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Exploring the VAT space

Tuesday, 14 November 2017   (0 Comments)
Posted by: Author: Dr Ferdie Schneider
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Author: Dr Ferdie Schneider,

This year brought various important changes to the VAT space. So, in case you missed them, we have included a brief summary of these changes for your reference.

The world of VAT in South Africa saw a number of interesting developments in 2017. These included changes to legislation, binding rulings and draft interpretation notes. Below, some of the more pertinent developments are discussed.

From zero rate to 14% in one year

As is customary, some of the first VAT developments of the year were announced in the Annual Budget Speech. One of the most notable announcements was the removal of the zero rate on the supply of fuel in 2018/19. Although this change is fine in principle, Government will have to cater for the effect that the removal of the zero rating will have on inflation, especially how such an increase may affect the transport and taxi industry.

Notable binding rulings

Binding General Ruling 38
Binding General Ruling 38 (January 2017) deals with the VAT rate on the supply and importation of fruits and vegetables.

The supply of fruits and vegetables that have not been cooked or treated in any manner, except for being preserved in their natural state, is subject to a zero VAT rate. Thus, the importation of certain fruits and vegetables are exempt from VAT on importation.

Fresh or frozen fruit and vegetables (except frozen potato products) which are sold individually or mixed are still subject to the zero rate if they have been cut, diced, sliced, shredded, crushed, minced, pureed, peeled, de-pitted or compressed. In addition, frozen fruit and vegetables still qualify for the zero rating if they have been blanched in hot water. Thus, the standard rate applies to the supply of fruits and vegetables if they have been cut, diced, sliced or peeled, and to fruit and vegetables to which any other substance has been added, for a purpose other than preservation. This includes the following:

  • If a salad dressing has been added.
  • If fresh or frozen fruits and vegetables have been treated with an additive to colour or flavour them (e.g., glucose, sugar or salt).
  • If the fruits and vegetables have been dehydrated, dried, canned or bottled.
  • If vegetable or fruit smoothies or juices or similar products are imported or supplied.

The supply of fruits and vegetables by a store or similar establishment is zero rated if it is “treated” in accordance with Binding General Ruling 38.

Binding General Ruling 39
Binding General Ruling 39 (January 2017) deals with the VAT treatment of municipalities affected by changes to municipal boundaries.

Supplies between the existing and superseding municipalities are ignored for VAT purposes. The prescribed documentation issued in the name of the existing municipality may be used as proof for an input tax deduction (within six months from the effective date of the boundary change) and, since the superseding municipality becomes the successor of the existing municipality, the superseding municipality will be liable to account to SARS on any VAT liabilities or outstanding VAT returns of the existing municipality.

Binding General Ruling 41
Binding General Ruling 41 (May 2017) deals with the VAT treatment of non-executive directors.

A non-executive director is not considered to be a common law employee as the services must be supplied independently and personally by the nonexecutive director. Therefore, the director’s fees paid or payable to the non-executive director for services rendered in that capacity is not regarded as “remuneration”.

For VAT purposes, non-executive directors are treated as independent contractors. Thus, such a director who runs an “enterprise” in South Africa is required to register for VAT if he or she receives fees exceeding R1 million in an uninterrupted 12-month period. Registered non-executive directors who have not yet accounted for VAT had to start charging and accounting for VAT from 1 June 2017.

SARS also released the Draft VAT Quick Reference Guide on Non-Executive Directors in August 2017.

Binding General Ruling 43
Binding General Ruling 43 (September 2017) deals with input tax in respect of second-hand gold.

A vendor that acquires second-hand goods from either a non-vendor or from a vendor that supplies the goods outside the course or furtherance of its enterprise may claim a notional input tax deduction if the vendor acquired the goods for the intended purpose of use or consumption in making taxable supplies in the furtherance of its enterprise.

In 2014, the definition of second-hand goods had been amended to exclude gold and goods containing gold in order to curb fraudulent notional input tax deductions on the acquisition of gold and jewellery. However, this amendment was not intended to have an adverse effect on legitimate transactions within the second-hand gold industry. A further amendment, effective from 1 April 2017, sought to limit the extent of the exclusion. Pursuant to these changes and in terms of this ruling, for the purpose of the definition of second-hand goods, the term “consisting solely of gold” refers to goods that consist of at least 99.5% gold and the industry designation of 24 carat gold is used as the minimum benchmark.

A notable draft binding ruling

7 Draft Binding General Ruling (April 2017) deals with the supply of potatoes.

SARS will consider the intention of the supplying vendor at the time of the supply to determine the classification of potatoes, taking into consideration the description of the potatoes in the tax invoice issued, the status of the recipient of the potatoes, the consideration paid for the potatoes and the labelling or packaging in which the potatoes are supplied.

Notable draft interpretation notes

Draft Interpretation Note 57
Draft Interpretation Note 57 (Issue 2) (April 2017) deals with the VAT treatment of the disposal of an enterprise or part thereof as a going concern.

The interpretation note provides more clarity on when the purchaser has to be registered for the zero rate to apply. It thus provides that the purchaser must be registered at the deemed time of supply and so the zero rating will only apply if the purchaser is actually registered at the time of supply (earlier than the invoice date or payment receipt date). Draft Interpretation Note 57 also includes a discussion on the registration of non-residents conducting e-services in South Africa.

SARS will not allow the zero rating without a joint written agreement stating the sale of the going concern and the application of the zero rate. Draft Interpretation Note 57 introduces a test of whether an income-earning activity has been transferred at the date of transfer which must be included in the agreement.

Draft interpretation note on international and ancillary transport services SARS released a draft interpretation note on the VAT treatment of international and ancillary transport services (May 2017).

The draft interpretation note interprets the zero rating on international transport services of passengers and goods, the domestic leg of an international passenger flight and the domestic leg of an international transport service and ancillary transport services.

Relief is granted to non-resident recipients of domestic transport services who are not vendors. This is subject to the requirement that the agent and the principal must agree that the provisions of the VAT Act will apply as if the supply had been made to the agent. A number of conditions apply:

  • The transport service must not be subject to VAT at a zero rate.
  • The principal must not be a resident and must not be a vendor.
  • The agent must be a vendor.
  • The transport service or the arranging of the transport service must be directly connected to the importation or exportation of goods which are being moved to, from or through South Africa.

Important VAT amendments to legislation

The Draft Taxation Laws Amendment Bill 2017 addresses VAT on leasehold improvements.

It proposes that a lessee vendor who effects leasehold improvements to the fixed property of a lessor for no consideration will be deemed to make a taxable supply of goods to the lessor in the course or furtherance of the lessee’s enterprise at a nil value.

The lessee is entitled to deduct the VAT incurred on the cost of the leasehold improvements as input tax. If the lessee does not use the property to make taxable supplies, there is no deemed supply and the lessee is not entitled to an input tax deduction.

There are no further VAT implications for a lessor vendor on the leasehold improvements effected by the lessee. However, if the leasehold improvements are not applied by the lessor to make taxable supplies, the lessor must account for the output tax on the higher of the open market value of the improvements, the actual cost to the lessee or the total amount of the leasehold improvements as agreed between the lessor and lessee.

These developments enhance clarity in applying the provisions of the VAT Act, but by no means address any principled changes that may be required to the VAT system per se.

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This article first appeared on November/December 2017 edition of Taxtalk.




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