VAT

Part 2
TAX327
Chapter 31
Silke
Mrs Zurelda Mongane
 Plan for week ahead
• Revise TAX212 (will not cover work in detail again)
• Prohibited input VAT
• Notional/deemed input VAT
• Deemed supplies – section 8
• VAT on fixed property
 Prohibited input VAT
S 17(2) sets out the prohibited input deductions
Prohibition in s 17(2)(a). Input tax on entertainment.
 Entertainment defined in s 1
 Vendors in the business of entertainment can claim input tax related to their entertainment if the
vendor charges for the entertainment and the charge covers all direct and indirect costs or charge
is equal to open market value.
 Vendors in the business of entertainment if the entertainment is supplied for bona-fide
promotional purposes to current customers or any excess food not consumed by customers during
a taxable supply and is subsequently given to any employee of the vendor or any welfare
organisation.
 Input tax can be claimed if the provision of entertainment to employees or connected persons is
supplied for a charge which covers all the costs of providing it.
 If an employee, office holder or partner is away from his usual residence for at least one night, the
VAT may be claimed on food, hotel expenses etc.
 If vendor supplies organises seminars etc ,input on entertainment can be claimed.
 If vendor supplies meals or refreshments as part of a taxable transport service the input can be
claimed.
 Prohibited input VAT
Input denied on fees or subscriptions
S 17(2)(b)
• Input tax denied on social or sport clubs
subscription or membership fees.
• Input can be claimed on subscription fees of
professional associations for example SAICA
membership fees.
 Prohibited input VAT
Section 17(2)(c) input denied on motor cars
• Definition in s 1 of motor car – questions often test whether you know the definition
and can apply it to the scenario facts describing the vehicle.
• Make sure of the definition. It is based on the purpose/intention for which the vehicle
was constructed not the actual use to which the vehicle is put.
• No input tax claimed on the acquisition if it is a motor car as defined.
• No input tax if vendor rents a motor car.
• The VAT on the insurance premium of a motor car is allowable also any repairs or
maintenance
• Denial of input tax does not apply in the case of a vendor who
 is in the business of dealing with motor cars. (car dealer)
 runs a car rental business and charges, or
 regularly supplies motor cars as prizes to clients or customers (not to employees, office holders
or any connected person in relation to employer, office holder or vendor)
EXAMPLE 31.38
 Second-hand goods: Notional input VAT
• Deemed or notional input tax on second-hand goods
• Definition second-hand goods s1
• Key words in definition:
– Supply by a non-vendor who is a SA resident
– Goods situated in SA
• How is notional input calculated?
– 15/115 (even though no VAT was paid) x (lesser of cost or open market value)
• Time of supply: to the extent of payment
• If goods are returned, consideration reduced or sale is cancelled difference should
be accounted for as output tax
• Documentation requirements
Example 31.39

Ignore 31.22.1
 DEEMED SUPPLIES
• Deemed supplies
– What does this mean?
Section 8(1) (page 1129)
• Goods (assets) sold by a creditor to cover a debt of the
person. Creditor will not know the tax status of
enterprise. If enterprise did not give a statement that it is
not a taxable supply, it will be deemed to be supplied in
the furtherance of an enterprise and thus a taxable
supply
 DEEMED SUPPLIES
Person ceasing to be a vendor – S 8(2) (page 1118)
• Any goods which forms part of the enterprise (except goods of which input tax was denied) are
deemed to be supplies made immediately prior ceasing to be a vendor.
• In other words the vendor will pay OUTPUT TAX on all assets (except goods where input tax was
denied) in his/her enterprise as if he sold the assets. Why? Input tax was claimed at purchase date.
• Value of supply: The tax fraction is applied to the lower of cost (incl VAT) or open market value.
S10(5)
• Time of supply: Immediately before the vendor ceases to be a vendor. S8(2) & 9(5)
• Please NOTE:
• Output tax will also be claimed on unpaid creditors not older than 12 months because input had
already been claimed at purchase date (if registered on invoice basis). S22(3) proviso (ii)(BB)
• Value of supply: Consideration is outstanding amount
• Output tax will also be claimed on unpaid creditors older than 12 months not as a result of the
cessation – this is due to an adjustment in terms of s 22(3).THIS RULE APPLIES TO ALL VENDORS NOT
ONLY WHEN YOU CEASE TO BE A VENDOR!!!
• Value of supply: Consideration is outstanding amount

Example 31.16
 DEEMED SUPPLIES
S8(3)
• if credit agreement allows a cooling off period (you have time to
return goods and get out of the credit agreement) then it is NOT
deemed to be a supply of goods or services till after the cooling
period.
• Time of supply: the day after the last day of the cooling period s
9(2)(b)
S8(4)
• lay-by sales up to R10 000 and reserved by a deposit will NOT be a
deemed supply of goods or services until the goods are delivered.
• Time of supply: day of delivery of goods to recipient s 9(2)(c)
 DEEMED SUPPLIES
S8(7) Disposal of going concern
Deemed to be a supply of goods.
S8(8) Insurance claims (indemnity payments)
• Deemed to be a consideration received for a supply of services performed
• Payment received is deemed to be made for services supplied by the insured to the insurer.
Only short term insurance contracts.
• Deemed output only when a payment (whether directly to insured or a third party) occurs NOT
if the insurer replaces the goods.
• Output tax only to the extent that taxable supplies were made.
• No deemed output if:
– It was not a supply subject to VAT ito s 7(1)(a); or
– input tax was originally denied on the goods and it was damaged beyond economic repair or stolen
and indemnity payment is for the total replacement of goods.
• Value of supply: tax fraction x consideration received x % taxable supplies
• Input tax is claimed in respect of the full insurance premiums paid by the insured.
DO Example 31.17, 18 & 19
 DEEMED SUPPLIES
S8(9) Branch/head office outside SA
• Deemed supply in the furtherance of an enterprise and output tax would be paid to SARS by vendor in
SA. (at 0% if certain requirements are met). The branch/head office outside SA is referred to as the
independent branch (certain requirements).
• Value of supply: lesser of cost or open market value s10(5)
• Time of supply: date of delivery of goods s9(2)(e)
• Supply made by independent branch is not in the furtherance of the enterprise and thus no VAT
charged.
• DO Example31.20

S8(10) If customer defaults on payment of goods it may result in the repossession of goods.
• The CUSTOMER is deemed to make a supply of goods to the vendor.
• Value of supply: Consideration in money equal to the balance of the outstanding debt. S 10(16)
• Time of supply: day on which goods are repossessed s9(8)
• Vendor will be able to claim an input tax when the deemed supply is made.
S8(14) Non-supplies
• If input tax was originally denied (motor car and entertainment, but excluding motor car fringe
benefit) it will be deemed to be supplied otherwise than in the furtherance of an enterprise.
Subsequent supply (sale) of the goods would not attract output tax.
• DO Example 31.28
 VAT
S8(15) Separate parts of a single supply
• If supply consists of a 15% supply and a 0% supply each part is deemed to be a separate
supply.
• How does this tie up with the case law CSARS v British Airways PLC?
• Remember British Airways showed an amount on their ticket price which included a
charge by the Airports Company (this charge is made to all airlines) (shows as passenger
service charge). SARS wanted to apply s 8(15) (fare for flight 0% (international flight) and
service charge @ 15%) which we discussed above. Can SARS apply this section?
• Court concluded that SARS could not apply s 8(15) because the service charge was not
supplied by British Airways they merely recovered this amount from their passengers. This
service cost was part of the price of the air ticket. BA is recovering this cost and adding it
to the cost of the ticket. The Airports Company will pay output tax of 15% on this charge
to the airlines as they supply this service. British Airways does not supply this service
DO Example 31.27.
 DEEMED SUPPLIES
S8(16) Supply of goods or services used partly for taxable supplies
• Deems the supply to be wholly in the course of the enterprise. (excluding fixed property owned
by a natural person and used mainly as a private residence and no input tax was claimed)
• What does it mean? Output tax is never apportioned!
• Remember two exceptions: fringe benefits (s 18(3)) and indemnity payments (s 8(8))
S8(21) Expropriated fixed property is deemed to be a supply made in the course or furtherance
of an enterprise.
S8(27) Amount received in excess of consideration charged. If not refunded within four months
of receipt the excess amount shall be deemed to be consideration for a supply of services
• Value of supply: the excess portion of payment s10(26)
• If excess is refunded after the output tax has been created, an input tax may be claimed s16(3)
(m)
• Time of supply: last day of the tax period during which the four month period ends. S 8(27)
• DO Example 31.26
 Special rules
Special rules: Instalment credit agreements (ICA)
• ICA definition in s1
• Par(a): describes a suspensive sale agreement
• Par (b): describes finance lease
• What is the difference between suspensive sale and finance lease transactions as described in
the definition of an ICA (s1)?
• The time when ownership goes over to the lessee. With a suspensive sale you become the
owner after the requirements of the agreement are met (at the end of the agreement but you
take possession of the goods at the beginning). In the case of a finance lease the ownership
goes over when agreement is concluded (thus at the beginning of the agreement when you
also take possession of the goods).

Value of supply: consideration is the cash cost of the asset s10(6)

NB!! The full output tax for the seller is raised and the full input tax is claimed by the purchaser
Time of supply: the earlier of the time of delivery of the goods or the time any payment is received
(finance lease) s9(3)(c)
When the cooling period of five days has expired (suspensive sale agreement) s9(2)(b)
Example 31.42 & 31.43
 Pointers: Example 31.42
Finance lease (definition ICA)
Time of supply: VAT output and input claimed upfront
at the beginning when agreement concluded (earlier
of time of delivery or time any payment is made) 1
June
Value of supply: cash cost (excluding finance charges)
R112 000 x 15/115 output tax
No input tax: motor car input denied
 Pointers: Example 31.43
Example 31.43
Suspensive sale agreement (definition ICA)
Time of supply: VAT output and input claimed upfront
at the beginning when agreement concluded (earlier
of time of delivery or time any payment is made) 15
May
Value of supply: cash cost (excluding finance charges)
R112 000 x 15/115 output tax
Input tax: R112 000 x 15/115 (delivery vehicle)
 VAT
Fixed property
RULE 1 (output and input tax)
Where fixed property or any real right in fixed property is supplied by a VENDOR (thus not 2 nd
hand property) to a connected person and s10(4) requirements are met (thus it means that
the value for the supplier is open market value)
Time of supply the earlier of registration in the name of the purchaser or payment of any part
of the purchase price . s 9(3)(d)
Application: full output tax or input tax taken into account s16(3)(a)(iiA)
RULE 2 (output and input tax)
If fixed property transaction is NOT between connected persons or open market value does
not apply to connected persons (s10(4) requirements are not met) the above time of supply
rule does not apply and we only look to the extent of payment (irrespective of accounting
basis).
Application: Output and input is taken into account as and when payment is made. S16(4)(a)(ii)
S 16(3)(a)(iiA) special time of supply rule is ignored and focus only on the extent of payment.
 VAT

RULE 3 (only affects input tax – why? Seller is a non vendor no output tax)
Fixed property not supplied in the course or furtherance of an enterprise
Examples:
Fixed property relating to exempt residential use supplied to a vendor, or
Second hand property (supplied by non-vendor) to a vendor
In both instances the vendor purchasing it to use the property in the
course or furtherance of an enterprise (residential property will have to
be converted to office space or shops as residential property is exempt no
VAT implications) will claim a deemed input tax.
 VAT
Rule 3:Time of supply?
Payments basis: to the extent payment is made
s 16(3)(b)(i)
Invoice basis: Registration in the name of the purchaser
AND extent of payment. S 16(3)(a(ii)(bb)
Do you see that rule 3 would only apply for input tax.
Why? Seller is a non-vendor, no output tax implications
Rule 1 and 2 could apply both to output and input tax
Example 31.44
 Pointers: Example 31.44
Rule 3 would apply.( Why? Non-vendor supplying fixed property –
not in the furtherance of an enterprise)
Invoice basis thus time of supply: Registration and extent of
payment thus 15 April 2020
Value of supply: lesser of consideration and open market value
(2nd hand goods rule (input tax definition))
See difference in answer if purchaser was natural person and
registered on payments basis and not full amount paid
immediately
Time of supply: extent of payment thus 20 March 2020 (no need
to wait for registration date)
 VAT
VAT vs transfer duty
Not both can be charged on a fixed property transaction
VAT takes preference if such property is sold by a VENDOR for VAT purposes. The property is
exempt from transfer duty. That means the purchaser will only pay VAT, not both.
When will VAT be charged and no transfer duty: if the seller is a vendor.

Transfer duty
Separate Act and a tax payable on the transfer of ownership of fixed property.
When will transfer duty be payable? ONLY if the seller is a non-vendor.
This means that the purchaser will pay transfer duty on purchase of the property in stead of VAT as
seller is a non vendor. (not both)
If the fixed property is used to make taxable supplies the fixed property will be dealt with as second
hand goods and a a notional/deemed input tax may be claimed. (normal second hand rules)
Transfer duty is not part of consideration. Thus notional input tax is on the cost of the property
without adding the transfer duty.
Transfer duty is paid by the purchaser just like VAT
 VAT
Context of separate discussion of these two types of
supplies
ICA
Fixed property
Like with some of the deemed supplies there are
special value and time of supply rules.