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FAQ - 26 April 2016

26 April 2016   (0 Comments)
Posted by: Should Output VAT be chargedShould Output VAT be c
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Author: SAIT Technical

1. Should Output VAT be charged on compensation received for stolen livestock?

Q: A farmer sent his cows to a feedlot where they were to be fattened before slaughter. Sometime later, the farmer went to the feedlot only to find that some of his cows were stolen out of the feedlot before they were going to be slaughtered. The farmer sued the feedlot owner and if the farmer is successful, the farmer will receive compensation in lieu of the stolen cows. So should output VAT be charged on the compensation received? 

A: This is quite a complex value-added tax issue.  

There is foreign precedent that argues that there was no supply, which seems to be your view also.  The vendor of course bears the onus of proof if the view is taken that there was no supply.  SARS, in their draft guide on short term insurance, agrees that an "indemnity payment made under a contract of insurance would not normally be considered to be payment for a supply of goods or services.”  This was presumably why section 8(8) was needed, but may well support your view.  

We agree that, as the goods (the cows) were not insured the compensation received will not be treated under section 8(8) of the Value-Added Tax Act.  

According to the definition in section 1(1) of the Value-Added Tax Act, ‘services’ means "anything done or to be done, including the granting, assignment, cession or surrender of any right or the making available of any facility or advantage…”  

This is a very wide definition, in particular the "surrender of any right” part.  In this regard, in CSARS v Stellenbosch Farmers’ Winery (504), Judge Kroon said "that, by agreeing to the early termination of the distribution right, the taxpayer surrendered the remaining portion of the right, and that such surrender constituted the supply of services in the course of an enterprise by the taxpayer to UD. There can be no quarrel with the correctness of these findings.”  

The definition of ‘supply’ is equally wide and the word ‘consideration includes the words ‘or any actor forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of any goods or services”.  

The Oxford dictionary explains that the word ‘forbearance’ means "the action of refraining from exercising a legal right, especially enforcing the payment of a debt.”  

2. Under what circumstances can I make a VDP application?

Q: Can I make a VDP application in the instance where tax returns are outstanding?

A: The voluntary disclosure relief only applies where there was a possible imposition of an understatement penalty in respect of a default – section 227 of the Tax Administration Act.  

Since 8 January 2016 a ‘default’ means the submission of inaccurate or incomplete information to SARS, or the failure to submit information or the adoption of a ‘tax position’, where such submission, non-submission, or adoption resulted in an understatement.  

An ‘understatement’, in turn, means any prejudice to SARS or the fiscus as a result of—

(a) a default in rendering a return;

(b) an omission from a return;

(c) an incorrect statement in a return; or

(d) if no return is required, the failure to pay the correct amount of ‘tax’.  

One of the requirements of a valid voluntary disclosure is that the disclosure must involve a behaviour referred to in column 2 of the understatement penalty percentage table in section 223 – see section 227(d).  

You must therefore determine whether the failure, by the client, to submit the relevant returns constitutes "the failure to submit information” or essentially "a default in rendering a return” and then involves one of the behaviours listed in the section 223 table.  

The Act allows for a no-name disclosure.  This may be used to obtain confirmation form SARS as to the person’s eligibility for the relief.  

Disclaimer: Nothing in these queries and answers should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answers, SAIT do not accept any responsibility for consequences of decisions taken based on these queries and answers. It remains your own responsibility to consult the relevant primary resources when taking a decision.  


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