VAT 420 Guide for Motor Dealers FOREWORD

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2 VAT 420 Guide for Motor Dealers Foreword FOREWORD This guide concerns the application of the value-added tax (VAT) law in respect of vendors that supply motor cars and other vehicles (motor dealers). Although fairly comprehensive, the guide does not deal with all the legal detail associated with VAT and is not intended for legal reference. Technical and legal terminology has also been avoided wherever possible. All references to the VAT Act or the Act are to the Value-Added Tax Act, No. 89 of 1991, and references to sections are to sections in the Value-Added Tax Act, unless the context otherwise indicates. The terms Republic, South Africa or the abbreviation RSA, are used interchangeably in this document as a reference to the sovereign territory of the Republic of South Africa, as set out in the definition of Republic in section 1 of the VAT Act. Similarly, the terms motor vehicle or vehicle are also used as a reference to all types of vehicles which may be supplied by motor dealers. However, the term motor car is used in certain instances, where it is necessary to refer to this specific defined term. A number of specific terms used throughout the guide are defined in the VAT Act. These terms and others are listed in the Glossary in a simplified form for ease of reference. The information in this guide is issued for guidance only and does not constitute a binding general ruling as contemplated in section 76P of the Income Tax Act, No. 58 of 1962, and section 41A of the VAT Act unless otherwise indicated. This guide is based on the VAT legislation as at 6 March The following guides have also been issued and may be referred to for more information about specific VAT topics: AS-VAT-08 - Guide for Registration of VAT Vendors Trade Classification Guide (VAT 403) Guide for Vendors (VAT 404) Guide for Fixed Property and Construction (VAT 409) VAT Guide: Accommodation, Catering and Entertainment (VAT 411) Share Block Schemes (VAT 412) Deceased Estates (VAT 413) Associations not for Gain and Welfare Organisations (VAT 414) Diesel Guide (VAT 415) Guide for the Small Retailers VAT Package (VAT 416) Guide for Small Vendors (VAT 417) AS-VAT-02 - Quick Reference Guide (Diplomatic Refunds) (VAT 418) Guide for Municipalities (VAT 419) Should there be any aspects relating to VAT which are not clear or not dealt with in this guide, or should you require further information or a specific ruling on a legal issue, you may contact your local South African Revenue Service (SARS) branch; visit the SARS website at contact your own tax advisors; if calling locally, contact the SARS National Call Centre on ; or if calling from abroad, contact the SARS National Call Centre on For details in respect of the general operation of VAT refer to the VAT 404 Guide for Vendors which is available on the SARS website. Prepared by: Legal and Policy Division: Indirect Taxes South African Revenue Service 6 March

3 VAT 420 Guide for Motor Dealers Contents CONTENTS CHAPTER 1 INTRODUCTION Approach of the Guide Background General VAT principles 6 CHAPTER 2 DEFINITIONS AND CONCEPTS Consideration Enterprise Exported Floor plan Goods and second-hand goods Input tax and notional input tax Instalment credit agreement (ICA) and rental agreement Motor car Motor dealer Output tax Over-allowance Sale, supply and taxable supply Services 13 CHAPTER 3 AGENT AND PRINICPAL Introduction Legal principles of agency Tax invoices, credit notes and debit notes Application of agency principles 15 CHAPTER 4 TYPES OF SUPPLIES Introduction Supply of motor vehicles Outright sales Instalment credit agreements (ICAs) Floor plan agreements Exports Motor vehicles sold on behalf of other persons Consignment stock Arranging supplies and referral of customers Accessories and parts Sponsorship Rental agreements and discounted rental agreements Discounted instalment credit agreements Deemed supplies in respect of indemnity payments Licensing and registration Service and maintenance plans Warranty services Fringe benefits Repossessions Auction sales 29 3

4 VAT 420 Guide for Motor Dealers Contents CHAPTER 5 EXPORTS Introduction Direct exports New goods Second-hand goods Indirect exports Part One of the Scheme Part Two of the Scheme New goods Part Two of the Scheme Second-hand goods 38 CHAPTER 6 IMPORTS Introduction Importation of goods Goods temporarily imported for servicing or repairs Trans-shipment of goods Non-resident manufacturer warranties 41 CHAPTER 7 INPUT TAX General rules Dealer stock Second-hand goods Importation of motor vehicles Insurance Commissions paid Floor plans General overheads Denial of input tax 46 CHAPTER 8 TAX INVOICES Tax invoice Consideration exceeds R50 but not R Consideration exceeds R Examples 48 GLOSSARY 52 ANNEXURE A FORM VAT ANNEXURE B FORM VAT CONTACT DETAILS 62 4

5 VAT 420 Guide for Motor Dealers Chapter 1 CHAPTER 1 INTRODUCTION 1.1 APPROACH OF THE GUIDE For the most part, the general VAT principles as set out in the Guide for Vendors (VAT 404) will apply to motor dealers as it does for any other vendor, and the information in this guide should be read together with the Guide for Vendors. The purpose of this guide is, therefore, to expand on the application of those VAT principles as they apply to specific types of transactions which are of interest to motor dealers and the motor industry in general. The approach to the topic and the layout of the material in this guide is set out as follows: Chapter 1.This chapter sketches the policy background concerning the VAT treatment of the supply of motor cars in the Republic. An important aspect in this regard is that, as a general rule, vendors may not claim input tax on the acquisition of motor cars, but this rule does not apply to vendors that supply motor cars for a consideration in the ordinary course of conducting an enterprise. A brief overview is also provided on the basic principles of VAT and how it applies to motor dealers. Chapter 2 The purpose of this chapter is to introduce the reader to some of the more important concepts and definitions contained in the VAT Act, as well as certain terminology used in the motor industry which is relevant for the purposes of topics to be discussed in later chapters. Chapter 3 A brief overview is provided of the legal concepts agent and principal. This is important as the VAT consequences of a transaction cannot be determined until the contracting relationship between the parties is established. These concepts are particularly important to clarify as to which person is required to account for output tax and input tax in regard to transactions concluded by a motor dealer when acting as principal, and when acting on behalf of another person. Chapter 4 In this chapter the various types of supplies which are made by motor dealers are discussed in some detail. In particular, the focus is on the nature of the supplies and whether output tax must be declared by the motor dealer, or by some other vendor in the case where the motor dealer has acted as agent. Chapter 5 It is important for motor dealers that are involved in exporting vehicles to draw a distinction between direct and indirect exports, as well as new and second-hand motor vehicles exported, as the VAT treatment differs. This chapter therefore discusses the rules for applying the zero rate of VAT to different types of exports, the applicable documentation which a vendor is required to hold to justify the charging of the zero rate on exports, and the possible VAT adjustments which may be required when the export documentation is not received timeously. Chapter 6 The different circumstances under which goods are imported into the Republic are discussed. As the normal rules in this regard are discussed in the Guide for Vendors (VAT 404), this chapter focuses on specific types of imports which may be of interest to motor dealers. For example, the temporary import of vehicles for the purpose of servicing or repair, trans-shipment of vehicles destined for export countries, and certain aspects concerning warranties. Chapter 7 This chapter focuses on the different types of supplies acquired or goods imported by motor dealers in the course of conducting an enterprise, and sets out the rules with regard to the claiming of input tax on those supplies or imports. Chapter 8 In this chapter, the general rules with regard to tax invoices are set out. In addition, examples of tax invoices are provided to provide guidance to vendors, particularly with regard to the export of second-hand vehicles. 5

6 VAT 420 Guide for Motor Dealers Chapter BACKGROUND The Value-Added Tax Committee (VATCOM) was a committee consisting of members from the private and public sectors, which was appointed by the Minister of Finance (the Minister) to consider the comments and representations made by interested parties in 1991 on the Government s draft Value- Added Tax Bill. VATCOM found that by far the majority of new motor cars are acquired by or for businesses and that to some extent private consumption of motor cars is funded by businesses. This places a person with a company car in a better position than a private person who purchases a motor car with his/her own financial resources, or borrowed funds. However, provision was made for the value of fringe benefits to be considered for VAT purposes to neutralise the deduction of input tax that the employer may enjoy. VATCOM also found that in other countries, the deduction of input tax in the hands of vendors encourages the registration of private motor cars in the name of businesses. Further, that many other countries which have a VAT system of taxation also deny input tax on the acquisition of passenger type motor cars. The reasons for the disallowance of the input tax on these supplies is to a large extent based on the potential for abuse because the use of a motor car usually has both a business and personal consumption component. Conceptually, the denial of input tax is linked to the idea that a vendor who acquires a motor car for business purposes (taxable supplies) should not be in a position to deduct the full amount of input tax in a situation where there is an element of personal consumption by that vendor, an employee of that vendor, or a connected person in relation to that vendor. However, from an administrative point of view it would be very difficult to apportion, or identify separately, the extent of that personal consumption so that the input tax deduction in relation to the total VAT incurred could be adjusted accordingly. The recommendation of VATCOM (which was accepted) was therefore that the South African legislation should disallow credit for input tax attributable to motor car purchases, even if the expense is incurred in the course of conducting an enterprise. Although there have been some amendments over the years to the applicable provisions in the VAT Act, the policy of generally denying input tax on the acquisition of motor cars is still currently an integral part of the structure of the VAT law. 1.3 GENERAL VAT PRINCIPLES VAT is an indirect tax charged on the supply of goods or services in the Republic by a vendor. It is also charged on the importation of goods into the Republic, and in some cases, on the importation of services. The aim of VAT is to raise revenue for the fiscus by taxing final consumption of goods and services in the Republic. Accordingly, supplies and imports of goods or services consumed in the Republic are generally taxable for VAT purposes. A motor dealer which is a vendor for VAT purposes must levy VAT on all taxable supplies made in the course or furtherance of its enterprise. In addition, a motor dealer is required to know the rate of VAT that must be imposed on such supplies (that is, 14% or 0%). VAT charged to customers is called output tax, while the VAT paid on purchases, as well as other business expenses acquired wholly or partly for purposes of making taxable supplies, is known as input tax. The output tax less the input tax in a tax period results in the amount of tax payable by or refundable to the vendor. However, as a general rule, input tax is specifically denied in respect of certain business expenses, for example, expenses in connection with entertainment and the acquisition of motor cars. The supply of a motor vehicle, as well as the conducting of other associated business activities by a person constitutes a taxable activity and an enterprise for VAT purposes if the activities are carried on continuously or regularly in the Republic or partly in the Republic. Accordingly, a person that continuously or regularly supplies motor vehicles (for example, a motor dealer) will be required to register as a vendor if the total value of motor vehicle sales or other taxable supplies of goods or services exceeds or is likely to exceed the compulsory VAT registration threshold 1 in any 12-month period. Failure to register will render the person conducting the motor dealer activities liable to account for output tax on past supplies and that person will be guilty of an offence. 1 In terms of the Revenue Laws Amendment Act, 2008, the compulsory registration threshold for VAT increased from R to R1 million on 1 March Refer also to VAT News No. 32 and 33 for more details in this regard. 6

7 VAT 420 Guide for Motor Dealers Chapter 1 When considering the factors in paragraph 1.2 it becomes evident that an integral part of the trading environment of a motor dealer is that in most cases, customers will not be able to claim input tax on motor cars purchased. 2 The ability or inability of customers to claim input tax on a particular type of vehicle which will be used for enterprise purposes is often an important factor in influencing business and consumer choices. To compensate for the inability of most vendors to claim input tax on the acquisition of motor cars, the VAT Act provides that the subsequent sale of such motor cars by the purchaser is not a transaction in the course or furtherance of an enterprise and will not attract VAT. Accordingly no output tax should be declared on such sales. However, as an input tax deduction should, in principle, not be denied in respect of legitimate business transactions, the denial of input tax is subject to a limited list of exceptions where certain specified conditions have to be met before input tax may be allowed. The obvious exception is where the vendor is in the business of supplying motor cars, and the taxable supply or import relates to the supply of motor cars in the ordinary course of that business. Therefore, a motor dealer or bank which supplies motor cars is not subject to the disallowance rule because it is selling the motor cars in the ordinary course of its business. There are a limited number of other instances where the disallowance rule does not apply, but these will be discussed in more detail later in the guide. For a more detailed discussion on general VAT principles, refer to the Guide for Vendors (VAT 404). 2 This excludes motor dealers and motor car rental enterprises which are usually entitled to claim input tax. 7

8 VAT 420 Guide for Motor Dealers Chapter 2 CHAPTER 2 DEFINITIONS AND CONCEPTS 2.1 CONSIDERATION The term consideration basically means the total amount of money (including VAT) received for a supply of goods or services. However, consideration is widely defined to include any form of payment and any act or forbearance, whether or not voluntary, for the inducement of a supply of goods or services. Where the consideration is not in money, (for example, in the case of barter transactions) the consideration is the open market value of the goods or services (including VAT) received for making the taxable supply. The term consideration excludes any donation made to an association not for gain; and a deposit 3 which is lodged to secure a future supply of goods or services, which has not yet been applied as payment, or which has not yet been forfeited. The value of supply or amount of the consideration for VAT purposes for different types of supplies of goods or services is determined in section 10 of the VAT Act. Furthermore, since VAT is the difference between the selling price including the VAT and the value of the taxable supply, the following formulae can be derived: Consideration = Value + VAT or VAT = Consideration Value 2.2 ENTERPRISE The term enterprise is the starting point in determining whether a person is liable to be registered for VAT purposes in the Republic. A person is generally considered to be carrying on an enterprise if all of the following requirements are met: An enterprise or activity must be carried on continuously or regularly by a person in the Republic or partly in the Republic. In the course of carrying on the enterprise or activity, goods or services must be supplied to another person. There must be a consideration payable for the goods or services supplied. Therefore, where a person conducts an enterprise and the value of taxable supplies made by that person in any 12-month period exceeds, or is likely to exceed the compulsory VAT registration threshold, the person is obliged to register for VAT. In cases where the value of taxable supplies is less than the compulsory VAT registration threshold, but more than R20 000, the person may apply for voluntary registration. It is important to note that even income from only one supply, for example, the sale of one motor vehicle by a motor dealer, can render a person liable for VAT registration. 3 For example, a security deposit held in trust until the time of supply is triggered. 8

9 VAT 420 Guide for Motor Dealers Chapter 2 Example 1 Scenario Mr S is employed fulltime as a financial consultant at a local bank. However, as a sideline business which he conducts in his spare time, Mr S buys old motor cars and sells them after restoration. During the period November 2005 to August 2006 he bought and sold the following motor cars: Date of sale Description of goods supplied R 04 November Toyota Corolla December Fiat Uno February VW Citi Golf March Mercedes Benz June Opel Monza July Nissan July Audi A August VW Citi Golf September Nissan Total Question Is Mr S required to register as a vendor for VAT purposes, and if so, from which date? Answer The activity of buying, restoring and selling motor cars on a continuous or regular basis is an enterprise for VAT purposes. In the first month of trading the total value of taxable supplies was already R45 000, however, due to the erratic nature of the sales, it is not certain whether there are reasonable grounds for believing that the compulsory VAT registration threshold (R at that time) would be exceeded. However, Mr S could register voluntarily if he chooses to do so, as he has exceeded the minimum threshold of R In this case, Mr S is obliged to register as a vendor within 21 days from the end of August 2006, which is the month in which he exceeded the compulsory VAT registration threshold. Note: The monthly salary that Mr S receives from his employer is remuneration earned in the course of his employment at the local bank and is not in respect of any taxable supplies made by him. The remuneration therefore falls outside the ambit of enterprise and is not taken into account to determine the value of taxable supplies. 2.3 EXPORTED The term exported in the context of this guide, refers to a situation when motor vehicles (being movable goods) are supplied under a sale or instalment credit agreement by a South African motor dealer (vendor) and subsequently removed from the Republic so that consumption of the goods takes place in an export country. The VAT principle of consumption provides that goods should be subject to tax in the country in which they will be consumed. VAT is therefore levied at the zero rate on goods exported from the Republic as they will be subject to VAT in the country into which they are imported for consumption. If the vendor consigns or delivers the movable goods (for example, a motor car) to the customer in an export country, this is referred to as a direct export, which is subject to VAT at the zero rate, 4 provided that the necessary documentary proof of export is obtained and retained. In the case of a direct export, the supplier is in control of the movement of the goods and is responsible for delivery in the export country. On the other hand, an indirect export is when the customer receives delivery of the goods in the Republic. The vendor supplying the goods in this case is not in control of the goods after the sale and cannot be certain that they will be exported by the customer. As a general rule indirect exports are subject to VAT at the standard rate but if the goods are subsequently removed from the Republic, the customer may apply for the VAT charged on the supply to be refunded In terms of paragraph (a) of the definition of exported in section 1, read with section 11(1)(a)(i) of the VAT Act. Refer also to Interpretation Note No. 30 (Issue 2) for the documentary proof requirements. As set out in Part One of the Export Incentive Scheme, published as Notice Number 2761 in Government Gazette No , dated 13 November Refer also to paragraph (d) of the definition of exported in section 1, read with section 11(1)(a)(ii) of the VAT Act. 9

10 VAT 420 Guide for Motor Dealers Chapter 2 To qualify for a refund under Part One of the Export Incentive Scheme (the Scheme), the customer must be a qualifying purchaser 6 and the goods must be removed from the Republic to the export country either personally by the qualifying purchaser, or by a VAT-registered cartage contractor appointed by the qualifying purchaser. A different type of indirect export is where the vendor may elect under certain circumstances to supply movable goods at the zero rate to a qualifying purchaser. 7 In this case the vendor must ensure that the movable goods are initially delivered to a designated commercial harbour or airport from where the qualifying purchaser (or that person s appointed cartage contractor) will subsequently export the movable goods to an export country. (Refer to Chapter 5 for more details.) 2.4 FLOOR PLAN A floor plan is a generic term used to refer to the financing of motor vehicles that are held in stock by a motor dealer before they are sold. The motor vehicles could be in transit, in a special storage facility (for example, a manufacturer's warehouse), or on the motor dealer's showroom floor. It is a standing arrangement, involving various parties and a predetermined combination of transactions and conditions primarily aimed at funding assets during the period between manufacture, exportation or importation (or purchase by a dealer in the case of second-hand motor vehicles) and the ultimate sale of those assets to the motor dealer s customer. It is common practice in the motor industry for a motor dealer to enter into a floor plan agreement to finance the acquisition of new motor vehicles which may be purchased from local motor vehicle manufacturers or importers. Floor plan agreements may be concluded with local or foreign motor dealers, for example, South African financiers may have floor plan agreements with motor dealers located in neighbouring African countries. Although a number of variations exist which take into account different funding requirements and risk factors, the supply of vehicles under a floor plan agreement basically involves the purchase of motor vehicles by the financier for cash or on credit terms from the manufacturer; importer, or dealer; and the subsequent supply of those vehicles under Instalment Credit Agreement (ICA) by the financier to the motor dealer. A floor plan agreement need not be a financing agreement in its own right but an arrangement which sets out how finance will be provided. However, it could also constitute a master agreement (instalment credit agreement or otherwise) against which individual motor vehicles are added to the agreement, as and when they are supplied. (Refer to paragraphs for more details.) 2.5 GOODS AND SECOND-HAND GOODS The term goods includes corporeal movable things, fixed property and any real right in such thing or fixed property. The definition basically refers to any tangible property and any real right in such tangible property. The term second-hand goods includes goods which were previously owned and used. It is necessary to determine whether goods are indeed second-hand goods because if a vendor acquires second-hand goods under a non-taxable supply from a resident for the purposes of making taxable supplies, the vendor may be permitted to deduct an amount of VAT as a notional input tax deduction (refer to paragraph 2.6). 2.6 INPUT TAX AND NOTIONAL INPUT TAX The term input tax refers to the tax paid by a vendor on the acquisition of goods or services that are to be consumed, used or supplied by that vendor either wholly or partly in the course of making taxable supplies. In cases where goods or services are acquired partly for the purpose of making taxable supplies and partly for non-taxable purposes, input tax is limited to the extent that the goods or services are acquired for the purpose of making taxable supplies. The VAT incurred in the course of making exempt or other non-taxable supplies does not fall within the definition of input tax. 6 7 In brief, this is a non-resident that holds a foreign passport (and who is not in the RSA at the time of the supply), a tourist, a foreign business or a foreign diplomat. Part Two of the Scheme, read with paragraph (d) of the definition of exported in section 1 and section 11(1)(a)(ii) of the VAT Act. 10

11 VAT 420 Guide for Motor Dealers Chapter 2 Input tax may be deducted on goods or services acquired for the purpose of making taxable supplies, provided the purchaser is in possession of the relevant documentation, 8 in the following circumstances: Where VAT is charged at the standard rate on the supply of goods or services by a vendor. Where VAT is paid at the standard rate on the importation of goods into the Republic. Where second-hand goods 9 (not being fixed property situated in the Republic) are acquired from a resident under a non-taxable supply for the purpose of making taxable supplies. Notional input tax deductible by a motor dealer (vendor) on the acquisition of second-hand goods under a non-taxable supply is, in terms of the definition of input tax, limited to the tax fraction applied to the lesser of the consideration in money paid by the motor dealer to the customer or the open market value of that supply. Further, the notional input tax is limited to the extent of payment of the consideration which has the effect of reducing or discharging the obligation relating to the purchase price of the goods which has been made in the tax period. In the case of second-hand goods, the notional input tax deduction is calculated as follows: VAT (input tax) = Lesser of consideration or open market value 10 x 14 x consideration paid 114 total consideration Example 2 Scenario Miss C (a resident) intends studying in Europe and sells her 2006 Toyota Yaris to Second Time Around motor dealers (a vendor) for R which is also equal to the open market value of the vehicle. Question What are the VAT implications for Second Time Around motor dealers? Answer Miss C is not a vendor and cannot charge VAT on the agreed selling price. However, as Second Time Around has purchased the motor car from a resident for a consideration of R for the purpose of making taxable supplies, an amount of R (R x 14/114) may be claimed as a notional input tax deduction. 2.7 INSTALMENT CREDIT AGREEMENT (ICA) AND RENTAL AGREEMENT An ICA was previously known as a hire purchase or HP agreement. There are two types of ICAs for VAT purposes, namely an instalment sale agreement and a financial lease. ICA agreements are characterised by a condition that the passing of ownership of the goods or services supplied only takes place upon payment of the final instalment or once the residual amount 11 has been settled (as the case may be). The agreement will normally provide for the payment of the purchase price including finance charges at a fixed or determinable charge and the recipient accepts the risks attached to those goods insofar as loss or damage is concerned. A rental agreement (or operating lease) where the recipient does not become the owner of the goods is not an ICA Usually this will be in the form of a tax invoice. However, for second-hand goods acquired under a non-taxable supply, the purchaser is required to be in possession of a completed form VAT 264, signed by the seller declaring that the supply of the motor vehicle is not a taxable supply, and to serve as evidence of the transaction. Refer to Annexure A for an example of the form. Refer to paragraph 2.5. Refer to paragraphs 2.11 and 7.3 for more details in this regard. Also known as a balloon payment. 11

12 VAT 420 Guide for Motor Dealers Chapter MOTOR CAR The term motor car includes vehicles which have three or more wheels, are normally used on public roads and which are constructed or converted wholly or mainly for carrying passengers, for example, ordinary sedan or hatch type motor cars, SUVs, double-cab bakkies (LDVs), microbuses etc. The following vehicles do not fall within the meaning of the term motor car as defined: Vehicles capable of accommodating more than 16 persons (for example, a bus). Specialised vehicles such as hysters, graders, tractors, mobile cranes and earthmoving vehicles which can only seat one person. Hearses, ambulances and caravans. Vehicles with an unladen mass of kg or more. Single cab bakkies (LDVs), trucks and delivery vehicles. Game viewing vehicles. 12 As a general rule input tax may not be claimed on the acquisition of any vehicle which falls within the meaning of the term motor car, regardless of the mode of acquisition or whether or not it is used for taxable supplies. However, the disallowance of input tax does not apply to vendors such as motor car dealers and car rental businesses that continuously or regularly supply motor cars in the ordinary course of their enterprises. Similarly, motor dealers and car rental businesses may also claim input tax on motor cars which are acquired as stock, but initially used for demonstration purposes or used temporarily for other purposes in the business before being sold. 2.9 MOTOR DEALER The term motor dealer is not defined in the VAT Act. For the purposes of this guide, this term is used to refer to a person that in the ordinary course of conducting a business, supplies motor cars or other motor vehicles on a continuous or regular basis as an integral part of an income earning activity of that business. A person may therefore be regarded as a motor dealer if the sale or rental of motor vehicles is conducted on a sufficiently continuous or regular basis so that the enterprise test 13 is met, and is not limited to persons that are formally set up in the trading style of a motor dealership. For example, banks and motor vehicle manufacturers are also regarded as motor dealers as they supply motor vehicles in the ordinary course of their business. The same would apply in the case of an informal trader or a person that conducts a part time business activity involving the supply of motor vehicles on a continuous or regular basis for a consideration OUTPUT TAX Output tax refers to the tax levied by a vendor on the taxable supply of goods or services. The output tax is determined by applying the VAT rate to the value of a supply of goods or services. In instances where the amount charged (consideration) for the supply of goods or services includes VAT, the output tax is determined by applying the tax fraction (14/114) to the consideration. For example, where the charge including VAT is R500, output tax included in the amount is R61.40 (R500 x 14/114) OVER-ALLOWANCE Motor dealers sometimes agree to pay an amount to a customer which is in excess of the generally accepted trade-in market value 14 of a second-hand motor vehicle. The difference between this value and the amount credited or paid to the customer is referred to as an over-allowance. This usually comes about when the vehicle traded-in, is an integral part of another transaction involving the supply of a new vehicle to the same customer by the motor dealer. Refer to paragraph 7.3 regarding input tax on second-hand vehicles and over-allowances Specialised vehicles used in the tourist industry which are constructed or permanently converted for the carriage of seven or more passengers and used exclusively for game viewing in national parks, game reserves, sanctuaries or safari areas. Refer to paragraph 2.2. Motor dealers usually determine the market value of second-hand vehicles according to a publication known as the Auto Dealer s Guide. 12

13 VAT 420 Guide for Motor Dealers Chapter SALE, SUPPLY AND TAXABLE SUPPLY The term sale is defined to mean an agreement of purchase and sale and includes any transaction or act whereby or in consequence of which ownership of goods passes or is to pass from one person to another. The term supply is defined very broadly and includes all forms of supply and any derivative of the term, irrespective of where the supply is effected. The term includes transactional performance in terms of a sale agreement, rental agreement, instalment credit agreement or barter transaction. The term also includes supplies which are made voluntarily 15 or supplies which take place by operation of law. 16 Apart from the supplies mentioned above, section 8 of the VAT Act also provides for certain deemed supplies. These are events or transactions which are regarded as being included in the meaning of supply, for example the receipt of an indemnity payment under a contract of insurance; the supply of the use, or right to use any goods; and the supply of goods or services under a warranty agreement. The term taxable supply includes all supplies of goods or services made by a vendor in the course or furtherance of an enterprise. Section 7(1)(a) of the VAT Act prescribes that VAT must be levied at the standard rate (presently 14%) on a taxable supply of goods or services supplied for consumption in the Republic, except where the type of supply is listed in section 11 (for example, where goods are supplied and exported to an export country), in which case VAT is levied at the zero rate (0%), or where the supply is exempt in terms of section 12 of the VAT Act. (Refer to Chapters 4 and 5 for more details.) 2.13 SERVICES The term services is defined to mean anything done or to be done, resulting in a definition of wide inclusion. Therefore, anything that does not constitute goods or money will usually constitute the supply of a service For example, the donation of goods or services. For example, forced sales, expropriation transactions etc. 13

14 VAT 420 Guide for Motor Dealers Chapter 3 CHAPTER 3 AGENT AND PRINCIPAL 3.1 INTRODUCTION Before determining the VAT consequences of a transaction, it is necessary to establish the relationship between the parties. This is to determine if the vendor is acting as an agent on behalf of another person or as principal. Section 54 of the VAT Act contains special provisions to deal with the VAT consequences arising from an agency relationship. This chapter aims to provide clarity regarding the VAT treatment of supplies where an agent/principal relationship exists and specific examples are provided to illustrate these concepts. 3.2 LEGAL PRINCIPLES OF AGENCY 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 understood in common law. An agency is a contract whereby one person (the agent) is authorised and required by another person (the principal) to contract or to negotiate a contract with a third person, on the principal s behalf. The agent in representing the principal, creates, alters or discharges legal obligations of a contractual nature between the principal and the third party. The agent therefore provides a service to the principal and normally charges a fee (generally referred to as commission or agency fee ) but does not acquire ownership of the goods and/or services supplied to or by the principal. This agent/principal relationship may be expressly construed from the wording of a written agreement or contract concluded between the parties. Where a written agreement or contract does not exist, the onus of proof is on the person who seeks to bind the principal and demonstrate that the relationship was that of a principal and agent. An understanding of the relationship between the parties is therefore a requirement in understanding the VAT treatment of supplies made by the parties. The differences between an agent and a principal can be summarised as follows: Agent The agent will not be the owner of any goods or services acquired on behalf of the principal. The agent will not alter the nature or value of the supplies made between the principal and third parties. Transactions on behalf of the principal do not affect the agent s turnover, except to the extent of the commission or fee earned on such transactions. An agent only declares the commission or fee for Income Tax and VAT purposes. Principal The principal is the owner of the goods or services acquired on the principal s behalf by the agent. The principal may alter the nature or value of the supplies made between the principal and third parties. The total sales represent the principal s turnover. The commission or fee charged by the agent forms part of the principal s expenses. The principal declares gross sales as income for Income Tax and VAT purposes, and may be allowed to claim a deduction for the commission or fee charged by the agent. In essence, the differences indicate that the principal is ultimately responsible for the commercial risks associated with a transaction, and that the agent is trading for the principal s account. The agent is appointed by and takes instruction from the principal regarding the facilitation of transactions as per the principal s requirements and generally charges a fee or earns a commission for that service. In order to correctly apply the VAT legislation, it is necessary to identify and understand the contractual relationship between the parties. The VAT treatment of supplies is determined from the fact of whether a person is acting on their own behalf, or on behalf of another person. In essence, section 54 of the VAT Act provides that where a vendor employs the services of an agent to acquire goods or services, or to make supplies on that vendor s behalf, the supplies are made to, or acquired by, the principal (as the case may be). There are also special provisions which deal with the receipt and issuing of tax invoices. (Refer to paragraph 3.3.) 14

15 VAT 420 Guide for Motor Dealers Chapter 3 As an agent merely acts on behalf of the principal, any output tax and input tax in relation to the underlying supplies made or received on behalf of the principal must be accounted for on the VAT return of the principal (if the principal is a vendor). The agent will only declare output tax and input tax in relation to the agency services supplied (if the agent is a vendor). 3.3 TAX INVOICES, CREDIT NOTES AND DEBIT NOTES The normal rule is that any tax invoice, credit note or debit note relating to a supply by, or to the agent, on the principal s behalf should contain the principal s particulars. However, the VAT Act does provide that if an agent (being a vendor) makes a supply on behalf of another vendor (the principal), the agent may issue a tax invoice or a credit or debit note relating to that supply as if the supply had been made by the agent. In this case, the agent s details may be reflected on the tax invoice, credit note or debit note and the principal may not also issue a tax invoice, credit note or debit note in respect of that same supply. The VAT Act also makes provision for the agent to be provided with a tax invoice, credit note or debit note as if the supply is made to the agent. When a tax invoice, credit note or debit note has been issued by or to an agent in the circumstances described above, the agent must maintain sufficient records so that the name, address and VAT registration number of the principal can be ascertained. In addition, the agent must, for supplies made on or after 1 January 2000, submit a statement to the principal in writing within 21 days of each calendar month, notifying the principal of a description of the goods supplied; the quantity or volume of the goods supplied; and either the value of the supply, the amount of tax charged and the consideration for that supply; or if the amount of tax charged is calculated by applying the tax fraction to the consideration, the consideration for the supply and either the amount of tax charged, or a statement that it includes a charge in respect of the tax and the rate at which the tax was charged. In these circumstances, the agent is required to retain the original tax invoices, credit notes or debit notes (if these documents are to be retained on the principal s behalf) and sufficient records should be maintained to enable the name, address and VAT registration number of the principal to be ascertained. 3.4 APPLICATION OF AGENCY PRINCIPLES According to the general principles of VAT a supply of goods or services made by an agent on behalf of, or for the principal, is deemed to be a supply made by the principal; and a supply of goods or services to an agent on behalf of, or for the principal, is deemed to be a supply made to the principal. In other words, the VAT consequences of the underlying transaction will depend on the principal's VAT status and not upon the agent's VAT status. A key element in determining whether that person contracts as a principal or agent, is to establish whether the goods or services are contractually acquired from the supplier, and then on-supplied (usually at a marked-up price) to the recipient; or by the recipient from the supplier of the goods or services, and a commission or fee is paid to the person that acts as an intermediary (agent) for arranging the supplies. A motor dealer acts as the principal in regard to the sale of a vehicle which is held as stock and paid for in full by the purchaser. However, in most cases, purchasers will require finance from a bank or other financial institution, so in practice, vehicles are usually supplied by the motor dealer to the financier, and the financier on-supplies the vehicle to the purchaser under an ICA or under an operating lease (rental agreement). The motor dealer therefore receives the consideration for the supply from the financial institution, and the financial institution may also pay a commission to the motor dealer for referring the business of the customer. 17 If the financier is a South African resident, the commission earned by the motor dealer is subject to VAT at the standard rate. 17 In these cases, there are two distinct supplies, being the supply of the vehicle itself and the supply of an arranging service. 15

16 VAT 420 Guide for Motor Dealers Chapter 3 If a motor dealer is requested to display and sell a motor vehicle on behalf of another person (that is, as agent and not as principal), the sale of the motor vehicle will not be a taxable supply by the motor dealer if the motor vehicle does not form part of the motor dealer s stock. However, the supply of the motor vehicle may be a taxable supply by the principal if the supply is in the course or furtherance of the principal s enterprise. In either case, the motor dealer (agent) is not entitled to an input tax deduction on the motor vehicle if it does not acquire the motor vehicle. The principal must account for output tax on the supply of the motor vehicle and not the motor dealer who is merely acting as the agent. However, the motor dealer must account for output tax on any commission earned for concluding the sale on behalf of the principal (whether the principal is a vendor or not). When acting as an agent for the seller, the motor dealer must establish if VAT should be levied on the sale of the motor vehicle. In addition, where the supply of the motor vehicle is a taxable supply, the motor dealer must establish if the principal will issue a tax invoice to the purchaser or whether the motor dealer is required to issue the tax invoice on behalf of the principal. (Refer to paragraph 3.3.) Example 3 Scenario Lenny is the managing director of ABC Motors (Pty) Ltd (vendor) which supplies motor vehicles in the course of its enterprise. Sam is a building contractor (vendor) and a good friend of Lenny s. During April 2007, Sam approaches Lenny to sell on his behalf (a) his private motor car; and (b) a delivery van which was used in his enterprise. The motor car was subsequently sold for R and the delivery van was sold for R during July ABC Motors (Pty) Ltd charged Sam commission of R1 500 and R3 000 respectively on the sale of the two vehicles. Question What are the VAT implications for ABC Motors (Pty) Ltd and for Sam? Answer ABC Motors (Pty) Ltd ABC Motors (Pty) Ltd (as agent) must establish from Sam if VAT must be levied on the supply of the vehicles and whether ABC Motors (Pty) Ltd is required to issue any tax invoices for the supplies. As ABC Motors (Pty) Ltd merely acted as Sam s agent in both cases, ABC Motors (Pty) Ltd will not account for any output tax on the sale of the vehicles, nor will any input tax be claimed, as ABC Motors (Pty) Ltd does not acquire the vehicles. However, ABC Motors (Pty) Ltd must charge VAT at the standard rate on Sam s behalf on the supply of the delivery van. The commission earned for arranging the sale is subject to VAT at the standard rate and ABC Motors (Pty) Ltd must provide Sam with a tax invoice in this regard. ABC Motors (Pty) Ltd must declare output tax as follows: Output tax = [(R1 500 x 14/114) + (R3 000 x 14/114)] = R R = R Sam The sale of the delivery van is in the course or furtherance of Sam s enterprise, but the sale of the private motor car is not. Therefore included in the amount payable to Sam by ABC Motors (Pty) Ltd will be the VAT charged on behalf of Sam on the sale of the delivery van. As the principal, Sam is liable to account for VAT on the supply of the delivery van. Note that Sam is only entitled to input tax in respect of the commission charged for the sale of the delivery van as the sale of the private motor car was not in the course or furtherance of his enterprise. Sam will declare VAT as follows on his VAT 201 return in respect of these transactions: Output tax = R (R x 14/114) Input tax = R (R3 000 x 14/114) = R (net output tax) 16

17 VAT 420 Guide for Motor Dealers Chapter 3 Example 4 Scenario Motor Dealer G (a vendor) is approached by Customer Y to purchase a motor car. As Customer Y was not able to pay the full purchase price in cash, Motor Dealer G assisted her in obtaining finance from Bank X. As part of the financing arrangement, the motor car was supplied to Bank X, which in turn, onsupplied the motor car to Customer Y. Motor Dealer G also arranged short-term insurance cover for her from Insurer Z. Motor Dealer G received a dealer s incentive commission from Bank X and a finder s fee from Insurer Z for referring the business of Customer Y. Question What are the VAT implications of these transactions for the parties? Answer Motor Dealer G Motor Dealer G is required to account for output tax on the supply of the motor car to Bank X, the dealer s incentive commission received from Bank X and the finder s fee paid by Insurer Z. Bank X Bank X is entitled to input tax on the acquisition of the motor car from Motor Dealer G and the dealer s incentive commission (to the extent that the vehicle is acquired for making taxable supplies). Bank X must account for output tax on the subsequent supply of the motor car to Customer Y. Insurer Z Insurer Z must account for output tax on the short-term insurance premiums received from Customer Y and may claim input tax on the finder s fee paid to Motor Dealer G. Customer Y If Customer Y is a vendor (but not a motor dealer) she would not be entitled to input tax on the acquisition of the motor car, as the input tax would be specifically denied. She would, however, be allowed to claim input tax on the insurance expense (being a running cost), to the extent that she uses the motor car in her enterprise. In order to determine the VAT implications of motor vehicles supplied on consignment, the legal and contractual relationship established between the consignor and the motor dealer as consignee must be established in accordance with the principles discussed in this chapter. (Refer to paragraph 4.5 for further details in regard to supplies of consignment stock.) Refer also to paragraph 4.17 in regard to supplies made by auctioneers as agent. 17

18 VAT 420 Guide for Motor Dealers Chapter 4 CHAPTER 4 TYPES OF SUPPLIES 4.1 INTRODUCTION Motor dealers supply new as well as second-hand motor vehicles to customers situated in the Republic or in an export country. Generally, the supply of a motor vehicle by a motor dealer (including the supply of a motor car ) is subject to VAT at the standard rate of 14% as it will be supplied in the course or furtherance of the enterprise by a person that continuously or regularly supplies motor vehicles. However, in the case of exports the rate of 0% may apply. (Refer to paragraph 2.3 and Chapter 5.) Motor dealers supply not only motor vehicles, but also a wide range of other goods and services associated with motor vehicles, and the maintenance thereof. In this chapter we take a look at the different supplies made by motor dealers and discuss the VAT consequences of the transactions concerned. 4.2 SUPPLY OF MOTOR VEHICLES The main type of supply which a motor dealer makes is the supply of motor cars and other motor vehicles, and as mentioned in paragraph 4.1, these supplies are generally subject to VAT at the standard rate. However, what is important to discuss here is the different types of transactions in terms of which motor vehicles may be supplied to, and by, motor dealers. It is important to note as a general point that any prices advertised, displayed, published or quoted to the public must be VAT-inclusive. This is so that the customer will know the final price payable upfront Outright sales Outright sales are the simplest type of transaction and may be entered into where a private person or a business has cash resources available, or has borrowed funds from a financial institution to purchase the vehicle. The VAT implications of outright sales follow the normal rules whereby output tax is declared by the supplier at the time that the transaction occurs, being the earlier of the time that payment for the supply is made, or an invoice for the supply is issued; and input tax may be claimed if the vehicle is acquired for taxable purposes, provided that the purchaser holds a tax invoice or other prescribed document which will entitle that person to claim input tax. (Refer to Chapter 7.) If the vehicle is exported, the supply may be subject to VAT at the zero rate. (Refer to Chapter 5.) Instalment credit agreements (ICAs) As few purchasers can afford to buy motor vehicles under an outright sale, the supply of vehicles is usually funded by way of an ICA. As mentioned in paragraph 2.7, there are two types of ICAs for VAT purposes, namely an instalment sale agreement and a financial lease. ICA agreements are characterised by a condition that possession and use of the vehicle passes to the purchaser, but ownership only passes once payment of the final instalment under the ICA has been made. The time of supply 18 for motor vehicles or other goods supplied under an ICA takes place at the earlier of the time that the goods are delivered; or any payment of the consideration is received by the supplier in respect of the supply. The value upon which VAT must be accounted is the cash value of the supply. 18 This establishes the tax period in which the supplier must account for output tax, and the tax period in which the recipient may claim input tax (subject to the requirement that the person must be in possession of a tax invoice for the supply). 18

19 VAT 420 Guide for Motor Dealers Chapter 4 Motor dealers may purchase and supply motor vehicles under ICAs, but usually the supply made to the final customer is financed by a financial institution and not the motor dealer. For VAT purposes, the sale of a motor vehicle under an ICA to the final customer usually results in two separate supplies in that the motor dealer supplies the motor vehicle to the financial institution, which in turn, supplies the motor vehicle to the customer. Example 5 Scenario In February 2007, Mrs D (a vendor) purchases a new delivery van to be used in her enterprise. The sale of the delivery van was negotiated with ABC Motor Dealers (a vendor) and Mrs D is granted finance for the transaction by RSA Bank Limited (a vendor). ABC Motor Dealers sells the delivery van to RSA Bank Limited for the purpose of selling it to Mrs D and providing finance for the deal. Question What are the VAT implications on the abovementioned transactions? Answer ABC Motor Dealers Although ABC Motor Dealers negotiated the sale to Mrs D, the delivery van is actually supplied first to RSA Bank Limited, and then by RSA Bank Limited to Mrs D. Since the supply of the delivery van is a supply of goods made in the course or furtherance of an enterprise carried on by ABC Motor Dealers, the sale to RSA Bank Limited is subject to VAT at the standard rate of 14%. If a commission or referral fee is paid to ABC Motor Dealers by RSA Bank Limited, that fee is also subject to VAT at the standard rate. RSA Bank Limited As RSA Bank Limited is a vendor that supplies motor vehicles in the course of its enterprise, the supply of the delivery van to Mrs D will be subject to VAT at the standard rate of 14% and the bank is entitled to deduct input tax on the acquisition of the delivery van from ABC Motor Dealers. Input tax may also be claimed on any commission or referral fee paid to ABC Motor Dealers which includes VAT at the standard rate. Mrs D As the vehicle purchased is a delivery van, and not a motor car, which is to be used in Mrs D s enterprise, she may claim input tax on the acquisition thereof. Mrs D must obtain a tax invoice from either RSA Bank Limited or from ABC Motor Dealers if the latter has been authorised to issue tax invoices on behalf of the bank Floor plan agreements As motor dealers usually require finance for their purchases of new motor vehicles, it is common practice in the motor industry for a motor dealer to enter into a floor plan agreement with a financial institution or with the manufacturer of the motor vehicles. Although there can be different types of floor plan arrangements, the discussion in this guide will be limited to the basics of the most common type. The process for the financing of new vehicles is depicted below. Delivery Motor Vehicle Manufacturer Taxable supply 1 Taxable supply 2 Financier Payment 1 Payment 2 Motor Dealer 19

20 VAT 420 Guide for Motor Dealers Chapter 4 The flow of transactions and VAT implications for the parties are as follows: The manufacturer, importer, dealer or other institution (being a vendor), sells a motor vehicle on credit or for cash to the financier and accounts for output tax. Ownership of the motor vehicle is reserved until payment is received by the financier. A cartage contractor will deliver the motor vehicle to the motor dealer (either on behalf of the financier or as contracted by the motor dealer). The financier receives a tax invoice from the manufacturer 19 and claims an input tax deduction thereon. The financier pays the manufacturer, importer, dealer or other institution after any interest-free period which may be applicable, and ownership of the motor vehicle passes to the financier. The motor vehicle is sold by the financier to the motor dealer under an ICA and placed on the motor dealer s floor plan. The financier issues a tax invoice to the motor dealer and accounts for output tax. The dealer claims input tax once the tax invoice has been received. Interest is paid to the financier by the motor dealer at predetermined intervals and the full settlement amount in terms of the ICA for that motor vehicle (including any outstanding interest) is usually paid shortly after the motor dealer has sold the motor vehicle to a customer. The financier does not declare any output tax on these payments as interest is exempt, and the VAT on the capital amount paid in respect of the motor vehicle would have already been accounted for at the time that the motor vehicle was supplied under the ICA. Similarly, no input tax may be claimed by the motor dealer on these payments as interest is exempt from VAT. Once the motor vehicle has been sold to a customer, either in terms of an outright sale for cash, or under an ICA, the motor dealer will account for the output tax. The full settlement amount in terms of the ICA for that motor vehicle is paid to the financier (including any outstanding interest) once the dealer has found a buyer or lessee. This allows ownership of the vehicle to pass to the motor dealer thus enabling the on-supply. There are no VAT implications on the settlement made to the financier as this would have already been accounted for as discussed above. The process for second-hand vehicles is depicted below. Payment 1 Taxable supply 1 Motor Dealer Taxable supply 2 Financier Payment 2 The flow of transactions and VAT implications for the parties are as follows: The motor dealer supplies the motor vehicle (acquired from a 3 rd party) to the financier in terms of a normal sale, 20 issues a tax invoice and accounts for output tax upon issuing an invoice or receiving payment from the financier (whichever event occurs first). The motor vehicle is acquired back from the financier immediately thereafter in terms of an ICA, and input tax is claimed by the motor dealer on the cash value upon receipt of the tax invoice from the financier. The financier declares output tax on the transaction Although the cartage contractor may be solicited by the financier, the cost of the delivery service is usually invoiced to the manufacturer as this is built into the price of the motor vehicle invoiced by the manufacturer or importer. If the financier entered into a similar arrangement with a private individual or vendor who was denied an input tax deduction at the time of purchase, the supply to the financier would not be subject to VAT. A notional input tax deduction can be made if a completed and signed VAT 264 form is obtained and retained. Refer to paragraph 7.3. Also, if the financier exports a motor vehicle acquired from a non-vendor in these circumstances, the supply will be subject to VAT at the standard rate, based on the special value of supply rule (original acquisition cost upon which notional input tax was claimed). Refer to paragraph

21 VAT 420 Guide for Motor Dealers Chapter 4 Interest is paid to the financier at predetermined intervals and the outstanding amount (cash value and any unpaid interest) is settled within a few days of reselling the motor vehicle. Upon resale of the motor vehicle to a customer under an outright sale, or on terms provided by the motor dealer, a tax invoice is issued and output tax is declared. Any subsequent supplies resulting from a customer s requirement to finance his purchase will no longer form part of the floor plan arrangement and must be dealt with in accordance with the VAT provisions applicable to that supply. Therefore, if the customer requires the sale to be financed under an ICA, the motor dealer supplies the motor vehicle to a financier 21 in terms of a normal sale, issues a tax invoice and accounts for output tax. The customer concludes an ICA transaction with the financier, the financier declares output tax on conclusion of the ICA with the customer and payment is made to the motor dealer. 4.3 EXPORTS Refer to Chapter MOTOR VEHICLES SOLD ON BEHALF OF OTHER PERSONS Refer to Chapter CONSIGNMENT STOCK In order to determine the VAT implications of motor vehicles supplied on consignment, the legal and contractual relationship established between the consignor and the motor dealer as consignee must be understood. If the agreement is that the motor dealer becomes the principal (owner) in respect of the goods at the time that the goods are sold to a customer, the consignor makes a supply as principal to the motor dealer and the motor dealer makes a supply as principal to the customer. The motor dealer in this case will be liable for the output tax on the supply to the customer. If the consignor is registered for VAT and was entitled to claim input tax on the acquisition of those vehicles, the motor dealer must be issued with a tax invoice so that input tax may be claimed on the acquisition from the consignor. The consignor in such as case will be liable to account for output tax on the supply to the motor dealer. The general time of supply rule, being the earlier of the time an invoice is issued or the time any consideration is received, will be applicable in each case. The motor dealer must obtain a tax invoice from the consignor in order to claim input tax. In the event that the motor dealer only acts as the selling agent on behalf of the consignor, the consignor will be the principal and will be responsible to account for output tax on the supply to the customer in terms of the general time of supply rule as set out above. Depending on the agreement, either the consignor (principal) will issue the tax invoice, or the motor dealer (agent) will issue the tax invoice on the principal s behalf. 4.6 ARRANGING SUPPLIES AND REFERRAL OF CUSTOMERS Where a motor dealer acts as agent and arranges the supply of goods or services or refers the business of customers to other suppliers, payment in the form of commission, fees, rebates or other consideration 22 will be received from the person to whom the service has been provided. These supplies by motor dealers are usually subject to VAT at the standard rate as the amount received will, in most cases, constitute consideration for a taxable supply of services rendered to a resident. The following are some examples of amounts received by motor dealers for services rendered: Dealer incentive commission (DIC) for the referral of customers to banks and other financial service providers. Commission on credit life short-term insurance or comprehensive vehicle insurance sold. Fees for the referral of customers to motor vehicle accessory fitment centres. Advertising rebates. Other rebates received by a motor dealer from a manufacturer, for example, for rendering excellent customer service. Warranty payments. (Refer also to paragraphs 4.14 and 6.5.) This will usually be the case where the motor dealer is not a registered credit provider as defined in the National Credit Act. Sometimes referred to as kickbacks. An important point to be noted is that the name by which the payment is known in the motor industry is not necessarily indicative of the underlying type of supply to which the payment relates. 21

22 VAT 420 Guide for Motor Dealers Chapter 4 Output tax must also be declared on volume rebates received which constitutes a variation of the previously agreed consideration for past supplies. 4.7 ACCESSORIES AND PARTS As mentioned in paragraph 4.6, motor dealers may refer customers to vehicle accessory fitment centres for accessories or extras such as smash-and-grab products, tracking devices, satellite navigation devices, paint protection, tow bars and mag wheels to be supplied separately. The suppliers of these products will charge VAT at the standard rate separately to the customer or the motor dealer (if these products are already included in the price of the vehicle). The same will apply in respect of any charge by the fitment centre to the customer. In such cases a referral fee may be paid to the motor dealer for referring the customer. However, if the motor dealer is the supplier of the accessories or extras, the motor dealer must charge VAT at the standard rate on the price of the products, whether they are supplied separately, or included in the price of the motor vehicle. Second-hand motor dealers and scrap dealers that sell scrap or dismantled motor vehicle parts must also charge VAT on these supplies if registered, or liable to be registered for VAT. 4.8 SPONSORSHIP According to the Sponsorship Code 23 of the Advertising Standards Authority of South Africa (ASA) the term sponsorship is defined as: a form of marketing communication whereby a sponsor contractually provides financial and/or other support to an organisation, individual, team, activity, event and/or broadcast in return for rights to use the sponsor's name and logo in connection with a sponsored event, activity, team, individual, organisation or broadcast. Further, that the objective of investing in sponsorship is to create a positive association between a sponsor's image, product or brand and a sponsored event or activity, team, individual, organisation or broadcast, within the sponsor's target market in order to attain marketing and corporate objectives. Sponsorship can take on many forms, from an altruistic act of donating funds or the use of goods to a charitable cause, 24 to a formal business arrangement whereby goods, services or funding is made available under a sponsorship contract to a person in return for specific advertising, branding and promotional services. In the commercial world of a motor manufacturer or motor dealer, it is seldom the case that funds are donated or vehicles are made available to sporting organisations or other businesses without expecting something of value in return which is in pursuance of the sponsor s organisational objectives. In the motor industry, sponsorship arrangements are usually concluded by motor manufacturers rather than motor dealerships, and they are normally concluded with sporting and business organisations rather than with individuals. Typical arrangements include the making available of funds, vehicles and technical expertise in motor sports, as well as national and provincial team sports such as rugby, cricket and soccer, or for competitions and events. It follows that when a motor manufacturer or motor dealer concludes a sponsorship agreement to provide funding to an organisation, the payment constitutes consideration for an advertising, branding or promotional service provided by the recipient. If the organisation receiving the sponsorship funding is a vendor, the service provided will be a taxable supply and a tax invoice should be issued to the motor manufacturer or motor dealer. If the right to use a motor vehicle is provided to an organisation for a specified period of time, in return for the service, this constitutes a barter transaction, and as the consideration received by each party to the agreement is not in money, the open market value (OMV) of each supply must be determined. The OMV is the consideration in money (including VAT) that the supply of those goods or services would generally fetch if supplied in similar circumstances on the relevant date in the Republic if the supply were freely offered and made between persons who are not connected persons, as defined The Sponsorship Code is available on the website of the ASA at - accessed on 23 February Where a motor dealer makes a true donation as defined in section 1 of the VAT Act to an association not for gain, the motor dealer will not declare any output tax on the supply of the right of use of a motor vehicle. Since most forms of sponsorship do not constitute donations, this aspect is not discussed further in the guide. Section 1 of the VAT Act. 22

23 VAT 420 Guide for Motor Dealers Chapter 4 In such a barter transaction, the motor dealer must declare output tax on the OMV of the advertising or promotional benefit received, as this constitutes the consideration for the supply of the right of use of the motor vehicle. Similarly, if the organisation receiving the sponsorship vehicle is registered for VAT, output tax must be declared on the OMV of the right of use of the motor vehicle, being the consideration for the taxable supply of the advertising or promotional service supplied to the motor dealer. Generally, the view on the determination of the OMV for each of the supplies in this kind of a barter transaction is that as long as the parties are trading at arm s-length and are not connected persons, the supplies concerned may be regarded as being of equal value. It is further considered that the OMV to be used by each party should be an amount which is equal to the average rental (including VAT) which would be charged by a motor vehicle rental enterprise operating under normal business conditions in the Republic for the specific type of motor vehicle. If both parties are vendors, each party is liable to account for output tax on the consideration received for the supply made, and to issue a tax invoice to the other. Each party will also be entitled to claim input tax on the consideration paid for the supplies, provided that the goods or services are acquired for taxable purposes and that a tax invoice is held. 26 The motor dealer will not be entitled to claim input tax on the advertising or promotional service provided if the supplier is not a registered VAT vendor. Similarly, to the extent that the supply to the motor dealer constitutes entertainment, input tax may not be deducted. Example 6 Scenario Motor Manufacturer X (Manufacturer X) enters into an agreement with Professional Soccer Team Y (Team Y). Both parties are registered VAT vendors. In terms of the agreement, Team Y is supplied with the right to use 12 motor cars owned by Manufacturer X for a period of 12 months. In return, Team Y must participate in all of Manufacturer X s advertising campaigns, and the vehicles must carry the branding and logo s of Motor Manufacturer X. The specific type of motor cars supplied to Team Y may each be rented on a monthly basis from a reputable local car rental enterprise for R5 700 per month (including VAT). Question What are the VAT implications of this barter transaction for the parties concerned? Answer As the parties are trading at arms-length and are not connected persons, the supply of the right of use of the vehicles and the advertising, branding and promotional services exchanged may be regarded as being of equal value (OMV = R5 700 x 12 = R68 400). Manufacturer X Manufacturer X has granted the right of use of the motor cars to Team Y in return for the performance of specific advertising, branding and promotional services. Manufacturer X is therefore liable to account for output tax on the consideration received for the supply of the right to use the motor cars. The consideration received is equal to the OMV of the advertising, branding and promotional service. Manufacturer X will therefore declare output tax of R8 400 per month (R5 700 x 12 x 14/114) for the duration of the contract. Manufacturer X will be entitled to claim input tax on the amount paid for the services acquired from Team Y, provided that it is in possession of a valid tax invoice issued by Team Y. Continued overleaf 26 This is subject to the general rule that the organisation acquiring the vehicle will usually not be able to claim input tax on the acquisition of the right of use if the vehicle is a motor car as defined in section 1 of the VAT Act. 23

24 VAT 420 Guide for Motor Dealers Chapter 4 Example 6 (continued) Team Y Similarly, Team Y supplies an advertising, branding and promotional service to Manufacturer X in return for the right of use of the motor cars. Team Y must, therefore, account for output tax on the consideration received for the supply of services to Manufacturer X. The consideration received is equal to the OMV of the right of use of the motor cars. Team Y will, therefore, declare output tax of R8 400 per month (R5 700 x 12 x 14/114) for the duration of the contract. However, Team Y will not be entitled to claim input tax on the amount paid for the acquisition of the right of use of the motor car, as input tax will be denied in terms of section 17(2)(c) of the VAT Act, since it is not in the business of supplying motor cars. If the right to use the vehicles is supplied by Team Y to any of the players in the team (being employees), this constitutes a taxable fringe benefit for employee s tax and VAT purposes. Team Y will be required to account for output tax on the value of the benefit, calculated at 0.3% of the determined value of the motor vehicle (for each month or part thereof) for each employee. Refer to paragraph 4.15 for more details in regard to a vehicle which is provided as a fringe benefit. 4.9 RENTAL AGREEMENTS AND DISCOUNTED RENTAL AGREEMENTS Under an ICA, the VAT is accounted for upfront upon conclusion of the contract, whereas under a rental agreement 27 the VAT is accounted for by the motor dealer as the VAT liability arises in each tax period. Where a motor dealer concludes a rental agreement with a customer and subsequently discounts the right to receive the payments under the agreement to a financial institution, the discounting transaction constitutes an exempt financial service. The motor dealer must, however, continue to declare output tax in each tax period until the agreement terminates, if the discounting of the rental income stream does not have the effect of cancelling or transferring the other rights and obligations under the original rental agreement. 28 (Refer to paragraph 2.7.) Before the deletion of section 2(4)(b) of the VAT Act such transactions were regarded as taxable supplies at the standard rate and the motor dealer would have had to account for output tax on the full consideration received. The deletion of section 2(4)(b) of the VAT Act came into effect on 21 October 2008 and applies to agreements entered into on or after that date DISCOUNTED INSTALMENT CREDIT AGREEMENTS Before the introduction of the National Credit Act, 2005 (the NCA) it was fairly common practice for a motor dealer to conclude an ICA with a customer for the capital amount in respect of the price of the motor vehicle, plus interest or finance charges and subsequently cede the debt under the ICA to a financial institution. 29 In these cases, the motor dealer must account for the VAT upfront on conclusion of the ICA with the customer and the subsequent payment to the dealer by the bank constitutes the consideration for the cession of a debt security which is exempt from VAT. 30 The amount paid for the cession may either be at a premium or a discount, based on the face value of the debt security. This premium or discount is exempt from VAT. However, since the introduction of the NCA on 1 June 2006, very few retail motor dealers continue to provide their own finance. Those motor dealers that continue to operate on this basis are required to register as credit providers 31 under section 40 of the NCA A rental agreement is sometimes referred to as an operating lease or lease agreement. Where the rights and obligations under a rental agreement (for example, the rights of repossession and ownership) are also transferred to the person to whom the rental income stream was discounted, this constitutes a taxable supply of goods at the standard rate. This is commonly referred to as a discounted deal. In terms of section 12(a), read with section 2(1)(c) of the VAT Act. A credit provider, as defined in section 1 of the NCA, includes a person who supplies goods or services under a discount transaction, incidental credit agreement or instalment agreement. 24

25 VAT 420 Guide for Motor Dealers Chapter 4 Example 7 Scenario ABC Motors is a registered vendor that supplies motor vehicles, and also provides finance under ICAs if required by the customer. During April 2007, Ms K entered into an ICA with ABC Motors for the purchase of a motor car. ABC Motors subsequently cedes the ICA which has a face value of R to XYZ Bank. XYZ Bank pays ABC Motors R as consideration for the cession of the debt owed under the ICA. Question What are the VAT implications of these transactions for ABC Motors and XYZ Bank? Answer ABC Motors ABC Motors must account for output tax on the full selling price of the motor vehicle supplied to Ms K. However, the provision of credit under the ICA is a financial service and any interest charged in respect of the finance provided is exempt from VAT. The cession of the ICA by ABC Motors is a cession of a debt security which is a financial service and therefore exempt from VAT. Accordingly, the consideration of R received by ABC Motors for the cession of the debt is not subject to VAT. XYZ Bank XYZ Bank is not entitled to claim input tax on the cession of the debt, as it is an exempt financial service and is not acquired for taxable purposes DEEMED SUPPLIES IN RESPECT OF INDEMNITY PAYMENTS The VAT Act provides that where a vendor receives any indemnity payment, or if an amount of money is paid to another person under that vendor s contract of insurance, the payment is deemed to be consideration received for a supply of services by that vendor to the extent that it relates to a loss incurred in the course of carrying on an enterprise. 32 Therefore, when a motor dealer insures motor vehicles held in dealer stock or other property held for enterprise purposes (taxable supplies), output tax must be declared if any payment is made by the insurer in terms of the contract of insurance to the motor dealer for any insured property that has been damaged or stolen. This rule does not apply if the indemnity payment is in connection with the loss of goods or services on which a deduction of input tax was denied in terms of section 17(2) of the VAT Act. 33 However, if the damaged or stolen goods are replaced by the insurer instead of making a payment to the vendor, the motor dealer will not be required to declare any output tax. In such cases, the motor dealer will not be entitled to claim input tax on the replacement or restoration of vehicles or other property, as this will be claimed by the insurer Section 8(8) of the VAT Act. For example, vendors that are not motor dealers will not declare output tax on the loss of a motor car used in an enterprise as input tax would have been denied on the acquisition thereof. Similarly, if a motor dealer provides free meals to its employees any loss relating to the assets used in the canteen facility will not give rise to an output tax liability in the hands of the motor dealer. This is because input tax would have been denied in this case on the assets acquired and used in the canteen for providing those meals. 25

26 VAT 420 Guide for Motor Dealers Chapter 4 Example 8 Scenario Happy Motor Dealership has a contract of short-term insurance with Insurance Company A for theft or damage of new motor cars held in dealer stock. On 20 November 2008, one of Happy Motor Dealership s employees damaged a new motor car whilst driving it onto the showroom floor. On 28 November 2008 Insurance Company A pays R to Happy Motor Dealership so that the motor car can be repaired. Question What are the VAT implications of the payment of R received by Happy Motor Dealership? Answer The payment received by Happy Motor Dealership is an indemnity payment made under a contract of insurance. Section 8(8) of the VAT Act deems the R to be consideration received for a taxable supply of services performed on the day of receipt of the payment. Happy Motor Dealership must therefore account for VAT of R (R x14/114) on the payment received in the tax period in which 28 November 2008 falls (the date of receipt of the payment) LICENSING AND REGISTRATION In principle, no VAT is payable on motor vehicle licensing and registration fees because these charges are levied by the provincial government which is not a vendor. 34 Therefore, to the extent that a motor dealer merely obtains a reimbursement for the costs of the motor vehicle licensing and registration fees which it has outlaid on behalf of the purchaser, the motor dealer does not make any supplies in this regard and no output tax will be payable. However, any separate fee charged by the motor dealer for performing the service of arranging the payment of those fees and other incidental goods or services 35 in connection with the delivery of the motor vehicle to the customer is subject to VAT at the standard rate. Motor dealers should, therefore, identify any on the road service fee separately on the tax invoice from the recovery of any fee charged by the province in respect of licenses, permits or motor vehicle registration. Failure to make this distinction may result in the full amount charged by the motor dealer being subject to VAT at the standard rate. The VAT treatment of other goods or services acquired in connection with the delivery of the motor vehicle to the customer will depend on whether those supplies are made by the motor dealer as principal, or if the motor dealer has acted as the agent of the customer in that regard. (Refer to Chapter 3.) For example, if the motor dealer charges a documentation fee to compensate for the time spent completing forms, standing in queues and travelling to the place where payment of the motor vehicle licensing and registration fees is made, that fee will be subject to VAT at the standard rate. However, if the motor dealer merely acts as agent by paying the charges on behalf of the customer to obtain the new number plates, no supply is made by the motor dealer to the customer in this regard. In this case, the supply is made by the person supplying the number plates and the motor dealer will indicate the amount paid as a disbursement. Any fee charged for arranging the supply of the number plates constitutes consideration for a taxable supply which is subject to VAT at the standard rate In some cases the fees are paid to a municipality, but this does not affect the VAT treatment, as the municipality in that case merely acts as the collection agent of the province. For example, carpets, reflectors, number plates and inspection or delivery charges where the motor dealer is the principal for the purpose of those supplies. An exception will be where the customer is charged for a full tank of petrol or diesel, as these products are subject to VAT at the zero rate. 26

27 VAT 420 Guide for Motor Dealers Chapter SERVICE AND MAINTENANCE PLANS Where a motor dealer supplies a service or maintenance plan as principal to the purchaser, output tax must be accounted for at the standard rate in respect thereof, whether the amount charged is included in the selling price of a vehicle, or charged separately by the motor dealer. A vendor may claim input tax on the VAT-inclusive service or maintenance charge for a vehicle (including a motor car ) to the extent that it is used in the course of carrying on an enterprise by that vendor. This will only apply where the price of the service or maintenance plan is indicated as a separate item on the tax invoice issued for the sale of vehicle, or if it is invoiced separately. If the motor dealer acts as agent for the supply of the service plan which is provided by another person (for example, the manufacturer or importer of the motor vehicle), the VAT on any separate charge for the service plan must be accounted for by that other person and not the motor dealer. Output tax at the standard rate must be declared on any commission received on the sale of the service plan. The above principles will also apply in regard to any extended service plan, top up policy or used car warranty sold separately to the customer. The liability to account for any VAT payable on the supply of these products will, therefore, depend on whether the motor dealer makes the supply as principal or as agent. Any charges by motor dealers for the servicing, maintenance and supply of parts whether in terms of a service/maintenance plan or not, are subject to VAT at the standard rate. However, if services and parts are supplied in respect of motor vehicles that are specifically imported into the Republic for the purpose of servicing or for repairs to be carried out, after which the motor vehicle is re-exported, the supplies may be subject to VAT at the zero rate under certain conditions. (Refer to paragraph 6.3 for more details in this regard.) 4.14 WARRANTY SERVICES A motor vehicle manufacturer (warrantor) generally supplies a warranty in respect of the motor vehicles which it manufactures. The aim is to provide assurance to the end consumer that any manufacturing defaults covered within the warranty period will be rectified free of charge. Accordingly, when the motor vehicle manufacturer supplies the motor vehicle to a motor dealer, the selling price would inherently include an amount for the warranty. If the supply is provided by a non-resident motor vehicle manufacturer, the person importing the motor vehicle would be liable for VAT on importation. The VAT payable on importation is determined by applying the standard rate of VAT (14%) to the selling price of the motor vehicle, including any embedded charge or deemed value in respect of the warranty. When warranty service repairs are carried out, or replacement parts are fitted under the warranty agreement by a local VAT-registered vendor, the service is subject to VAT at the standard rate. However, if the warranty services are provided to a warrantor who is not a resident of the Republic and not a vendor in respect of goods that were subject to VAT upon importation, 36 the services are subject to VAT at the zero rate with effect from 1 February Where the warrantor compensates the local VAT-registered vendor by way of replacing a defective part, the importation of the part is exempt from VAT. 38 The general time of supply rule, being the earlier of the date of issue of an invoice or the date that payment for the supply is made, applies for warranty services. After a motor dealer has carried out the necessary repairs to a motor vehicle in terms of the warranty agreement, it submits a warranty claim to the warrantor in respect of the cost of its services rendered and any parts used. This claim does not necessarily constitute an invoice for VAT purposes, 39 as the warrantor may still have to evaluate the claim. Some local motor vehicle manufacturers have been allowed to do self-invoicing for the supply of warranty services, however, in many cases motor dealers receive the payment in respect of the claim before receiving the self-invoicing tax invoice from the local motor vehicle manufacturer (warrantor). The time of supply is, therefore, often triggered by the receipt of the warranty payment if it is the event which occurs first under the general time of supply rule Levied in terms of section 7(1)(b) of the VAT Act. Refer to sections 8(26) and 11(2)(v) of the VAT Act. Refer to Item No /00/00/01.00 of paragraph 8 of Schedule 1, read with section 13(3) of the VAT Act, and subject to the requirements contained in the proviso to the Item No.. Whether the claim constitutes an invoice will depend on the facts and circumstances of the case and depends on whether or not this claim notifies the warrantor of an obligation to make payment for the supply. 27

28 VAT 420 Guide for Motor Dealers Chapter FRINGE BENEFITS When an employee of a motor dealer is granted the right of use of a motor car or other type of motor vehicle for private or domestic purposes either free of charge or for a consideration payable by the employee which is less than the value of such use, the motor dealer is deemed to have made a taxable supply to the employee in the course or furtherance of the enterprise 40 and output tax is payable by the employer (motor dealer) on the consideration determined for that fringe benefit. The consideration for the supply is calculated in the manner prescribed by the Minister of Finance in Regulation GN 2835 Directions for purposes of sections 10(8) and (13) dated 22 November This Regulation basically provides that the consideration in money for the deemed supply (fringe benefit) upon which VAT is payable is calculated as being 0.3% of the determined value of the motor vehicle (for each month or part thereof) if an input tax credit on the motor vehicle was specifically denied in terms of section 17(2) of the VAT Act; or 0.6% of the determined value of the motor vehicle (for each month or part thereof) if an input tax credit has, or may be claimed on the motor vehicle. Since motor dealers may claim input tax on the acquisition of motor cars, the 0.6% factor will be applicable in most cases where a motor dealer supplies a motor car to an employee as a fringe benefit. The 0.3% factor will usually apply to calculate the consideration for the fringe benefit for employers that are not motor car dealers that provide motor cars to their employees, since the input tax on the acquisition of those motor cars will usually be denied to that employer. The consideration determined in terms of the calculation above may be reduced by any consideration paid by the employee for the right of use of the motor vehicle; and the lesser of R85 or the amount of the consideration in money determined monthly if the employee bears the full cost of repairs and maintenance of the motor vehicle; and the extent to which the motor vehicle is used to make exempt supplies REPOSSESSIONS Where a creditor 41 supplies a vehicle under an ICA (suspensive sale or financial lease), the agreement usually provides for the supplier to retain ownership of the vehicle until full payment has been made by the customer (debtor). The ICA will also provide that if the customer defaults by not making payment as agreed, the creditor may exercise a right of repossession over the vehicle. When a vehicle is repossessed, a supply of goods is deemed to be made by the debtor to the creditor 42 on the date of repossession. In the case where the debtor s rights and obligations under the ICA could be reinstated under any law, the time of the supply is deemed to be the day after the last day of any period during which the debtor may be reinstated. 43 If both the creditor and the debtor are vendors in relation to the deemed supply, the debtor must account for output tax on the deemed supply if the goods constituted part of the assets of an enterprise. The creditor must issue the debtor with a tax invoice within 21 days of repossessing the vehicle and the creditor may claim an input tax deduction in 44 respect of the deemed supply. However, the debtor does not account for any output tax on the deemed supply if that person is not a vendor; or that person acquired the vehicle exclusively for making exempt supplies; or that person acquired the vehicle for other non-taxable purposes; or the repossessed asset is a motor car in respect of which the debtor was specifically denied an input tax deduction Refer to section 18(3) of the VAT Act. 41 The creditor is usually a bank or other institution which provides vehicle finance to customers. However, the creditor could also be a motor manufacturer or motor dealer that is an approved credit provider under the NCA. 42 Section 8(10) of the VAT Act. 43 Section 9(8) of the VAT Act. 44 The creditor in the case of a repossessed vehicle is the person that issues the tax invoice and not the debtor. The VAT Act basically provides for a self-invoicing situation to be permitted in this case. 45 Refer to sections 17(2)(c) and 17(3) of the VAT Act. 28

29 VAT 420 Guide for Motor Dealers Chapter 4 In any of the above cases, the creditor is still entitled to claim a notional input tax deduction on repossessing the vehicle, 46 but no input tax deduction may be claimed on the basis that the original debt is irrecoverable. 47 The consideration for the deemed supply is equal to that portion of the original cash value of the goods which has not yet been recovered at the time of the repossession. 48 The cash value is calculated as shown in the table below. Bankers and financiers The balance of the cash value (consideration) equals the sum of an amount equal to (or exceeding) the cost of the vehicle to the banker/financier the cost of erection, construction, assembly or installation (where applicable) the VAT leviable on the supply minus repayments already made by the debtor in respect of the capital (excluding any appropriate amount allocated to interest). Motor dealers The balance of the cash value (consideration) equals the sum of an amount equal to or exceeding the price at which the goods are usually supplied for cash the cost of erection, construction, assembly or installation (where applicable) the VAT leviable on the supply minus repayments already made by the debtor in respect of the capital (excluding any appropriate amount allocated to interest) AUCTION SALES Vehicles which are repossessed under an ICA, or otherwise attached from a debtor to be sold in satisfaction of a debt, are usually sold on public auction. Furthermore, private individuals and businesses often also make use of auctioneers to sell their second-hand vehicles. The auctioneer does not receive ownership of the goods sold at the auction, and at the fall of the hammer, ownership of the goods passes directly from the seller (principal) to the person who makes the highest bid. As auctioneers act as selling agents on behalf of their clients they must ensure that the vehicles (or other goods) sold on auction are charged with VAT where applicable. VAT is also charged to the client on any commission payable if the auctioneer is registered for VAT. The general provisions applying to agents and auctioneers are dealt with in section 54 of the VAT Act. The normal rule in terms of this provision is that where an agent (auctioneer) sells goods on behalf of a principal, the supply is deemed to be made by the principal and not by the auctioneer. The principal must, therefore, account for output tax on the supply on the VAT 201 return for that tax period in the usual manner, and may deduct the VAT incurred on the auctioneer s commission as input tax. However, section 54(5) of the VAT Act, contains special provisions which allow auctioneers to proceed on the basis that all items being auctioned are charged with VAT. This rule applies where the auctioneer agrees with the principal to have a non-taxable supply treated as if it were a taxable supply made by the auctioneer. For example, if only one vehicle on the auction would not be a taxable supply, the auctioneer can obtain the agreement of the owner to treat the sale as if it were a taxable supply made by the auctioneer. In these cases, the VAT charged on the non-taxable supplies must be accounted for by the auctioneer and the auctioneer is required to issue the tax invoice to the highest bidder for the supply. In terms of this special rule, the auctioneer may recover the amount of tax charged on the supply, from the principal through the Courts, or retain or deduct the VAT from any amount due by the auctioneer to the principal The notional input tax deduction is calculated by multiplying the tax fraction applicable at the time that the original agreement was entered into by the balance of the cash value. Refer to the definition of cash value and paragraph (c) of the definition of input tax in section 1 of the VAT Act. Section 22(1) of the VAT Act. Section 10(16) of the VAT Act. 29

30 VAT 420 Guide for Motor Dealers Chapter 4 The auctioneer must also maintain the records contemplated in section 20(8) of the VAT Act for the purposes of claiming a notional input tax deduction as if the principal has made a non-taxable supply of second-hand goods to the auctioneer. If no agreement is made between the auctioneer and the principal, the taxability of each supply is assessed on an individual basis. After the auction, payments are disbursed to the owners of the goods sold at the auction. Registered vendors will receive a VAT inclusive payment for their goods supplied whilst non-registered suppliers will receive an amount from which VAT has been deducted. In either case, the auctioneer s commission (including the VAT on the commission) will be deducted from the payment. In establishing if a particular vehicle should be charged with VAT when sold at the auction, the factors listed below should be taken into account by auctioneers and vehicle owners. The taxable nature (or otherwise) of vehicles supplied on auction will depend on the following factors: The VAT status of the owner or supplier. Whether the vehicle is a motor car or some other type of vehicle. Whether, in the case of a motor car, the owner or supplier is a motor car dealer or car rental enterprise which was entitled to claim input tax on the acquisition of the motor car. Whether there is any agreement between the auctioneer and the principal, to regard a nontaxable supply of the vehicle to be a taxable supply under the auction concerned. Considering the above factors, the following will apply: Taxable supplies - Vehicles supplied on auction under the following circumstances will constitute taxable supplies upon which VAT must be charged by the auctioneer (in addition to the VAT on the auctioneer s commission): Vehicles that have been repossessed under an ICA by a bank, motor dealer or other financial institution. This will apply for all vehicles, including those falling within the definition of motor car, as the owners in this case are regarded as being in the business of supplying motor cars in the ordinary course of their enterprises. 49 Vehicles such as trucks and other trade vehicles of a type not falling within the definition of motor car, where the owner of the vehicle is a VAT registered vendor which has applied the vehicle as an asset of the enterprise in the course of making taxable supplies. All vehicles, including those falling within the definition of a motor car where the owner of the vehicle is a VAT registered motor car dealer, motor manufacturer, bank or other person that provides motor vehicle finance to customers on a regular basis. This will include any vehicles which are owned by the auctioneer which are sold at the auction. Where the vehicle was attached by a creditor so that it could be sold in satisfaction of a debt, the supply is taxable in some cases. 50 For example, if the vehicle is a motor car and the debtor (being a vendor) is a motor car dealer or car rental enterprise, the supply will be taxable on the auction because if the vehicle was supplied by the owner, VAT would be charged on that supply. Where the owner and the auctioneer agree that an otherwise non-taxable supply shall be a treated as a taxable supply as provided under the special rule in terms of section 54(5) of the VAT Act. 49 Furthermore, input tax would have been claimed by the owners once the vehicles were repossessed as explained in 50 paragraph Refer to section 8(1) of the VAT Act. The auctioneer is required to obtain a written declaration from the owner (debtor) confirming whether that person is a vendor or not, and whether the supply by that person would constitute a taxable supply or not. The VAT treatment will follow what is stated in the declaration. Where the declaration cannot be obtained, it is recommended that VAT be charged. This is to prevent a situation where, after the auction, it is found that the supply should have been taxable. 30

31 VAT 420 Guide for Motor Dealers Chapter 4 Non-taxable supplies - Vehicles supplied on auction under the following circumstances will constitute non-taxable supplies upon which no VAT must be charged by the auctioneer (except for VAT on the auctioneer s commission): If the vehicle is a motor car, the supply will generally not be subject to VAT. However, if the owner is in the business of supplying motor cars in the ordinary course of an enterprise (for example, motor dealers and motor manufacturers), the supply will be taxable. Where the vehicle was attached by a creditor so that it could be sold in satisfaction of a debt, the supply is not taxable where, if the supply was made by the debtor, it would not constitute a taxable supply. For example, if the debtor is not a vendor, the supply by the debtor would not be a taxable supply. Therefore, the sale of the vehicle at the auction will similarly not be subject to VAT. In any other case where the owner is a private person or a business which is not registered for VAT. 31

32 VAT 420 Guide for Motor Dealers Chapter 5 CHAPTER 5 EXPORTS 5.1 INTRODUCTION As mentioned in paragraph 2.3, a motor dealer that supplies motor vehicles for consumption or use in an export country may levy VAT at the zero rate if the supply is made under a direct export. On the other hand, when the customer receives delivery of a motor vehicle in the Republic, the supply is generally subject to VAT at the standard rate even if it will subsequently be exported. If the motor vehicle is subsequently removed from the Republic, this is referred to as an indirect export, and the customer may apply to the VAT Refund Administrator 51 (VRA) for the VAT charged on the supply to be refunded. It is important to draw a distinction between direct and indirect exports, as well as new and secondhand motor vehicles exported, as the VAT treatment differs. The VAT implications of the different types of exports are therefore discussed in some detail this chapter. 5.2 DIRECT EXPORTS New goods Where a motor dealer supplies new goods, for example, a new motor vehicle or new motor vehicle spares, the supply is subject to VAT at the zero rate if the new goods are exported to the purchaser under a direct export. Basically, a direct export requires that the motor dealer is responsible for the delivery of the goods to the recipient 52 at an address in an export country by either using the motor dealer s own driver (being an employee of the motor dealer) or the motor dealer s own delivery vehicle, or by the motor dealer engaging a supplier s cartage contractor. Supplier s cartage contractor Motor dealers generally engage the services of a cartage contractor to transport goods which have been supplied to the purchaser in another country. In this regard, the motor dealer must ensure that the cartage contractor is a registered vendor in the Republic; carrying on a transport business as its main activity; contractually liable to the supplying vendor to transport and deliver the goods to the recipient at an address in an export country; and paid by the motor dealer for the transport costs. Period during which goods must be exported The motor dealer must also ensure that the goods are exported within two months of the earlier of the time an invoice is issued by the motor dealer (that is, the date of the invoice) or the time any payment of consideration for the supply is received by the motor dealer. The goods must also be exported via a designated commercial port. 53 Documentary proof A motor dealer must obtain and retain documentary proof as follows to substantiate the levying of VAT at the zero rate on the supply: The VRA is a private company appointed by SARS to administrate the VAT refund mechanism established by the Scheme. A recipient is the purchaser, whether a resident of the Republic or a non-resident. Refer to paragraph 7.7 of the Interpretation Note No. 30 (Issue 2) dated 15 March 2006 for a list of designated commercial ports. 32

33 VAT 420 Guide for Motor Dealers Chapter 5 Either the purchaser s order or the contract between the motor dealer and the purchaser; Proof that the goods have been received by the purchaser in the export country, (for example, a signed delivery note); Where the prescribed export or removal documentation is processed manually/by disk a copy of the SAD 500 form, bearing an original SARS Customs date stamp; and where applicable, a copy of the DA 74 form, bearing an original SARS Customs date stamp; or Where the prescribed export or removal documentation is processed as an Electronic Data Interchange declaration a copy of the customs release notification; or a copy of the computer generated release notification; or a copy of the SAD 500 form, and where applicable, a copy of the DA 74 form, bearing an original SARS Customs date stamp; Proof of payment; and Where the goods have been transported by road by a supplier s cartage contractor proof that the motor dealer paid the transport costs; and either o proof that the supplier s cartage contractor took possession of the goods from the motor dealer; or o a copy of the road manifest issued by the supplier s cartage contractor, or Where the goods have been transported by rail by a supplier s cartage contractor proof that the motor dealer paid the transport costs; and either o a copy of the combined consignment note and wagon label; o a copy of the container terminal order or freight transit order; or o a copy of the rail consignment note, or Where the goods have been transported by air or sea by a supplier s cartage contractor proof that the motor dealer paid the transport costs; and a copy of the airfreight transport document (where applicable); or a copy of the sea freight transport document (where applicable). All of the documentation must be obtained within three months of the earlier of the time an invoice is issued by the motor dealer or the time any payment of consideration is received by the motor dealer. Output tax adjustment Should any of the documentation not be received within the three-month period mentioned above, the motor dealer must account for an output tax adjustment at the standard rate by applying the tax fraction to the consideration. Input tax adjustment In instances where the documentation is subsequently received within 12 months of the earlier of the time an invoice is issued by the motor dealer or the time any payment of consideration is received by the motor dealer, the motor dealer may deduct the output tax adjustment previously declared, as an input tax adjustment. Proof of payment Furthermore, should the motor dealer experience problems in obtaining the required proof of payment, for example, as a result of extended credit terms granted to the purchaser, the motor dealer may apply in writing to the local SARS branch office where the motor dealer is on register to obtain an extension of the aforementioned time-periods. The rules for the extension relate specifically to difficulties in obtaining the proof of payment and not to other documentation. 33

34 VAT 420 Guide for Motor Dealers Chapter 5 Example 9 Scenario On 11 March 2007, ABC Motors (a vendor) sells a new double cab bakkie to Mr. N (a resident of the Republic), for use on his game farm in Namibia, trading under the name Wild at Heart. The tax invoice is issued on the same date. ABC Motors undertakes to deliver the motor vehicle on 21 March 2007 to Mr. N at his farm in Namibia. ABC Motors contracts with RSA Transporters (a VAT vendor), to carry out the delivery on 16 March 2007 by transporting the motor vehicle to Mr N via the Nakop land border post with Namibia. The delivery is carried out as planned, and on 21 March 2007 RSA Transporters provides ABC Motors with the documents pertaining to the exportation of the motor vehicle. Question Can ABC Motors charge VAT at the zero rate on the supply of the double cab bakkie to Mr. N? Answer ABC Motors has made a supply of new goods, under a direct export and may charge VAT at the zero rate on the supply. It does not matter that Mr N (the recipient) is a resident of the Republic. The critical aspect in order to apply the zero rate is that ABC Motors must control the exportation of the goods by either using its own mode of transport or by engaging a cartage contractor to deliver the goods to the recipient at an address in an export country on its behalf. ABC Motors has met all the requirements in that it has obtained and retained the relevant export documentation; the vehicle was exported within the required two month period from the date of the tax invoice; delivery took place in Namibia (an export country); RSA Transporters who delivered the motor vehicle is a vendor which performs, as its main business, the transportation of goods and is regarded as a supplier s cartage contractor ; and Nakop land border post is an official designated commercial port for the purpose of imports into, and exports from, the Republic Second-hand goods When a motor dealer exports second-hand goods upon which a notional input tax deduction was made on the acquisition thereof, a special valuation rule applies. 54 The rule provides that the motor dealer must account for output tax on the supply at the standard rate on a consideration equal to the original purchase price of those goods by the motor dealer. In other words, the rule operates in such a way that if the motor dealer exports second-hand goods upon which a notional input tax deduction was claimed, the deduction is effectively paid back in the form of an equivalent amount of output tax which must be declared in the tax period in which those goods are supplied. In a case where the motor dealer acquired the second-hand goods concerned from a connected person, that previously claimed a notional input tax deduction on the acquisition thereof, the consideration upon which output tax must be declared is the greater of the purchase price at which those goods were acquired by the motor dealer supplying the goods for export; or the original purchase price for the supply when the goods were acquired by that connected person. 54 Refer to paragraphs 2.5 and 2.6 of this guide, as well as section 10(12) and the proviso to section 11(1) of the VAT Act. The special valuation rule applies whether the motor dealer exporting the goods, or a connected person in relation to that motor dealer, claimed a notional input tax credit on the acquisition of those second-hand goods. However, this rule does not apply where the motor dealer acquired the second-hand goods under a taxable supply and paid VAT at the standard rate thereon. 34

35 VAT 420 Guide for Motor Dealers Chapter 5 It follows that unlike other direct exports, the supply of second-hand goods for export may not be subject to VAT at the zero rate and VAT must, therefore, be charged at the standard rate if a notional input tax deduction was claimed on the acquisition of those goods by the supplier, or a connected person in relation to that supplier. The VAT on these types of exports must be declared by the seller whether the VAT was charged to the purchaser or not, and it is not refundable under any circumstances. Example 10 Scenario On 28 November 2007, ABC Motors sells a second-hand motor vehicle for R (including VAT) to Mr. B (a resident of Botswana) and issues a tax invoice for the supply on the same date. ABC Motors undertakes to deliver the motor vehicle to Mr. B at his residence in Botswana. ABC Motors enters into a contract to engage RSA Transporters (a VAT vendor), to transport the motor vehicle by road, via the Ramatlabama designated commercial border post, to Mr. B at his residence in Botswana. The motor vehicle was initially acquired by ABC Motors from a private individual for R On acquiring this motor vehicle, ABC Motors deducted notional input tax of R (R x 14/114). Question Can ABC Motors charge VAT at the zero rate on the supply of the motor vehicle to Mr. B? Answer As ABC Motors acquired the motor vehicle under a non-taxable supply from a private individual (nontaxable supply), and deducted notional input tax on the acquisition of the second hand motor vehicle, the supply of the motor vehicle to Mr. B cannot be subject to VAT at the zero rate even though it is a direct export. The special valuation rule applicable to second-hand goods in such cases requires that VAT must be declared at the standard rate on the consideration of R90 000, being ABC Motors cost of acquisition of the motor vehicle from the private individual. ABC Motors must, therefore, charge VAT of R (R x 14/114) on the supply even though the motor vehicle was sold for R Example 11 Scenario Mr and Mrs J trade separately as ABC Motors and XYZ Motors respectively, and both are registered for VAT, trading as motor dealers. On 6 January 2007, XYZ Motors buys a second-hand motor vehicle from Mr X for R As Mr X is not a VAT vendor, XYZ Motors deducts notional input tax of R (R x 14/114) on the acquisition of the motor vehicle. On 9 January 2007, XYZ Motors sells the same motor vehicle to ABC Motors for R (including VAT). XYZ Motors declares output tax on the sale and ABC Motors deducts input tax on the acquisition. On 11 March 2007, ABC Motors sells the same motor vehicle for R (including VAT) to Mr. L (a Lesotho resident) and issues a tax invoice for the supply on the same date. ABC Motors undertakes to deliver the motor vehicle to Mr. L at his residence in Lesotho. ABC Motors enters into a contract to engage RSA Transporters (a VAT vendor) to transport the second-hand motor vehicle by road Mr. L s residence in Lesotho, via the Maseru designated commercial border post. Question Can ABC Motors zero rate the supply of the motor vehicle to Mr. L? Continued overleaf 35

36 VAT 420 Guide for Motor Dealers Chapter 5 Example 11 (continued) Answer As ABC Motors acquired the second-hand motor vehicle from Mrs J trading as XYZ Motors (a connected person in relation to Mr J trading as ABC Motors), and XYZ Motors deducted notional input tax of R (R x 14/114) on the acquisition of the motor vehicle from Mr. X, ABC Motors cannot supply the second-hand motor vehicle at the zero rate even though the supply falls within the ambit of a direct export. The special valuation rule applicable to second-hand goods in such cases requires that VAT must be declared at the standard rate on a consideration equal to the greater of the purchase price of those goods to that supplier and the purchase price of those goods to the connected person. Therefore, ABC Motors is required to charge VAT of R calculated as the tax fraction of the greater amount of R , even though the selling price of the vehicle to Mr L was R INDIRECT EXPORTS Part One of the Scheme 55 Where a motor dealer supplies goods, whether new or second-hand, to a purchaser who takes delivery of the goods in the Republic but intends exporting the goods to an export country, the motor dealer must levy VAT at the standard rate. The reason why VAT may not be charged at the zero rate in these cases is that the motor dealer does not have control of the goods once the customer has taken delivery, and the motor dealer cannot be certain that the purchaser will personally export the goods or engage a cartage contractor to export the goods (referred to as an indirect export ). The motor dealer will, therefore, treat the supply just like any other local supply of goods and levy VAT at the standard rate. If the goods are subsequently removed from the Republic (exported) by the purchaser or a cartage contractor appointed by the purchaser for consumption in an export country, the purchaser may submit a claim to the VRA for the VAT incurred on the goods to be refunded. Part One of the Scheme requires that the following must be complied with in order for the VRA to process a refund claim: The purchaser must be a qualifying purchaser, (refer to paragraph 2.3). The goods must be exported via a designated commercial port, (refer to paragraph 1.4 of the Scheme) in accordance with the prescribed Customs and Excise procedure. The goods must be exported within 90 days of the date of the tax invoice issued in respect of the supply of the goods. If the goods are exported personally by the qualifying purchaser, that person must present himself/herself to a VRA Official at the designated commercial port, together with the goods and the tax invoice. In the case of registrable goods exported personally by the qualifying purchaser, or where the qualifying purchaser s cartage contractor exports the goods, the qualifying purchaser may submit a VAT refund claim to the VRA for a postal refund only after the goods have been imported into the export country (and in the case of registrable goods, only after the goods have been registered in the export country concerned, for example, a motor vehicle must be registered with the relevant motor registering authority). Documentary proof Where the goods are exported via a designated commercial port where the VRA is present, the qualifying purchaser s written VAT refund request, together with the following documentation, must be received by the VRA within three months of the date of export of the goods: 55 The Export Incentive Scheme, published as Notice Number 2761 in Government Gazette No , dated 13 November Refer also to paragraph 2.3 of this guide which deals with the meaning of the term exported. 36

37 VAT 420 Guide for Motor Dealers Chapter 5 The original tax invoice endorsed by SARS Customs. A copy of the qualifying purchaser s passport; or trading licence, as well as the letter of authorisation and a copy of the authorised person s passport; or passport and the relevant letter as stipulated in paragraph 1.1 of the Scheme under the heading Foreign diplomats ; and where the qualifying purchaser was in the RSA at the time of purchase, the copy of that person s passport including those pages reflecting the endorsements for entry into, and exit from the RSA. A copy of the zero-rated tax invoice from the qualifying purchaser s cartage contractor to the qualifying purchaser 56. Proof that the qualifying purchaser declared the movable goods for customs purposes in the export country. Where the goods are registrable goods, proof of registration in the export country concerned (in the form of a copy of the registration certificate, certified by a Commissioner of Oaths). Refundable amount The VRA is allowed to deduct a commission from the tax refundable to the qualifying purchaser, calculated at a rate of 1.5% of the VAT inclusive price, with a minimum charge of R10 and a maximum charge of R250 per refund, in order to cover administration costs of the Scheme. Note that, in the case of an indirect export of second-hand goods, the Commissioner will determine the VAT amount that is refundable to the qualifying purchaser after ascertaining whether the motor dealer or any other person who is a connected person to the motor dealer, deducted notional input tax on the acquisition of the second-hand goods supplied and exported. The value of the refund is, therefore, limited to the VAT charged in excess of the notional input tax deducted. Example 12 Scenario ABC Motors is a registered vendor that supplies motor vehicles in the course or furtherance of its enterprise. On 20 November 2007, ABC Motors sells a second-hand motor vehicle to Mr. Z (a resident of Zimbabwe) and issues a tax invoice for the supply for R (including VAT) on the same date. Mr Z drives the motor vehicle back to his home in Zimbabwe the next day, via the Beit Bridge designated commercial border post. The motor vehicle was initially acquired by ABC Motors from a private individual for R and ABC Motors deducted notional input tax of R (R x 14/114) on acquiring the vehicle. Question What are the VAT implications for Mr. Z? Answer Mr. Z must complete the prescribed export declaration and declare the export of the motor vehicle to Customs at Beit Bridge on exiting the Republic. Thereafter, Mr. Z must proceed to the VRA office at the border post and produce the processed export declaration, his passport, the original tax invoice and the motor vehicle for inspection. The motor vehicle will be inspected and the tax invoice will be endorsed to the effect that the motor vehicle must be registered in Zimbabwe with the relevant motor vehicle registering authority. Mr Z may lodge his claim by submitting the documentary proof listed in paragraph to the VRA by mail. On receipt of the claim, the VRA will process and forward the claim to the Commissioner to calculate the VAT amount that is refundable to Mr. Z. As ABC Motors deducted notional input tax on the initial acquisition of the motor vehicle, the VAT amount refundable to Mr. Z is R (R x 14/114 = R R ) less the VRA s commission. 56 This requirement is only applicable where goods are exported by a qualifying purchaser s cartage contractor. 37

38 VAT 420 Guide for Motor Dealers Chapter Part Two of the Scheme New goods Where a motor dealer supplies a new motor vehicle to a qualifying purchaser who will export the motor vehicle by sea or by air, the motor dealer may elect to supply the motor vehicle at the zero rate as an indirect export in terms of Part Two of the Scheme. 57 Part Two of the Scheme provides further that the motor dealer must ensure that the motor vehicle is delivered (irrespective of the contractual conditions of the delivery) to any of the designated harbours or airports listed in paragraph 1.4 of the Scheme. The decision to apply the zero rate is entirely subject to the motor dealer s choice, and should the motor dealer decide not to apply the zero rate, the supply is taxable at the standard rate and the qualifying purchaser can apply to the VRA for a VAT refund. (Refer to paragraph ) Documentary proof In the case of new goods supplied at the zero rate as an indirect export in terms of Part Two of the Scheme, the motor dealer must obtain and retain the following documentation to substantiate levying VAT at the zero rate: A copy of the zero-rated tax invoice issued by the motor dealer. The qualifying purchaser s order or the contract between the motor dealer and the qualifying purchaser. A copy of the qualifying purchaser s passport or trading license. A copy of the necessary documentary proof (as prescribed in the Customs and Excise Act) from the Controller of Customs and Excise. Generally, this would be a SAD 500 form, bearing an original SARS Customs date stamp. A copy of the air freight or sea freight transport documents (whichever is applicable). Proof of payment by the qualifying purchaser for the motor vehicle. Output tax adjustment In the event that the required documents are not obtained by the motor dealer within a period of two months from the date of the tax invoice, the motor dealer will be required to make an output tax adjustment in Block 12 of the VAT 201 return rendered for the tax period in which the two-month period ends. The adjustment is calculated by applying the tax fraction to the consideration for the supply. Input tax adjustment However, if the required documentation is received within 12 months from the date of the original tax invoice issued by the motor dealer, subsequent to making any output tax adjustment referred to above may be deducted as an input tax adjustment in Block 18 for the tax period in which the documentation is received by the motor dealer. Extensions and proof of payment If the motor dealer experiences difficulties in obtaining the required proof of payment, both the periods referred to above may be extended up to a maximum period of four months by the SARS branch office where the motor dealer is on register. The rules for the extension relate specifically to difficulties in obtaining the proof of payment and not to other documentation Part Two of the Scheme Second-hand goods Part Two of the Scheme does not provide for the vendor to charge VAT at the zero rate in respect of supplies of second-hand goods to qualifying purchasers who will export the goods by sea or by air, if notional input tax was deducted on the acquisition of the goods by the supplier, or any other person who is a connected person in relation to that supplier. VAT must therefore be accounted for by the supplier at the standard rate in accordance with the special value of supply rules as discussed in paragraph (Refer also to paragraphs 2.5 and 2.6). 57 This election is at the risk of the motor dealer who will be liable for any VAT at the standard rate which may be applicable on the transaction in the event of any non-compliance with the rules of the Scheme. 38

39 VAT 420 Guide for Motor Dealers Chapter 6 CHAPTER 6 IMPORTS 6.1 INTRODUCTION The South African VAT is a consumption based tax which basically means that where goods or services are supplied in, or imported into South Africa, those goods or services are subject to VAT at the standard rate. In applying the consumption principle, the following applies in South Africa: Goods or services supplied locally are subject to VAT at the standard rate, subject to specific exemptions, exceptions, deductions and adjustments. Goods or services which are exported for consumption in an export country are generally subject to VAT at the zero rate (or the VAT charged may be refunded by the VRA upon export). Goods imported into South Africa are subject to VAT at the rate of 14%, unless the importation is specifically exempt. Any services which are imported into South Africa otherwise than for the purpose of making taxable supplies are subject to VAT at the standard rate. 6.2 IMPORTATION OF GOODS As mentioned above, the importation of goods into South Africa by any person is subject to VAT at the standard rate of 14%, calculated on the value of the importation, in terms of section 7(1)(b) of the VAT Act, unless the importation is specifically exempt 58 (for example, a temporary importation for a specific purpose). The VAT Act contains provisions which deal with the time and value of importation for goods imported into South Africa as follows: Time of importation this is the date on which the goods are deemed to be imported in terms of the provisions of the Customs and Excise Act. Importation value The value to be placed on any importation is the sum of (a) the value of the goods for customs duty purposes, (b) plus any duty applicable on the importation of those goods, (c) plus 10% of the value in (a) above (except where the goods have their origin in Botswana, Lesotho, Namibia or Swaziland, in which case the 10% upliftment does not apply) GOODS TEMPORARILY IMPORTED FOR SERVICING OR REPAIRS One of the reasons why the importation of goods may be exempt from VAT is to deal with a situation where goods are temporarily imported into South Africa to be serviced or repaired and the goods are subsequently re-exported. Consumption of the serviced or repaired goods continues to take place outside of South Africa. For example, if a tractor is used in a farming business in Botswana and is sent to be repaired in South Africa, after which the tractor is returned to Botswana for continued use in the business carried on in that country, the importation of the tractor into South Africa may be exempt from VAT. The VAT Act therefore provides for an exemption from the VAT levied on the importation of goods in these circumstances, provided that the goods are exported within six months of the date of importation. 60 A common example of when this provision will apply is when a non-resident temporarily imports a motor vehicle into South Africa, specifically for a motor dealer, panel beater or other service provider to service or repair the motor vehicle Section 13(3) of the VAT Act provides that certain goods imported into South Africa may, under certain conditions, be exempt from VAT on importation. The specific conditions and circumstances, under which these exemptions apply, are set out in Schedule 1 to the VAT Act. Refer to section 13(2) of the VAT Act. Refer to section 13(3), read with Item No s /00.00/01.00 or /00.00/02.00 listed in paragraph 8 of Schedule 1 to the VAT Act. These Item No s are subject to the various provisos and Notes as stipulated in the said paragraph 8. 39

40 VAT 420 Guide for Motor Dealers Chapter 6 For the temporary importation of goods for the purpose of being serviced or repaired, the following procedure should be followed: The importer must complete and submit the following to Customs at the time of importation: An import declaration as prescribed in the Customs and Excise Act (SAD 500 form), indicating that the motor vehicle is being temporarily imported for the purposes of being serviced or repaired by the motor dealer and that the importation is exempt from VAT. A VAT 262 form (refer to Annexure B), which is obtainable from Customs or from the SARS website: Customs will process the import declaration and the VAT 262 form by completing the applicable sections of the VAT 262 form, verifying the goods against the description on the VAT 262 form, and date stamping the form. Customs may require a provisional payment as security for the VAT amount on the value of the motor vehicle and will issue a DA 70 form in his regard. Customs will retain the Original page of the VAT 262 form and will return the 1 st copy, 2 nd copy and 3 rd copy pages of the VAT 262 form to the importer so that they may be handed to the motor dealer who will perform the service. The relevant copies of the SAD 500 declaration form must also be returned to the importer. The motor dealer must complete Part B of the VAT 262 form and retain the 1 st copy as documentary proof 61 that the zero rate may be applied for the supply of any goods or services 62 in connection with the repair or service. The 2 nd copy and 3 rd copy pages must be returned to the importer. The importer must ensure that the motor vehicle is duly exported within six months from the date of importation 63 and on exiting South Africa, must hand the 2 nd copy of the VAT 262 form to SARS Customs, together with the permanent export declaration form (SAD 500) and the DA 70 form. The 2 nd copy will be checked to the original page of the VAT 262 form that was retained by SARS Customs on importation to confirm that the same goods are being exported, where after the provisional payment will be acquitted. The importer will retain the 3 rd copy of the VAT 262 form for recordkeeping purposes. From the above, it should be clear that the primary purpose of the VAT 262 form is to serve as documentation to substantiate the motor dealer s entitlement to apply the zero rate of VAT to the consideration charged for the goods and services supplied in servicing or repairing the motor vehicle. It should, therefore, be noted that if an importer is unable to provide the motor dealer with a completed VAT 262 form duly processed by Customs, the motor dealer must levy VAT at the standard rate. In this case, the importer may, on exiting South Africa with the serviced or repaired motor vehicle, approach the VRA for a VAT refund after passing through Customs. (Refer to paragraph 5.3.1). The importer must be a qualifying purchaser and the application for VAT refund will only be considered for goods which become an integral part of the motor vehicle 64 that was temporarily imported for servicing or repair. The VAT component applicable to any services provided is not refundable As required in terms of section 11(3) of the VAT Act. The services supplied directly in respect of servicing the motor vehicle is subject to VAT at the zero rate in terms of section 11(2)(g) of the VAT Act. Certain goods, such as parts or components, that will be provided in the course of providing the services which are wrought into, affixed to, attached to or otherwise form an integral part of the goods which have been temporarily admitted; or if the goods are consumed as a direct result of being used in a repair, renovation, modification or treatment process, are also subject to VAT at the zero rate (section 11(1)(b) of the VAT Act). 63 Note that there is an error on the form VAT 262 in that reference is made in the notes to a period of 30 days within which the goods must be exported. The form is currently being updated to reflect the correct period of six months. 64 For example, where parts are replaced or fitted such as tyres, tow bars, engine parts, wheel rims etc. Any charges for labour or other services performed in South Africa will not be refunded in such cases. 40

41 VAT 420 Guide for Motor Dealers Chapter TRANS-SHIPMENT OF GOODS Goods such as motor vehicles which are shipped or conveyed to South Africa for trans-shipment or conveyance to any export country are exempt from VAT on importation since consumption will not take place in South Africa. However, the exemption is subject to the requirement that the Controller of Customs and Excise ensures that the tax is secured in part or in full. This means that the importer will normally be required to lodge what is known as a provisional payment or bond to cover the risk of any duties and taxes becoming payable in the event that the goods are not exported. Before the provisional payment is refunded or the bond is released, proof must be submitted to SARS Customs by the importer that the goods were removed from the Republic within 30 days (or any further period which may have been allowed by the Commissioner in exceptional circumstances). It follows that if a South African motor dealer has imported motor vehicles which have been supplied to customers in export countries, no VAT will be payable on the importation of the motor vehicles into South Africa if those motor vehicles are to be trans-shipped or conveyed through South Africa to the country into which the motor vehicles will ultimately be imported and consumed. A provisional payment or bond may, however, be required by Customs upon importation. The provisional payment or bond may be refunded or released once the vehicles have been exported. 6.5 NON-RESIDENT MANUFACTURER WARRANTIES As mentioned in paragraph 4.14, when a motor vehicle has been manufactured in another country, the motor vehicle will generally be supplied by the non-resident motor vehicle manufacturer (warrantor) to a local motor distributor or motor dealer, together with a warranty which provides assurance to the customer that any costs of rectifying any manufacturing defects will be covered. Accordingly, when a warrantor supplies a motor vehicle directly to a motor dealer, or to a motor vehicle distributor who in turn supplies the motor vehicle to a motor dealer, the selling price includes an embedded amount (whether separately specified or not) for the warranty which may be included in the determination of the value of the motor vehicle for importation purposes. The purchaser, being the motor dealer or motor vehicle distributor, is usually the importer of the motor vehicle and would be liable for VAT on importation. The VAT payable on importation is determined by applying the tax rate (14%) to the selling price of the motor vehicle which includes any charge which may be applicable in respect of the warranty. Where the importer is a vendor and acquires the motor vehicle to make taxable supplies, the importer can deduct the VAT paid on the importation of the motor vehicle as input tax. Where the warrantor compensates the local motor distributor/motor dealer by way of replacing defective parts, the importation of the part will be exempt from VAT The importation is exempt in terms of Item No /00.00/01.00 in paragraph 8 of Schedule 1, read with section 13(3) of the VAT Act, and subject to the requirements contained in the proviso to that Item No. 41

42 VAT 420 Guide for Motor Dealers Chapter 7 CHAPTER 7 INPUT TAX 7.1 GENERAL RULES Generally, the VAT charged by a vendor to another vendor on any goods or services acquired for the business will qualify as input tax in the hands of the recipient. It does not matter if the goods or services are acquired for the purposes of consumption or use by the business itself, or for the purposes of making a taxable supply to another person. It is important that input tax is only claimed insofar as the supplies are used for the purposes of making taxable supplies in the course or furtherance of the enterprise. Input tax may not be claimed where goods or services are acquired for private purposes or for exempt supplies. Where VAT has been incurred for both taxable and nontaxable purposes, the input tax must be apportioned. To qualify as input tax, three requirements must be met, namely a) the goods or services supplied must be acquired by the vendor wholly or partly for consumption, use or supply in the course of making taxable supplies; and b) VAT at the standard rate must have been charged on the taxable supply (or second-hand goods must have been acquired under a non-taxable supply and paid for by the purchaser); and c) the appropriate documentation must be held by the vendor, as follows: Standard rated supplies a valid tax invoice. Second-hand goods bought under a non-taxable supply sufficient records must be maintained by the vendor (that is, a completed and signed form VAT 264). Importation of goods a Customs bill of entry SAD 500 or other prescribed Customs document (for example, a CCA 1 or DA 500 form), as well as the relevant proof of payment of the VAT in respect of the importation made to Customs. For more details in regard to input tax, refer to Chapter 7 of the VAT 404 Guide for Vendors which is available on the SARS website The application of these general rules and any special rules which may be applicable to motor dealers are set out in paragraphs 7.2 to 7.9 below. 7.2 DEALER STOCK The primary input costs of a motor dealer will be the acquisition of dealer stock for resale and a motor dealer will acquire both new and used (second-hand) motor vehicles for this purpose. Dealer stock of new motor vehicles is typically acquired under a floor plan arrangement 66 (refer to paragraph 4.2.3) and stock of second-hand motor vehicles (refer to paragraph 7.3) is typically acquired through tradeins either connected to another supply made by that motor dealer, or acquired from other motor dealers that supply only new motor vehicles, but which accept trade-ins on new motor vehicle sales. When motor vehicle stock is purchased from another vendor under a taxable supply, the motor dealer may claim input tax if the supplier provides the motor dealer with a tax invoice. Input tax may also be claimed on motor vehicles acquired which fall within the definition of motor car, provided that the vendor supplies motor cars in the ordinary course of its business. In other words, the general rule applicable to other vendors which disallows input tax on the acquisition of a motor car does not apply to a motor dealer that continuously or regularly supplies motor cars. Motor cars acquired for demonstration purposes or which are used for other incidental purposes before being supplied to a customer are regarded as having been acquired wholly by the motor dealer for taxable purposes 67 and input tax may be claimed thereon However, floor plan agreements may also include the supply of second-hand motor vehicles. In some cases, demonstration vehicles or other motor vehicles in dealer stock may be made available for employees to use, either free of charge, or for a consideration that is less than the cost or value of that right of use. This does not affect the motor dealer s ability to claim input tax on acquisition of the motor vehicle as long as the motor dealer ultimately intends supplying the motor vehicle under a taxable supply. Refer also to paragraph

43 VAT 420 Guide for Motor Dealers Chapter SECOND-HAND GOODS When a motor dealer purchases a second-hand motor vehicle (including a motor car ) from another motor dealer, the supply will usually constitute a taxable supply and the supplier will be required to issue a tax invoice as discussed in paragraphs 7.1 and 7.2 above. The same will apply if a motor vehicle is purchased from any other vendor which has used the motor vehicle in an enterprise and claimed input tax thereon. 68 However, motor dealers often purchase second-hand motor vehicles from private owners (non-vendors) or accept these as trade-ins. If a second-hand motor vehicle purchased or accepted as a trade-in is not a taxable supply by that person, the motor dealer will be entitled to claim a notional input tax deduction on the motor vehicle acquired, subject to the following conditions: The motor vehicle must qualify as second-hand goods as defined. 69 The supply may not be a taxable supply. 70 The supplier must be a South African resident. The goods supplied must be situated in South Africa. The motor dealer must have paid 71 for the motor vehicle or at least made part payment, as input tax is only allowed to the extent that payment has been made. The prescribed records 72 must be kept (form VAT 264 and attachments refer to Annexure A). The notional input tax is calculated by multiplying the tax fraction (presently 14/114) by the lesser of the consideration paid or the open market value (OMV). Where the OMV is less than the consideration paid, the OMV will be used to calculate the notional input tax claim. 73 No input tax may be claimed by a motor dealer on any second-hand motor vehicles acquired under a non-taxable supply unless a form VAT 264 has been completed, signed by the seller and retained as part of the motor dealer s records. Form VAT 264 is a declaration in respect of the acquisition of moveable second-hand or repossessed goods in which the owner of the goods or the person representing the owner declares that the supply of the goods is not a taxable supply. Motor dealers may not claim input tax on the acquisition of second-hand motor vehicles from diplomats or consular or diplomatic missions if relief was granted to the owner on the acquisition of that motor vehicle in the form of a refund of VAT. 74 As mentioned in paragraph 2.11, motor dealers sometimes agree to pay an amount to a customer which is in excess of the generally accepted trade-in value of a second-hand motor vehicle in cases where the trade-in is an integral part of another transaction involving the supply of a new vehicle to the same customer by the motor dealer. The difference between this value and the amount credited or paid to the customer is referred to as an over-allowance. The issue which arises in this regard is that the notional input tax which the dealer seeks to claim on the vehicle traded in is limited to the tax fraction of the lesser of: any consideration in money given by the dealer; or the OMV of the vehicle. It is generally accepted that the values mentioned in the Auto Dealer s Guide represent the OMV. As a result, when any so-called over-allowance is paid to the customer, the OMV will be the lesser amount, and the notional input tax credit will be limited accordingly Motor cars acquired from vendors that do not supply motor cars in the ordinary course of their business are usually not taxable supplies. Section 1 of the VAT Act. This will occur when the supplier is not a registered vendor, or if the supply is made by a vendor, but is not a taxable supply in the circumstances (for example, the supply of a motor car by a vendor that has been denied input tax on the acquisition thereof). A set-off, or granting of credit to the customer for the trade-in value of a second-hand motor vehicle against the selling price of another motor vehicle will constitute payment of the consideration for the second-hand motor vehicle traded in. In addition to form VAT 264, a copy of the green bar-coded ID of the supplier (or the supplier s representative) must be attached as well as a copy of the business letterhead or other similar document if the supplier is a juristic person. However, refer to the binding general ruling in this regard on page 44. Refer to section 68 of the VAT Act - Tax relief allowable to certain diplomats and diplomatic and consular missions. 43

44 VAT 420 Guide for Motor Dealers Chapter 7 As it is not the intention of the VAT Act to deny an input tax credit on an arm s-length transaction between parties that are not connected persons in such circumstances, a binding general ruling has been issued in this regard (refer to the following page). OVER-ALLOWANCES: NOTIONAL INPUT TAX AND OPEN MARKET VALUE The statement below regarding the application of the VAT law in regard to over-allowances for the purposes of paragraph (b) of the definition of input tax and open market value as defined in section 1 of the VAT Act constitutes a binding general ruling issued in accordance with section 76P of the Income Tax Act, 1962 (Act No. 58 of 1962), read with section 41A of the VAT Act. This binding general ruling applies with effect from 1 March 2009 and will remain in force until withdrawn or replaced. Where a motor dealer pays an amount to a customer in excess of the generally accepted trade-in market value reflected in the Auto Dealer s Guide of a second-hand motor vehicle, the difference between this value and the amount credited or paid to the customer is referred to as an overallowance. The effect of paying an over-allowance is that in terms of paragraph (b) of input tax and open market value as defined in section 1 of the VAT Act, the open market value is less than the consideration paid to the customer. Consequently, the notional input tax to which the dealer is entitled is limited to the tax fraction of the open market value of the vehicle traded-in. In cases where the trade-in is an integral part of another transaction involving the supply of a new vehicle to the same customer by the same motor dealer, the overall position for the motor dealer is the same with regard to the VAT payable if the generally accepted trade-in open market value of the second-hand motor vehicle is paid and a discount is granted to the customer on the new vehicle; or a so-called over-allowance is paid to the customer on the second-hand motor vehicle tradedin, and no discount (or a very small discount) is granted to the customer on the new vehicle purchased. As it is not the intention of the VAT Act to deny an input tax credit on an arm s-length transaction between parties that are not connected persons in such circumstances, an arrangement is hereby made in terms of section 72 of the VAT Act, to allow motor dealers to deduct input tax in terms of paragraph (b) of input tax as defined in section 1 of the VAT Act, read with section 16(3)(a)(ii)(aa) and 16(3)(b)(i) on the full consideration (including any over-allowance amount) paid or credited to the supplier for a second-hand vehicle traded-in under a non-taxable supply. This ruling is made under the following conditions: (a) The trade-in transaction is dependent on the conclusion of a transaction for the purchase of another motor vehicle by that customer from the same motor dealer. (b) The parties to the transaction are trading at arm s-length and are not connected persons as defined in section 1 of the VAT Act. (c) The consideration paid shall be regarded as the value of the trade-in plus the over-allowance given by the vendor. However, this allowance given by the vendor shall not exceed the discount that is permissible on the vehicle being sold. (d) The required records as prescribed in section 20(8) of the VAT Act must be held, as well as the following: A detailed list of the second-hand vehicles traded in, and the subsequent sale thereof. A statement containing the details of the allowance/discount allowable on the vehicles to be sold. A statement showing the net accounting effect of the combined transactions involved (that is, the trade-in and sale). (e) Failure on the part of the motor dealer to comply with the aforementioned conditions and the provisions of the VAT Act will result in the arrangement not being allowed or withdrawn. Furthermore, SARS reserves the right to withdraw this arrangement, should it be found that such dispensation is being misused or causing verification problems for SARS. In these instances the normal rules as set out in the VAT Act will apply. 44

45 VAT 420 Guide for Motor Dealers Chapter IMPORTATION OF MOTOR VEHICLES When a motor dealer imports motor vehicles for subsequent supply in South Africa, VAT is payable as the motor vehicles will be imported for home consumption. The VAT incurred on importation may be claimed as input tax provided that the bill of entry or other document required for the importation in terms of the Customs and Excise Act is held by the motor dealer (or that person s agent), as well as the receipt from Customs confirming that the VAT has been paid in respect of the importation. If the motor vehicles are shipped or conveyed to South Africa for trans-shipment or conveyance to any export country, no VAT is payable on importation, and no input tax may be claimed on any provisional payment made to Customs in this regard (refer to paragraph 6.4). A motor dealer cannot claim a notional input tax deduction on any second-hand motor vehicle purchased outside of South Africa 75 whether acquired from a resident or a non-resident. In such cases, only the VAT payable on importation will be allowed as input tax. 7.5 INSURANCE In terms of certain floor plan agreements between the dealer and the financial institution, the motor dealer has to ensure that the motor vehicles in its possession are properly insured, even though the financial institution may be the owner of the motor vehicles. These insurance contracts are then in certain instances, ceded to the financial institution. Alternatively, the motor dealer will insure the stock that it owns. In these scenarios, the supply of insurance is made to the motor dealer and input tax may therefore be claimed, provided the motor dealer is in possession of a valid tax invoice or documents and information which constitutes an alternative to a tax invoice COMMISSIONS PAID Where the motor dealer pays a finder s fee (commission), it must be established if the person to whom the fee is paid is a vendor. Where the person is not a vendor, the motor dealer is not entitled to claim input tax. Where the commission is paid to a vendor, the vendor must issue the motor dealer with a tax invoice and in this case, the motor dealer is entitled to input tax on the commission paid. 7.7 FLOOR PLANS Refer to paragraph which deals with input tax and output tax on transactions concluded under floor plan arrangements. 7.8 GENERAL OVERHEADS To the extent that general overheads such as rent, electricity, administration costs, audit fees, office equipment and the like are incurred for the purpose of making any taxable supplies (as discussed in Chapter 4), input tax may be claimed by the motor dealer. This is subject to the usual documentary requirements and other conditions for claiming input tax as set out in paragraphs 7.1 and 7.3 being met This is discussed in paragraph 7.3. Notional input tax may not be claimed in either case where the supplier is a nonresident, or where the motor vehicle is situated outside of South Africa and has to be imported. Refer to paragraph 4 of VAT Practice Note No.2 25 September

46 VAT 420 Guide for Motor Dealers Chapter DENIAL OF INPUT TAX The general rules regarding input tax are that in certain circumstances the VAT paid on certain business expenses cannot be deducted by the vendor as input tax. These include goods or services acquired for purposes of entertainment; membership fees or subscriptions of clubs, associations or societies of a sporting, social or recreational nature; the acquisition of a motor car by a vendor (who is not a motor car dealer or car rental enterprise); and goods or services acquired by medical schemes or benefit funds for the purposes of health insurance or benefit cover. The general rule that input tax may not be claimed on the acquisition of motor cars does not apply in the case of motor dealers as they purchase and supply motor cars in the ordinary course of their enterprises. This also applies where a vehicle is in dealer stock if it is used temporarily for demonstration purposes or as a courtesy car provided to customers who are having their vehicles repaired. However, if the motor dealer rents a motor car from another vendor specifically for the purpose of supplying that motor car as a courtesy car to a customer, input tax is denied. This is because in such a case, the motor dealer does not acquire the motor car for the specific purpose of selling or leasing it in the course or furtherance of the enterprise. For a more detailed discussion on the general VAT principles in regard to input tax, refer to Chapter 7 of the Guide for Vendors (VAT 404). 46

47 VAT 420 Guide for Motor Dealers Chapter 8 CHAPTER 8 TAX INVOICES 8.1 TAX INVOICE A registered vendor making a taxable supply must issue a tax invoice within 21 days of making such supply, irrespective of whether the recipient of the supply requests a tax invoice or not. To constitute a valid tax invoice, the document must contain the details prescribed in section 20 of the VAT Act. These details will vary depending on the consideration for the taxable supply. 8.2 CONSIDERATION EXCEEDS R50 BUT NOT R3 000 If the consideration for the supply exceeds R50, but not R3 000, the document must contain the following particulars to constitute a valid tax invoice (referred to as an abridged tax invoice ): The words tax invoice displayed in a prominent place. The name, address and VAT registration number of the supplier. An individual serialised number and the date on which the tax invoice is issued. A full and proper description of the goods (indicating, where applicable, that the goods are second-hand goods) or services supplied. With regard to the tax charged, either the value of the supply, the total amount of tax charged and the consideration including tax charged for the supply; or the consideration including tax charged for the supply and either the amount of tax charged or a statement to the effect that it includes a charge for the tax and the rate at which the tax was charged. The value and consideration must be denominated in Rand (except in relation to a zero-rated supply). 8.3 CONSIDERATION EXCEEDS R3 000 If the consideration for the supply exceeds R3 000, the document must contain the following particulars to constitute a valid tax invoice (referred to as a full tax invoice ): The words tax invoice displayed in a prominent place. The name, address and VAT registration number of the supplier. The name, address and VAT registration number of the recipient. An individual serialised number and the date on which the tax invoice is issued. A full and proper description of the goods (indicating, where applicable, that the goods are second-hand goods) or services supplied. The quantity or volume of the goods or services supplied. With regard to the tax charged, either the value of the supply, the total amount of tax charged and the consideration including tax charged for the supply; or the consideration including tax charged for the supply and either the amount of tax charged or a statement to the effect that it includes a charge for the tax and the rate at which the tax was charged. The value and consideration must be denominated in Rand (except in relation to a zero-rated supply). Importantly, while the general requirement is that the tax invoice must be in the currency of the Republic, this is not necessary where the supply is subject to tax at the zero rate (proviso to section 20(4) of the VAT Act). 47

48 VAT 420 Guide for Motor Dealers Chapter EXAMPLES Example 1 Local supply - VAT shown separately. The words tax invoice in a prominent place on the document. TAX INVOICE Trading name, address and VAT registration number of the supplier Serialised tax invoice number Invoice no. 1958/08 Date : 30 November 2008 Date of the tax invoice Name and address of the recipient AC Motor Dealers CC t/a Bushlands Motors 57 Bush Heights BUSHLANDS VAT No.: To : Mr Joe Soap 123 Gingerbread Road Newlands Cape Town VAT No VAT registration number of the recipient (if registered) where the consideration exceeds R3 000 Accurate description of the goods or services supplied Date Quantity Description VAT R 30/11/ BMW 318i (second-hand goods) Alarm System Total VAT 14% Quantity of goods or services supplied Total selling price charged including VAT. The VAT must either be shown separately, or the tax invoice must contain a statement that the total consideration includes 14% 48

49 VAT 420 Guide for Motor Dealers Chapter 8 Example 2 Local supply - VAT not shown separately. TAX INVOICE Invoice no. 1969/09 AC Motor Dealers CC t/a Bushlands Motors 57 Bush Heights BUSHLANDS VAT No.: Date : 3 January 2009 To : Mr Joe Soap 123 Gingerbread Road Newlands Cape Town VAT No Date Quantity Description R 3/1/ Toyota Hi-Lux Single Cab Bakkie Panasonic Audio System Total All prices include 14% The VAT in this example is not shown separately, but includes a statement that the price includes 14% 49

50 VAT 420 Guide for Motor Dealers Chapter 8 Example 3 Direct export of second-hand goods on which a notional input tax deduction has been made by the supplier (on an original cost price of R90 000). TAX INVOICE Invoice no. 1970/09 AC Motor Dealers CC t/a Bushlands Motors 57 Bush Heights BUSHLANDS VAT No.: Date : 30 January 2009 To : Mr S. Mokwana 123 Long Street Gaborone Botswana VAT No. n/a Date Quantity Description R 30/1/ Second-hand vehicle BMW 318i (E90) VAT included in the 14% Total The VAT in this example is shown separately. It is calculated as the tax fraction 14/114 of the cost price of R (R R ) x 14% = R

51 VAT 420 Guide for Motor Dealers Chapter 8 Example 4 Indirect export of second-hand goods on which a notional input tax deduction has been made by the supplier (on an original cost price of R90 000). TAX INVOICE Invoice no. 1977/09 AC Motor Dealers CC t/a Bushlands Motors 57 Bush Heights BUSHLANDS VAT No.: Date : 30 January 2009 To : Mr D. Raile 125 Short Street Gaborone Botswana VAT No. n/a Date Quantity Description R 30/1/ Second-hand vehicle BMW 318i (E90) VAT not refundable by VRA on the export of second-hand goods R % Total In this example, VAT has been charged on the full selling price. Upon exporting the vehicle, the customer may claim a refund from the VRA on the difference between the VAT of R which was charged and R which is a non-refundable amount. 51

52 VAT 420 Guide for Motor Dealers Glossary GLOSSARY Consideration The total amount of money (including VAT) received for a supply. Consideration is widely defined to include any form of payment and any act or forbearance, whether or not voluntary, for the inducement of a supply of goods or services. Where the consideration is not in money, (for example, in the case of barter transactions) the consideration is the open market value of the goods or services (including VAT) received for making the taxable supply. Section 10 determines the value or the consideration of a supply for VAT purposes in respect of various different types of supplies. The term consideration excludes any donation made to an association not for gain; and a deposit which is lodged to secure a future supply of goods or services, which have not yet been applied as payment (for example, a deposit held in trust until the time of the supply is triggered in terms of section 9), or which has not yet been forfeited. Enterprise Includes any business or activity in the broadest sense. The enterprise or activity must contain the following crucial elements: It must be carried on continuously or regularly. By any person. In or partly in the Republic. In the course of which goods or services are supplied for a consideration, that is, some form of payment. Whether or not for profit. The following are some examples of activities which are not enterprise activities: Services rendered by an employee to an employer, for example, salary/wage/remuneration earners (excluding independent contractors). Private occasional transactions, for example, the occasional sale of domestic or household goods, personal effects and private motor vehicles. Any activity involving the making of exempt supplies (that is, those listed in section 12). Supplies by persons who are not vendors. The supply of these goods or services will accordingly not attract VAT. Exempt supplies Refers to a supply on which no VAT may be charged (even if the supplier is registered for VAT). Persons making only exempt supplies may not register for VAT and may not claim input tax on expenses incurred for the purpose of making these supplies. Section 12 contains a list of exempt supplies. Some examples are the supply of certain financial services; rental of accommodation in any "dwelling" including employee housing; the transport of fare-paying passengers and their personal effects by road or railway; and certain educational services. 52

53 VAT 420 Guide for Motor Dealers Glossary Exports Refers to the supply of goods or services to a recipient who will consume those goods or services in an export country. There are two types of exports for VAT purposes: Direct exports consigned or delivered by the supplying vendor to a recipient in an export country. Indirect exports removed from the Republic by either the recipient or the recipient s cartage contractor. Goods Includes corporeal (tangible) movable things, goods in the ordinary sense (including any real right in those things); fixed property, for example, land and buildings; any real right in fixed property, for example, servitudes, mineral rights, notarial leases etc; sectional title units (including timeshare); shares in a share block company; electricity; postage stamps; and second-hand goods. The term excludes money, that is, notes, coins, cheques, bills of exchange etc (except when sold as a collectors item); value cards, revenue stamps etc which are used to pay taxes (except when sold as a collectors piece or an investment item); and any right under a mortgage bond. Input tax Includes VAT paid by the recipient to a VAT registered supplier in respect of the acquisition of goods or services; VAT on the importation of goods by a vendor; and the tax fraction of the lesser of the consideration in money paid or the open market value of second-hand goods (which is commonly referred to as notional input tax ) acquired from a non-vendor, or acquired as a non-taxable supply. Certain conditions, however, apply, for example input tax may only be deducted by the recipient vendor if the goods or services are acquired for making taxable supplies; where goods or services are acquired only partly for the purpose of making taxable supplies, an apportionment of input tax must be made; and no input tax may be claimed where the goods or services are acquired for making exempt supplies, or other non-taxable activities (for example, for private use). The recipient vendor must retain the relevant supporting documentation in order to claim the input tax, for example the recipient vendor must be in possession of a valid tax invoice as envisaged in section 20; and in the case of second-hand goods exceeding the value of R1 000, the recipient vendor must keep a declaration by the supplier stating whether the supply is taxable or not, and must maintain sufficient records containing certain details of the transaction. (This includes a completed and signed form VAT 264 and a copy of the green bar-coded ID of the supplier). 53

54 VAT 420 Guide for Motor Dealers Glossary Person The entity which is liable for VAT registration and includes sole proprietors, that is, natural persons; companies and close corporations; partnerships and joint ventures; deceased and insolvent estates; municipalities; public authorities; and foreign donor funded projects. Recipient SARS The person to whom a supply of goods or services is made. The acronym for The South African Revenue Service. Services Is broadly defined and includes the granting, assignment, cession, and surrender of any right; the making available of any facility or advantage; and certain acts which are deemed to be services in terms of section 8. The definition of services excludes a supply of goods ; money; and any stamp, form or card which falls into the definition of goods. Some examples of services are commercial services such as services provided by electricians, plumbers, builders etc; professional services such as services provided by lawyers; accountants and auditors; and advertising services provided by advertising agencies. Supply Is defined very broadly and includes all forms of supply, and any derivative of the term, irrespective of where the supply is effected. The term includes performance in terms of a sale, rental agreement and an instalment agreement, and may be voluntary, compulsory or by operation of law. Some examples are the expropriation of fixed property; letting of office buildings; and the provision of a motor vehicle in terms of an instalment sale agreement. Taxable supplies Includes all supplies which are chargeable with tax under the VAT Act. There are two types of taxable supplies, namely supplies which attract VAT at the zero rate (listed in section 11); and. supplies which attract VAT at the standard rate (that is, 14% of VAT must be charged). A taxable supply does not include any exempt supply listed in section 12, even if supplied by a registered vendor. 54

55 VAT 420 Guide for Motor Dealers Glossary Tax period A vendor must submit a VAT 201 return to SARS in respect of the tax period contemplated in section 27, in terms of which the vendor is registered. A vendor may be required to account for VAT in terms of one of the following five categories: Category A two-monthly (ending at the end of every odd month, for example, Jan, Mar, May, July etc). Category B two-monthly (ending at the end of every even month, for example, February, April, June etc). Category C monthly (taxable supplies greater than R30 million in a 12-month period). Category D six-monthly (only certain farmers whose taxable supplies are less than R1.5 million in a 12-month period) Category E annually (only in exceptional circumstances where supplies are made to connected persons and payment of consideration only becomes due once a year). Category F four-monthly (for small businesses only whose taxable supplies are less than R1.5 million in a 12-month period). Time of supply Value of supply As a general rule, a supply is deemed to take place at the earlier of the time an invoice is issued, or the time any payment of consideration is received by the supplier. However, section 9 also provides for specific time of supply rules (for example, connected persons, periodic or progressive supplies, fixed property etc). The price charged, excluding VAT. Section 10 makes provision for specific value of supply rules (for example, connected persons, instalment credit agreements, tokens, vouchers or stamps etc). VAT Vendor The acronym for value-added tax. Any person that is registered, or is required to be registered for VAT. Therefore any person making taxable supplies in excess of the threshold for compulsory registration prescribed in section 23, is a vendor regardless of whether or not the person is registered as such. The registration threshold is currently R a year, but will increase to R1 million on 1 March

56 VAT 420 Guide for Motor Dealers Contact details Annexure A Form VAT

57 VAT 420 Guide for Motor Dealers Annexure B Annexure B Form VAT

58 VAT 420 Guide for Motor Dealers Annexure B 58

59 VAT 420 Guide for Motor Dealers Annexure B 59

60 VAT 420 Guide for Motor Dealers Annexure B 60

61 VAT 420 Guide for Motor Dealers Annexure B 61