VALUE-ADDED TAX. (c) CA Campus PART 1. Copyright CA Campus. CA Campus

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1 VALUE-ADDED TAX PART 1 Copyright These notes enjoy copyright under the Berne Convention. In terms of the Copyright Act, no 98 of 1978, no part of this material may be reprinted or reproduced, in any form whatsoever, either in whole or in part or by any electronic or other means including the making of photocopies thereof, without the express prior written consent of the proprietor, CA Campus. No individual may share any CA Campus content or material with any other person. The proprietor will not hesitate to prosecute any such offenders to the fullest extent of the law and to report their details to: UNISA The South African Institute of Chartered Accountants (SAICA) for purposes of barring such persons from registering as chartered accountants (SA), as such actions constitute a gross transgression of ethical principles, which is a violation of the code of professional conduct of SAICA South African Police Service Any other relevant professional body / organisation including any employer 1

2 INTRODUCTION Very important for CTA, ITC and APC Can be integrated into most areas of tax questions. The government collects tax both directly and indirectly Direct taxes: Income Tax, CGT, Estate Duty, Donations Tax, Import Duties Indirect taxes: Value-added Tax (VAT) VAT is a destination based tax that taxes goods and services which are consumed within South Africa VAT is levied at two different percentages: 14% 0% This is called Taxable Supplies Certain transactions are specifically exempt from VAT. This means that there is no Output Tax or Input Tax implications. GENERAL APPROACH TO STUDYING VAT Students struggle to navigate the VAT Act. You must learn how to do so. Often discussion questions will ask you to discuss the VAT implications of a transaction. It is important that you can reference this to the VAT Act. For each transaction you need to be able to discuss at minimum the following elements: Timing Value Any other special rule In our studies, we will approach the VAT Act by focusing on Output Tax. First understand how Output Tax works because Input Tax is much easier. 2

3 BASIC SCENARIOS Lecture Example 1 Before attempting VAT you must refresh yourself on the basic principles. It is essential that you master them You must understand the basic workings of Output Tax and Input Tax. Do not progress until you can do all the related lecture examples When answering VAT questions it is important that you refer to Output Tax and Input Tax and that you do NOT refer to it as Output VAT and Input VAT. If you are comfortable with the basics, you may test yourself in Lecture Example 1 or progress to the next part of the slides The lecture examples will show you the level of your current knowledge of the very basics The theory will be covered in the rest of the slides THE BASICS In this section we discuss basic principles that pertain to VAT. Focus on understanding the theory it is very important for discussion questions. 3

4 LEVY OF VAT (s7) s7 is important tells us when Output Tax should be levied VAT should be levied and paid: On the supply by any vendor of goods or services in the course of carrying on an enterprise On the importation of any goods into SA On the supply of imported services SUPPLY (s1) The definition of supply is very broad It includes barter transactions (South Atlantic Jazz Festival case) This means if a vendor gives goods or services to another person as payment, then that vendor must still raise output tax Common understanding is that there must be at least 2 persons involved: the person that is making the supply and the person receiving the supply 4

5 GOODS (s1) and SERVICES (s1) NB! Supplying money is not subject to VAT. EXAMPLE: the sale of a gift voucher is not subject to VAT as it is not goods. Very wide definition. Anything that is NOT a supply of goods and which is not excluded from the definition of goods will form part of services. ENTERPRISE The concept of an Enterprise is very important for VAT If goods/services are supplied by a vendor in the furtherance of an enterprise, then there must be output tax (s7(1)(a)) If goods/services are PURCHASED by the vendor and used in the furtherance of an enterprise, then input tax may be claimed It is possible for a vendor to carry on activities that does not have anything to do with the enterprise. In that case, there is no output tax and the vendor also cannot claim any input tax. EXAMPLE: Mrs X is a VAT vendor. She decides to sell her personal residence (not used in the enterprise). Although she is a VAT vendor, this is not a supply of goods/services in the furtherance of an enterprise. There is thus no output tax. 5

6 ENTERPRISE ENTERPRISE ENTERPRISE Enterprise or activity Carried on regularly or continuously In South Africa (or partly in South Africa) By any person In the furtherance of an enterprise Who supplied goods/services for a consideration Whether for profit or not NOT an ENTERPRISE Services supplied by an employee to an employer (i.e. remuneration) Note that non-executive directors do NOT earn remuneration A hobby An exempt supply Commercial accommodation where the value of supplies does not exceed R Also includes: The supply of electronic services by a person in an export country, where AT LEAST TWO of the following are present: The recipient is a resident of South Africa The recipient has a South African bank account The recipient has a South African address Refer to the proviso to the Enterprise definition in s1 for the exclusions mentioned above and other important considerations. 6

7 VAT VENDOR REGISTRATION (s23) COMPULSORY REGISTRATION In terms of s23, a person must register (compulsory) as a VAT vendor if Carrying on an enterprise The taxable supplies for the enterprise (standard rated AND zero-rated) exceed R1million (ex VAT) in a period of 12 months Lecture Example 2 The R1million does not include exceptional items (selling of business, replacement of assets, any abnormal circumstance of temporary nature) Any foreign person that supplies electronic services to a SA resident (i.e. itunes) must register if value exceeds R (ex VAT). VOLUNTARY REGISTRATION Where the value of taxable supplies will exceed R (ex VAT) a person may apply to the Commissioner for voluntary registration Work through s23 for further information on registration of branches VAT VENDOR: NON-EXECUTIVE DIRECTORS SARS issued two important Binding General Rulings recently: Binding General Ruling 40: Remuneration paid to non-executive directors Binding General Ruling 41: VAT Treatment of non-executive directors Per these Binding General Rulings the following is important: Non-executive directors are NOT considered employees. Therefore the amounts paid to non-executive directors are NOT classified as remuneration This means that the amounts are NOT excluded from enterprise Non-executive directors are treated as if they are carrying on an enterprise that supplies services If a non-executive director earns more than R1million from these activities then the non-executive director MUST register as a VAT vendor in terms of s23 The non-executive director can voluntarily register for VAT if supplies exceed R50,000 This does not apply to executive directors as their earnings are classified as remuneration which is excluded from the definition of an enterprise in s1 7

8 s16: CALCULATE VAT EACH VAT PERIOD Tax payable by vendor shall be calculated for each tax period during which he has carried on an enterprise Refer to s27 Tax Payable = Output Tax Input Tax +/- Adjustments VAT PERIODS (s27) Every VAT vendor will be allocated a tax period This determines when (and how often) a VAT vendor needs to submit VAT returns to SARS e.g. every two months, every month, once a year, every six months s27 contains VAT periods The VAT period will be provided to students in the exam Important for tests and exams If you are asked to do the VAT return for a Category A VAT vendor for March and you are provided with information for January, February and March, do you know which months to include in your calculation? 8

9 ACCOUNTING BASIS (s15) There are two different accounting basis that exist: Invoice basis Most common. All companies are on invoice basis Payments basis Only to natural persons, municipalities and public authorities Must apply to SARS. For natural person turnover must be less than R2.5million The accounting basis determines when a vendor accounts for VAT (i.e. in which VAT period the vendor will include the VAT) Invoice Basis Payment Basis Earlier of Payment Invoice Payment Lecture Example 3 Can you answer this question? A VAT vendor sells goods for R (incl VAT) on 1 December 20x6 and the customer pays for it on 1 April 20x7. When should the VAT vendor account for VAT? 1 December or 1 April? TIME OF SUPPLY s9 s9 contains the rules around the timing of supplies NB as it tells you when the vendor should include it in VAT return NB for discussion questions Contains special timing rules for some transactions s9(1): earlier of invoice or payment (the invoice basis of accounting) Some of the important timing sections are: s9(2): supply of goods/services to connected persons s9(3)(a): rental agreements s9(3)(b): payments in instalments s9(3)(c): instalment credit agreements s9(3)(d): sale of fixed property s9(6): fringe benefits 9

10 TIME OF SUPPLY s9 The timing rule described in s9(1) applies to the majority of VAT transactions. The most common timing rule is thus earlier of invoice or payment. When studying you must look out for the special rules where the timing for VAT takes place at another time VALUE OF THE SUPPLY s10 s10 contains the rules to determine the value on which the VAT amount is based It contains a general rule and specific rules NB for discussion questions Note the following: Value refers to an amount excluding VAT Consideration refers to an amount including VAT General rule: (s10(2) and (3)) Value is the consideration for the supply (i.e. the amount paid/charged) If the consideration is in money, then the value is the amount of money If the consideration is not in money (i.e. give an asset), then the consideration is the open market value of that asset If supply is made for free then the value is nil (s10(23)) What is open market value? It is the market value including VAT (s3) This is only a term that is used for VAT NB!!! 10

11 VALUE OF THE SUPPLY s10 Special value rules: s10(4): supply between connected persons s10(5): when a vendor ceases to do business s10(6): instalment credit agreement s10(10): commercial accommodation for more than 28 days s10(13): fringe benefits s10(21): supply of entertainment where Input Tax was denied TYPES OF TRANSACTIONS Type Taxable supplies Standard Rated (14%) Zero-rated (0%) Could be an enterprise Not taxable Exempt NOT an enterprise: 11

12 EXEMPT SUPPLIES Definition of enterprise states that the making of exempt supplies is not considered an enterprise Lecture Example 4 There is thus NO VAT on exempt supplies NB Person making exempt supplies No Output Tax Person receiving exempt supplies No Input Tax Discussed in s12 Work through this section and make a list of the exempt supplies. There are not that many. Refer to your SAICA ITC examinable pronouncements Also refer to s2 for list of financial services EXAMPLES: residential accommodation, financial services, transport by road/rail of fare-paying passengers, supply of educational services, crèche ZERO-RATED SUPPLIES s11 This is a taxable supply, which means that there is VAT The VAT is charged at 0% If a vendor carries on an enterprise that makes only zero-rated supplies it can still claim Input Tax, provided that there is a valid VAT invoice The vendor can still only claim the amount that is stated on the VAT invoice s11(1) discusses the zero-rating of GOODS s11(2) discusses the zero-rating of SERVICES Make a list of these sections. Refer to your SAICA ITC examinable pronouncements Make sure to flag Schedule 2 (after the VAT Act) for lists of items that are zerorated NB Lecture Example 5 12

13 COMMON SPECIFIC TRANSACTIONS In this section we will touch on specific transactions which are very common. These include many of the s11 (zero-rated) and s12 (exempt) supplies. Make sure that you know where to find this in the Act. For each section you need to know the timing, the value and any other special rule. DEFINITION: EXPORTED (s1) Definition of exported in s1 Para (a) of the definition refers to a direct export Para (d) of the definition refers to an indirect export 13

14 EXPORTS GOODS (s11(1)(a)) EXPORTS (GOODS) Lecture Example 6.1 DIRECT INDIRECT (no export docs) INDIRECT(export docs) Zero-rated 14% Zero-rated SPECIAL RULE: There is a special rule relating to export of goods on which notional Input Tax had been claimed (2 nd hand goods). Refer to notes on 2 nd hand goods acquired from a nonvendor. SERVICES TO NON-RESIDENTS (s11(2)(f) & s11(2)(l)) Services rendered in connection with land and improvements situated in a foreign country, will be zero-rated (s11(2)(f)) Services rendered to a non-resident will be zero-rated but only if the nonresident is situated in a foreign country Read Interpretation Note 42 in your SAICA Student Handbook which deals with services rendered by the travel and tourism industry The general principle is that South African VAT is a destination based tax which taxes the consumption of goods and services in South Africa In other words, if the goods/services are supplied inside South Africa, VAT should be considered If services are rendered to a non-resident (or any other person) and the nonresident (or any other person) is in South Africa at the time the services are rendered, then it is NOT zero-rated Lecture Example 6.2, 6.3 Master Currency case Foreign exchange services rendered to a non-resident in an international airport s duty-free area is subject to VAT at 14% (See Interpretation Note 85) 14

15 RESIDENTIAL ACCOMMODATION s1 definition of dwelling : The word predominantly is important: It refers to a dwelling that is used mostly as a home by a natural person. The supply of residential accommodation is exempt in terms of s12(c): NOTE: When an employer provides residential accommodation to employees it is still exempt in terms of s12(c)(ii) COMMERCIAL ACCOMMODATION NOTE: Commercial Accommodation includes domestic goods and services. Note that commercial accommodation excludes a dwelling. Also note that the word predominantly is not used. Commercial accommodation thus excludes a situation where a natural person uses a dwelling predominantly as a residence. Remember: The definition of enterprise in s1 excluded commercial accommodation of less than R Commercial Accommodation <R Commercial Accommodation >R Not an enterprise Thus no output tax or input tax This will be an enterprise If the person is a registered VAT vendor then there will be output tax and input tax 15

16 COMMERCIAL ACCOMMODATION Definition of domestic goods or services in s1: any goods and services provided in supplying commercial accommodation including: cleaning and maintenance electricity, gas, air conditioning or heating a telephone, television set, radio or other similar article furniture and other fittings meals laundry nursing services water Special value rule in s10(10) where domestic goods and services are supplied in an all-inclusive charge by a vendor supplying commercial accommodation and a person stays for more than 28 days, the value of the supply shall be 60% of the all inclusive charge ACCOMMODATION (SUMMARY) Lecture Example 7 RESIDENTIAL ACCOMMODATION EXEMPT (s12(c)) ACCOMMODATION COMMERICAL ACCOMMODATION NORMAL VAT SPECIAL RULE FOR STAYING >28 DAYS (s10(10)) Output Tax calculated on 60% of the allinclusive charge. 16

17 TRANSPORT ROAD/RAIL Goods Standard VAT ROAD/RAIL TRANSPORT Lecture Example Fare-paying passengers Non-paying passengers Exempt s12(g) Standard VAT TRANSPORT FLIGHTS/BOAT TRANSPORT GOODS/PASSENGERS INTERNATIONALLY Zero-rated (s11(2)(a)) FLIGHTS/BOAT TRANSPORT GOODS/PASSENGERS WITHIN SOUTH AFRICA TRANSPORT IN SA PART OF INTERNATIONAL FLIGHT Standard VAT Zero-rated (s11(2)(b) & (c)) Lecture Example 8.3 INSURANCE ON INTERNATIONAL TRIPS Zero-rated (s11(2)(d)) 17

18 IMPORTS This section deals with the VAT implications relating to the importation of goods and services. Refer to s7(1)(b) and (c) IMPORTS - GENERAL As noted previously, s7 is very NB as it explains when VAT must be levied Make sure that you see it is not calculated on the open market value. In this case, the value EXCLUDES VAT Calculated at 14% of the value of the supply It s thus clear that there is Output Tax when importing goods or services NB! The person importing the goods/services will have to pay Output Tax and then claim Input Tax, if appropriate 18

19 OVERVIEW Same net effect but different treatment for Goods and Services Goods (s13) IMPORTS Services (s14) Output Tax & Input Tax Only Output Tax IMPORTS - GOODS When imported goods arrive at the South African border/customs, they are taken into a Customs and Excise warehouse In order to clear the goods for entry into South Africa, there are certain fees that will have to be paid. VAT is one of these fees The importer must pay the VAT in order to release the goods. This is thus an Output Tax that is paid by the person that purchased the goods. It does not matter if the importer is a registered VAT vendor or not If the goods will be used by a vendor in his enterprise, then Input Tax may be claimed The VAT is calculated in a special manner (s13) 19

20 IMPORTS - GOODS BLSN country s13(2)(b) Not BLSN country s13(2)(a) Botswana Lesotho Swaziland Namibia (Customs duty value + Import duties) X 14% (Customs duty value + 10% of customs duty value + Import duties) X 14% IMPORTS - GOODS Lecture Example 8 Steps to follow when encountering imported goods (not services): Identify that there was imported goods Determine if the goods are from a BLSN country or somewhere else Perform a calculation of OUTPUT TAX using the calculations provided After calculating the Output Tax and noting it in your solution, consider whether the importer would be able to claim Input TAX Claim the Output Tax (or a % thereof) as INPUT TAX 20

21 IMPORTED SERVICES Calculation differs from imported goods Please note that intangible assets are treated as services For imported services, the importer must only account for VAT to the extend that the services are not used to make taxable supplies EXAMPLE: A vendor carries on a residential accommodation business and contracts a foreign person to repair the air-conditioners. As residential accommodation is exempt, the vendor must pay Output Tax. If the repairs were done to commercial property, then there would not have been any Output Tax. Calculation: Value of services x 14% x % not used for taxable supplies IMPORTS - SERVICES Example of how the Output Tax would be calculated Will also apply if the vendor could not claim Input Tax (i.e. entertainment) % Used for Taxable % Used for Exempt % Output Tax Supplies Supplies payable 100% 0% 0% 90% 10% 10% 70% 30% 30% 50% 50% 50% 40% 60% 60% 10% 90% 90% Lecture Example 9 21

22 INPUT TAX INPUT TAX The most important concept around Input Tax is to remember that Input Tax is claimed from a VAT invoice If the vendor does not have a valid VAT invoice (per s20) then the vendor cannot claim the Input Tax (unless SARS allows it) Exception is 2 nd hand goods from a non-vendor (see later in notes) Always remember that the vendor can only claim Input Tax if the goods/services will be used in the making of taxable supplies in the carrying on of an enterprise In other words, if you are a VAT vendor but you purchase something that you will not use to make taxable supplies (such as purchasing something for personal use or purchasing something to use in making exempt supplies) then you cannot claim Input Tax even if you have a VAT invoice It is important that you understand which sections explain Input Tax so that you are able to reference this in the exam 22

23 INPUT TAX DEFINITION PARA(a) (s1) Look carefully at para(a)(i) above: It states that it must be the amount that the supplier (or seller) raised under s7. That means it is the amount of Output Tax raised by the supplier (seller). The Input Tax can thus not be more than the Output Tax on the VAT invoice (see next slide) Para(a)(ii) states that any amount of Output Tax raised when importing goods (not services) can be claimed as Input Tax. Remember, there is no Input Tax that can be claimed when importing services MUST HAVE VAT INVOICE TO CLAIM INPUT TAX (s16(2)) REMEMBER! If there is no valid VAT invoice/debit note/credit note then no Input Tax may be claimed For imported goods there must be valid bill of entry or documentation in terms of the Customs and Excise Act (s16(2)(d)) If there is no VAT invoice but SARS accepts other documentary proof, then the input tax may still be claimed (very rare) 23

24 CLAIMING INPUT TAX ON 2 nd HAND GOODS There is no difference from the normal VAT rules if a vendor purchases 2 nd hand goods from another vendor This is because there will be a valid VAT invoice But what happens if a VAT vendor purchases goods (not services) from a nonvendor There can be no Input Tax claimed because there is NO VAT invoice There is a SPECIAL RULE if a vendor purchases 2 nd hand goods (not new goods) from a non-vendor This special rule is in para(b) of the input tax definition in s1 The special rule for 2 nd hand goods allows a vendor to claim a notional Input Tax when purchasing goods from a non-vendor In other words, the vendor can act as if there was Output Tax charged by the seller The vendor can then claim Input Tax even though there was no Output Tax! 2 nd HAND GOODS DEFINITION (s1) It is important that you understand the definition in order to identify second hand goods Second-hand goods are goods which were previously owned and USED The following items are NOT considered second-hand goods: animals gold coins and goods containing gold Must have been used. any prospecting right, mining right, exploration right, production right, mining permit, retention permit or reconnaissance permit 24

25 INPUT TAX DEFINITION PARA(b) (s1) Value rule: Lower of Cost Open market value X 2 nd HAND GOODS FROM NON-VENDOR: TIMING RULE (s16(3)(a)(ii)(aa)) Timing rule: Only claim notional Input Tax to the extent that payment has been made. In other words: Only claim Input Tax each time you pay for the goods. 25

26 2 nd HAND GOODS SUMMARY Purchased from vendor Timing Normal rules (earlier of invoice or payment) Value Normal rules 2 nd HAND GOODS Purchased from nonvendor Timing Value To the extent that payment has been made (s16(3)(a)(ii)(aa)) Lower of cost or market value (definition of input tax 2 nd HAND GOODS - EXPORT The exporting of goods is zero-rated in terms of s11(1)(a) When a vendor exports 2 nd hand goods where he has claimed the notional Input Tax, then the export will NOT be zero rated Refer to the proviso to s11(1) It will be viewed as if the exported goods had been sold for the original purchase price (s10(12)) Output Tax will be raised equal to the notional Input Tax that was claimed (s10(12)) Lecture Example 10 26

27 APPORTIONMENT OF INPUT TAX This section covers the apportionment of VAT. It is a very important section and can be integrated into any VAT question. Make sure that you understand this section. APPORTIONMENT Covered in s17(1). Very NB! A vendor may acquire goods/services for use in making taxable supplies (standard and zero-rated) and exempt supplies No Input Tax may be claimed on exempt supplies If a vendor acquires goods/services for a combination of taxable and exempt supplies, then the Input Tax must be apportioned EXAMPLE: X Ltd buys a computer at a cost of R (R R1 400 VAT). The computer will be used 80% for taxable supplies and 20% for exempt supplies. X Ltd will then only claim R1 400 x 80% = R1 120 as Input Tax There is no need to apportion if the taxable supplies is 95% or more (s17(1)(i)) Called the de minimus rule In other words, if it is 95% or more, treat it as if it is 100% 27

28 s17(1): APPORTIONMENT OF INPUT TAX APPORTIONMENT Tips to approach VAT apportionment Always understand what % of the business is exempt Remember, Output Tax is always at 100% except for 3 situations: Fringe benefits Indemnity awards Change in use These are exceptions. It is mostly 100%. Students often get this wrong. Lecture Example 11 To decide if the Input Tax must be apportioned, always identify to what business the goods relate: If it relates to the taxable business claim 100% Input Tax If it relates to the exempt business no Input Tax may be claimed If it relates to BOTH sides of business (taxable and exempt) only claim % relating to taxable business REMEMBER! Taxable supplies mean - Standard rated AND - Zero-rated 28

29 INPUT TAX DENIED This section contains notes on s17(2) which lists items for which Input Tax will be denied. This is a popular section in tests. INPUT TAX DENIED s17(2) s17(2) contains items on which a vendor may NOT claim Input Tax These items are NOT exempt or zero-rated make sure that you explain yourself in tests Input Tax will be denied on the following items s17(2)(a): Entertainment s17(2)(b): Club subscriptions (does not apply to professional bodies, i.e. SAICA) s17(2)(c): Motor cars s17(2)(d): Goods and services by superannuation scheme Our discussion will focus on entertainment and motor cars 29

30 DEFINITION: ENTERTAINMENT (s1) Very broad definition EXAMPLES: lunch for employees, taking a client to a restaurant, furniture and equipment for the staff canteen, taking client/employees to a game, water-coolers, year-end gifts to clients/staff, boat trips, spa visits, etc. ENTERTAINMENT Lecture Example 12 In terms of s17(2)(a) a vendor may not claim Input Tax on entertainment. Vendor may claim Input Tax in the following situations: The vendor is in the business of providing entertainment (e.g. restaurant) (s17(2)(a)(i)) must make continuous or regular supplies of entertainment must charge a fee that covers all the direct and indirect costs of entertainment bona fide promotions to clients where there is no fee charged is excluded (e.g. try out a new dish) Left-over food given to staff but which was purchased for business Entertainment to staff and self-employed persons who are obliged to spend at least one night away from home (s17(2)(a)(ii)) If supplied to passengers or crew members during a journey if the transport service is a taxable supply (i.e. food on a plane) (s17(2)(a)(iii)) Vendor organises event and charges a fee that covers the cost of the meal/refreshment (e.g. hosting a seminar) (s17(2)(a)(iv)) If entertainment purchased to award a prize (s17(2)(a)(ix)) Rest of section: welfare organisations, medical care facility, 30

31 DEFINITION: MOTOR CAR (s1) Make sure that you see the VAT Act refers to motor car and not motor vehicle or any other variation. Pay attention to the terminology used in the Act! MOTOR CARS Study the s1 definition of motor car Motor car is vehicle with 3 or more wheels constructed or converted wholly or mainly for the carriage of passengers Motor car does NOT include vehicles that can only accommodate 1 person vehicles that can carry MORE than 16 people vehicles that weigh more than 3 500kgs when empty caravans and ambulances special purpose vehicles (e.g. fire trucks) hearses (either purchased as a hearse or converted into a hearse) game-viewing vehicles Constructed or permanently converted to carry 7 or more passengers in national parks, game reserves, sanctuaries or safari areas Used exclusively as game-viewing vehicle Make sure you know the requirements of a game-viewing vehicle 31

32 MOTOR CARS Input Tax is denied on the supply to or importation by the vendor Supply means: Sale Renting/leasing VERY IMPORTANT: Input Tax is NOT denied on any other costs relating to the motor car insurance repairs maintenance licencing If a motor car is converted into a hearse or a game-viewing vehicle after it was purchased, Input Tax may be claimed (s18(9)) Lower of the adjusted cost (incl VAT) or the open market value MOTOR CARS Input Tax may be claimed on motor cars if The vendor buys and sells cars and the car forms part of trading stock (s17(2)(c)(i)) The vendor buys and sells cars and the car will be used as a demo model before forming part of trading stock (s17(2)(c)(ii)) The motor car will be awarded as a prize (s17(2)(c)(iii)) Lecture Example 13 32

33 DISPOSALS & s16(3)(h) This section discusses the disposal of items (e.g. sale of assets). It is important to understand the implications as this is often tested. DISPOSALS Lecture Example 14 Output Tax is always accounted for at 100% of items which are supplied (i.e. sold) (s8(16)) The only exceptions to the rule are: Fringe benefits Indemnity awards Change in use (covered in next section) If the vendor could not originally claim 100% of the Input Tax and the item is later disposed, s16(3)(h) allows for an additional Input Tax claim calculated as Lower of cost (incl VAT)/Open Market Value x 14/114 x % exempt IMPORTANT: When Input Tax was denied, then there will be no Output Tax on disposal s10(21) If Input Tax was denied on entertainment, then the value of the supply (when sold) is Rnil s8(14) If Input Tax was denied on acquisition of a motor car or entertainment then the supply of these assets (when sold) is not considered part of the furtherance of the enterprise. This means, no Output Tax must be calculated. Note that there must still be Output Tax on any company car fringe benefit 33

34 DISPOSALS: Steps When there is a supply (such as sale of asset) follow these steps STEP 1: Calculate the Output Tax at 100% Exception: indemnity award, fringe benefit, change in use Exception: motor cars and entertainment on which Input Tax was denied STEP 2: Determine how much Input Tax was claimed when asset was purchased If 100% was claimed, then there are no further steps If less than 100% was claimed, refer to Step 3 STEP 3: Apply s16(3)(h) to calculate additional Input Tax s16(3)(h) is on the lower of the cost (incl VAT) or the open market value (which includes VAT per the definition in s3) This brings us to the end of Week 1. The rest of the VAT Act will be covered in Week 2. In Week 2 we will look at the more challenging sections of the VAT Act which are important to CTA students. Make sure that you are comfortable with the content for Week 1 before moving on to Week 2. 34