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FAQ - 25 May 2016

24 May 2016   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Can VAT be charged on a payment?

Q: Can deemed input VAT be claimed by the purchaser (VAT vendor) without any amount already being paid? 

A: In terms of the definition of input tax in section 1(1) of the Value-Added Tax Act ‘an amount equal to the tax fraction (at the time the supply is deemed to have taken place) of the lesser of any consideration in money given by the vendor for or the open market value of the supply (not being a taxable supply) to him by way of a sale by a resident of the Republic (RSA) … of any second-hand goods situated in the RSA’ will be input tax.   According to the definition "second-hand goods” means goods which were previously owned and used and we submit that in this instance the fixed property is in fact second hand goods as defined.  (Note: It is therefore not the transfer duty that qualifies to be deducted.)  

The input tax (or portion) can only be deducted to the extent that payment has been made – see section 16(3)(a)(ii)(bb). 

The deduction can then be made ‘where the goods or services concerned are acquired by the vendor wholly for the purpose of consumption, use or supply in the course of making taxable supplies or, where the goods or services are acquired by the vendor partly for such purpose, to the extent (as determined in accordance with the provisions of section 17) that the goods or services concerned are acquired by the vendor for such purpose’.  

In terms of section 17(1) the input tax must be an amount which bears to the full amount of such tax or amount, as the case may be, the same ratio (as determined by the Commissioner in accordance with a ruling as contemplated in section 41A or 41B) as the intended use of such goods or services in the course of making taxable supplies bears to the total intended use of such goods or services.  SARS issued a binding general ruling (number 16) that prescribes the turnover-based method of apportionment.  

The recipient of second-hand goods must obtain and maintain a declaration by the supplier stating whether the supply is a taxable supply or not, and must further maintain sufficient records to enable specific particulars to be ascertained as is stipulated in section 20(8) of the VAT Act.  

2. Is there VAT on foreign sales?

Q: The client is a local Travel agency, focused exclusively on sales of tour packages to Americans to travel here. They get billed before they arrive here in ZAR, their various reservations made with local airlines, hotels, suppliers. If there are any additional costs incurred while they are here, they are invoiced for that too. Is VAT due on these sales?

A: For purposes of the guidance that follows we accept that the client is in receipt of commission only for the services rendered to non-residents.  This only applies to the extent that the non-residents are not in the RSA at the time the services are rendered - for instance, if the non-resident changes a booking whilst in the RSA.  

The current practice generally prevailing in this regard is set out in Interpretation Note 42 - the supply of goods and/or services by the travel and tourism industry.  

With respect to what you refer to as the "additional costs incurred while they are here” the treatment, from a Value-Added Tax perspective, will depend on whether or not your client acts as the agent for the foreign tourist.  Judge Nugent, in the British Airways plc case, explained it as follows: 

"A further tax does not accrue when the vendor of another service (British Airways) does no more than bring to account and recover the charge that it was required to pay for the supply of that service by the company (whether it is supplied to the passengers themselves, or to the airline for the benefit of its passengers).  The moneys that are recovered by British Airways are not a consideration for the supply by it of airport services simply because it does not supply them at all.” 

If your client is the principal (unlikely) then they would have to account for output tax, but will be entitled to an input tax deduction.  If not, the output tax, at the standard rate, would have been charged by the other supplier and it is in a sense a non-supply by your client.  

In the Interpretation note referred to above SARS explains it as follows:

"In the travel and tourism industry, many of the goods and services supplied by service providers are made available through local entrepreneurs. That is, such local entrepreneurs act as agents under common law in representing principals (i.e. the service providers) that supply the goods and services. Notwithstanding this, local entrepreneurs may also act as principals, for example, the purchase and resale of tour packages.

Due to the unique relationship between an agent and the principal, special provisions have been introduced in the VAT Act, to deal with the VAT consequences arising from such relationships. In order to correctly apply the VAT legislation to the concept of agents, it is necessary to identify and understand the concept of an agent, as treated in common law.

An agency is a contract whereby one person (the agent) is authorised and usually required by another (the principal) to contract or to negotiate a contract with a third person, on the latter’s behalf.” If the service is rendered to the local suppliers of the tourism services, the tax would also be at the standard rate.  In VAT case 969, Judge Le Grange referred to the "difficulty, as in the present instance, arises, however, where goods and services are contractually supplied to a person who is outside the Republic, but physically rendered to a person who is in the Republic at the time the services are rendered for the benefit of both the person outside the Republic and the person inside the Republic.”  The taxpayer is a registered vendor and operates a business involving the supply of services to Foreign Tour Operators.  The Judge confirmed that the vendor could not apply the rate of zero percent. 

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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