, including South Africa.
KCM spreads its teachings and messages by the use of television presentations, radio broadcasts, conventions, books, CD's, DVD's videos, tapes, magazines, the internet , and personal correspondence. In South Africa,KCM prints a magazine which it distributes free of charge. KCM also operates a bookshop where it sells books, CD's, DVD's and other religious material and its major source of income consists of donations voluntarily and anonymously made by friends and partners in the ministry.
KCM sought to deduct the VAT it incurred on the printing costs of the magazine, which it distributes free of charge, as input tax which input tax the South African Revenue Service (SARS) denied.The Court came to the conclusion that the VAT incurred on the expenses is not deductible as input tax, and ruled in favour of SARS.
SARS contended that the concept of consideration is fundamental to an enterprise.A gratuitous act cannot, on a proper construction of the provisions of the VAT Act,constitute a supply of goods or services for a consideration because the definition of "consideration” in the VAT Act effectively excludes the feature of pure gratuitousness.
SARS argued that the distribution of the magazines is not a supply of goods for a consideration as they are distributed free of charge and,therefore, the distribution of the magazines does not comprise an "enterprise” as defined.Peter Franck, previously Head of VAT Policy at SARS who represented KCM, argued that the distribution of the magazines comprise a taxable supply of goods,and that the value of such supply is deemed to be nil in terms of Section10(23) of the VAT Act.
The Court however accepted the arguments of SARS and stated that there is nothing in the wording of Section 10(23) that deems a nontaxable supply for no consideration,to be a taxable supply for no consideration.
Technical aspects of the judgement
In support of its argument that the definition of consideration excludes the feature of pure gratuitousness,SARS relied on a publication by the Australian Tax Office issued in 2000 when VAT was implemented in that country. However, in the context in which the publication makes the statement that purely gratuitous acts do not constitute consideration, reference is made to the making of a gift to a non-profit body. The publication does not deal with, or refer to, supplies made by a non-profit body for no consideration.
The charging provision in Section 7(1)(a) stipulates that VAT must be levied on the supply of goods or services supplied by a vendor in the course of any enterprise carried on by him. An "enterprise" further includes any enterprise or activity in the course of which goods or services are supplied to another person for consideration.
It appears that KCM indeed carried on an enterprise as defined by promoting, ministering and spreading the Word of God as it supplied goods for a consideration in its bookshop in the course of such enterprise, and also distributed its magazine in the course of its enterprise, albeit for no consideration.It seems that the entire enterprise activity of the vendor in view of its aims and objectives must be considered to determine whether it comprises an "enterprise” as defined, and all activities performed to achieve such aims and objectives then forms part of such enterprise.
If this is the case, then KCM was correct in arguing that it made a taxable supply when it distributed its magazine, as the distribution was made in the course of its enterprise, and the value of such taxable supply is nil in terms of Section 10(23).In effect, the Court is saying that any activity involving the supply of goods or services for no consideration does not comprise an enterprise activity and, therefore,the input tax deduction on any related costs should be denied.Implications for ordinary trading(profit-making) enterprises
This interpretation of the VAT Act has a significant impact on all vendors supplying goods or services free of charge, and not only for associations not for gain.This could mean that where a vendor has a buy-one-get-one-free promotion or where it provides samples free of charge, the cost of the items given away for no consideration will not qualify for any input tax as they are supplied for no consideration, which is not an enterprise activity.
Of more significance is that where associations not for gain rely on donations to fund certain of their activities which are supplied for no consideration, such associations will now bear an additional VAT cost in respect of the denied input tax, which will place a further financial burden on these associations which are already cash strapped.
The absurdity of the judgement is that if KCM charges a nominal consideration of, say, 1 cent for each magazine distributed, it will be entitled to claim the VAT on the printing and distribution costs.Also, the provisions of Section 10(23) seems to be superfluous in view of the judgment.
The judgement in VAT Case 711 will fortunately not have any effect on the activities of welfare organisations, as the activities of welfare organisations are specifically included in the VAT Act as enterprise activities, and they are entitled to register for VAT and claim input tax, even if they receive no consideration at all.
Source: By Gerhard Badenhorst (Tax breaks)