VALUE-ADDED TAX ACT 89 0F 1991

CHAPTER SPECIFIC OUTCOMES:

 After studying this chapter, students should be able to:
 Explain how the VAT system works
 Identify when and at what rate VAT is levied
 State when a person needs to register as a vendor
 list the requirements for the documents that are the driving force of the VAT
system
 Explain how zero-rating of supplies works
 State when a supply is an exempt supply
 Identify in which other special circumstances output tax must be raised
 Say when input tax will be denied
 list and explain the timing rules for supplies
 Determine the value of a supply.
VALUE-ADDED TAX ACT 89 0F 1991
INTRODUCTION:
• Value-added tax (VAT) is an indirect system of taxation which came into effect on 30
September 1991 at 10%. Vat is an example of an “indirect tax” in the sense that the
tax is not assessed directly by SARS as a tax on a “person” but indirectly through
the taxation of “Transaction”. The current rate of VAT is 15% effective from the 1st of
April 2018.
• The 15% rate of VAT is known as the standard rate.
• The Vat system in South Africa is one which is referred to as a “destination-based”
consumption-type, invoice VAT. A destination-based tax imposes tax in the country
in which consumption takes place.
• Some VAT systems are origin-based. The main difference between these two
systems is that the origin-based taxes exports and not imports, while a destination-
based tax taxes imports and not exports. South African exports are therefore
subject to the “Zero rate” of Value-added-tax.
VALUE-ADDED TAX ACT 89 0F 1991
The main components of VAT is the Output tax and the Input tax.
Output tax is levied at a “standard” rate of 15% or a “Zero-rate” of 0% on the supply of
goods and services by persons registered as vendors in terms of section 23 of the VAT Act.
The supplies on which output tax is charged is called ‘taxable supplies”. Registered
vendors pay output tax to SARS.
Input tax is the output tax borne by a vendor on supplies of goods of and services made
to the vendor by other vendors, in respect of which the vendor is entitled to claim a
refund from SARS.
In some instances the vendor may claim a notional input tax.
VAT = Output tax – Input tax.
A vendor has to register for VAT if that person carries on an enterprise in the republic or
partially in the Republic and the value of the taxable supplies which that person makes in
the course of all enterprise that the person carries on exceeds R1 million in any 12-month
period.
VALUE-ADDED TAX ACT 89 0F 1991
The person may register voluntarily if the turnover limit is not reached.’ provided that certain
requirements are meet.
Section 7(1)(b) and ( c) provides that VAT is also levied if a person imports goods and services
into the Republic. The vat payable on imported goods forms part of the cost of those goods.
However, if the importer is a vendor it can claim the VAT as an input tax deduction and
deduct it from the output tax to calculate the VAT payable to SARS. This means that if the
vendor can claim the input tax, the cost of the imported goods is net of the input tax.
The are two ways of calculating VAT:
(a) 15% on the “Value” excluding VAT.
(b) 15/115 of the “consideration” including VAT. Tax fraction is given by 15/115.
The general rule is that a vendor may only claim a refund of input tax if the goods or services
are acquired by the vendor for the purpose of consumption, use or supply in the course of his
business of making taxable supplies.
Note: It is not enough that the goods and services are acquired for the purposes of making
taxable supplies but rather the goods and services must actually be used or consumed to
make taxable supplies.
VALUE-ADDED TAX ACT 89 0F 1991
A vendor who acquires capital goods for the purposes of carrying on his enterprise can
claim the vat component of the cost as input tax if the asset is used for making taxable
supplies of goods and services. But if the asset is used partly for making taxable supplies,
only part of the vat input may be claimed.
CALCULATION OF VAT: R
OUTPUT TAX: At standard rate of 15% *******
Output: At zero rate of 0% *******
Less : INPUT TAX (******)
Vat ******

TAX PERIOD:
Normal tax is calculated with reference to a year of assessment, which is
usually a period of 12 months. VAT is calculated and paid for each tax period.
Every vendor is registered for a specific tax period or VAT assessment period.
• The following different tax periods exist (s 27(1)):
• Category A: Periods of two months ending on the last day of January,
March, May, etc. (odd-numbered months).
• Category B: Periods of two months ending on the last day of February,
April, June, etc. (even-numbered months).
• Category A and Category B are applicable to:
Vendors with taxable supplies that do not exceed R30 million over 12
months, or
farmers with taxable supplies that exceed R1,5 million over 12 months.
• Category C: Periods of one month ending on the last day of each month.
Category C vendors are mainly vendors whose taxable supplies exceed
R30 million over 12 months.
VALUE-ADDED TAX ACT 89 0F 1991
• Category D: Periods of six months ending on the last day of February and August respectively.
• Category D vendors only carry on farming activities with taxable supplies of less than R1,5
million over 12 months.
• Category E: Periods of 12 months ending on the last day of their year of assessment for
normal tax purposes.
• Category E vendors include specific entities who solely earn rental and management fees
from connected persons.
The Commissioner may permit a vendor’s tax period to end within either 10 days before or
after the day the period was originally supposed to end. The future tax period, as approved by
the Commissioner, must be used by the vendor for a minimum period of 12 months (s 27(6)(ii)).
A vendor could use the 10-day rule if the cut-off date is;
A fixed day of the week
A fixed date in a calendar month, or
A fixed day in accordance with ‘commercial accounting periods’ applied by the vendor
(Interpretation Note No. 52).
VALUE-ADDED TAX ACT 89 0F 1991 : OUTPUT TAX-SUPPLY OF GOODS & SERVICES

VAT is levied if any of the following three situations arise:

 supply of goods or services (s 7(1)(a))
 Importation of goods into South Africa (s 7(1)(b) or
 Supply of imported services (s 7(1)(c) .
It is thus important to understand the different definitions to be able to decide whether or
not a specific transaction attracts VAT. For a “supply of goods or services” to attract VAT,
there should be
A supply
Of goods or services
By a vendor in the course or furtherance of an enterprise
The first requirement for a transaction to attract VAT is that the transaction should
constitute a supply for VAT purposes.
VALUE ADDED TAX:
The VAT Act provides for two types of supplies, namely;
1. TAXABLE SUPPLIES; consisting of
• supplies at the standard rate (presently 15%), or
• supplies at the zero rate (0%) and
2. EXEMPT SUPPLIES
Supplies or transactions are usually taxable at the rate of 15% (standard
rate) unless they are taxed at 0% (zero rate) or are specifically exempt.
It is thus important to know exactly which supplies are taxed at 0% and
which supplies are exempt, as all the other supplies will be taxable at
the standard rate of 15%.
VALUE-ADDED-TAX:
In order to be able to calculate the VAT component of a VAT inclusive price, it is
necessary to apply the tax fraction to the VAT inclusive price of such a supply. In the
case of a standard-rated taxable supply, the tax fraction is 15/115.
Example: Calculation of output Tax:
Soldier Ltd’s sales (all standard-rated taxable supplies) for a specific tax period
amounted to R39 100 (including VAT). You are required to calculate output tax in
respect of the supplies:
• Solution:
Tax fraction × taxable supplies (15/115) × R39 100 =R5 100
This output tax collected by the supplier from the recipient, must be paid over to
SARS. If the zero rate was applied to Soldier Ltd’s supplies, the output tax would be:
• Tax fraction × taxable supplies = (0/100) × R39 100……….nil.
• Rnil output tax has been levied, and Rnil is payable to SARS.
VALUE-ADDED-TAX: INPUT TAX

Input tax is the VAT component of the payment for goods and services supplied to
the vendor for the purpose of making taxable supplies that can usually be claimed
back. A vendor who purchases, for example, stationery to be used in the making of
taxable supplies, can claim the VAT part of the expense as input tax. This input tax
can be deducted from the output tax collected on behalf of SARS on supplies made
by the vendor, in order to calculate the total VAT payable or refundable to SARS.
Not all input VAT can, however, be deducted. Some expenses, by their very
nature, have a private and business purpose embedded in them. Two such
expenses are entertainment and motor cars. A vendor is therefore usually not
allowed to claim the input VAT on entertainment and motor cars supplied to
him, even if he can argue that he uses the entertainment and motor car for
business purposes only. The VAT Act states that these inputs are denied.
VALUE-ADDED-TAX: INPUT TAX
EXAMPLE:
Google Ltd, a vendor who only makes taxable supplies, acquired the following goods from vendors
during the tax period:
• computer: R12 397 (including VAT)
• stationery: R4 807 (including VAT)
• entertainment: R1 150 (including VAT), and
• motor car: R250 000 (including VAT).
Calculate input tax for the goods acquired.
SOLUTION:
• computer: R12 397 ...........................(15/115* R12 397) =R1 617
• stationery: R4 807 (including VAT)…..(15/115 *R4 804) =R 627
• entertainment: R1 150 (including VAT)…Input tax denied ****
• motor car: R250 000 (including VAT)……..Input tax denied****
R 2 244
INPUT TAX DEFINED:
Input tax is defined in section 1 of the Vat Act as;
 VAT charged to a vendor by another vendor, on the supply of goods or services to
him ( the vat the purchaser pays or bears) or
 VAT paid on the import of goods, and VAT on certain goods of the class subject to
excise duty; or
 The tax fraction (15/115) of the lesser of the cost or market value of second-hand
goods acquired by way of purchase and sale from a non-vendor or in terms of a
sale not subject to VAT. The sale must take place in the Republic and the seller
must be a Republic resident insofar as the asset is concerned.
 The tax fraction of certain repossessed goods ( being the tax fraction when the
goods were first sold to the debtor.
VALUE-ADDED-TAX : CALCULATION OF VAT PAYABLE
A vendor collects VAT on behalf of SARS (output tax) and incurs VAT on expenses
that the vendor can claim back from SARS (input tax). If the output tax payable
exceeds the input tax claimable, the difference is payable by the vendor to SARS. If
the input tax claimable exceeds the output tax payable, the difference is refundable
to the vendor by SARS. In calculating the VAT payable or refundable.
EXAMPLE:
A vendor carries on an enterprise and supplied goods and services for R115
000 (including VAT of R15 000) during a tax period. The vendor makes 100%
taxable supplies.
You are required to calculate the VAT payable by or refundable to the vendor
if he paid the following input tax on goods and services supplied to him
during the tax period:
(a) R6 000
(b) R16 000
VALUE-ADDED-TAX : CALCULATION OF VAT PAYABLE

Output tax ...............................................................................R15000

Less: Input ...............................................................................R(6 000)
VAT payable .............................................................................R 9 000
(b) Output tax ......................................................................... 15 000
Less: Input tax .........................................................................(16 000)
VAT (refundable) ..................................................................... (R1 000)
REGISTRATION FOR VAT AS A VENDOR:
• A person is required to register as a VAT vendor at the end of the month during
which the total value of the taxable supplies for the preceding 12 months from all
his businesses carried on, exceeded R1 million at the beginning of the month if it
is anticipated that the total value of the taxable supplies in terms of a written
contractual obligation from all his businesses carried on for the following 12
months will exceed R1 million (s 23(1)(b)), or at the end of the month where the
total value of the taxable supplies made by a foreign supplier of electronic
services has exceeded R1 million for any consecutive 12-month period.
REGISTRATION FOR VAT AS A VENDOR:
It is important to note that there is no reference to tax periods or financial
years; therefore, SARS will look at any consecutive period of 12 months.
The amount of R1 million refers to the value of the taxable supplies (thus
both standard and zero rated supplies, but excluding exempt supplies), and
‘value’ excludes VAT levied.
In determining whether the value (turnover) exceeds R1 million, the
following must be excluded;
 The supplies arising out of the cessation of an enterprise, or a substantial
and permanent reduction in the size or scale of an enterprise.
 Supplies resulting from the replacement of capital assets, and
 Supplies resulting from temporary abnormal circumstances, for example
when the grasslands of a sheep farmer that the sheep use for grazing, are
destroyed in a fire and the farmer is therefore forced to sell all his sheep.
THE BASIS OF ACCOUNTING FOR VAT : SECTION 15

• The timing of the VAT payable or refundable depends on the specific VAT
accounting basis of a vendor as well as the tax period.
• Two accounting bases may be applied by a vendor to account for VAT:
The invoice basis, and
The payments basis.
The accounting basis determines the time of supply for VAT purposes. The
two accounting bases are discussed below:
• INVOICE BASIS: In general, vendors are registered for VAT on the invoice
basis (s 15(1)). VAT on the invoice basis is generally accounted for when
an invoice is issued, or any payment is received,
• whichever occurs first s 9(1).
THE BASIS OF ACCOUNTING FOR VAT : SECTION 15
• EXAMPLE: A vendor, registered on the invoice basis, supplied the following goods:
(a) On 2 February 2021 goods are delivered at one of the clients’ premises and the invoice for the
goods was issued on the same date. Full payment for the goods was only received on 31 March
2021.
(b) On 29 April 2021 a client paid R100 000 for goods delivered on the same date. The invoice was
only issued on 14 May 2021.
Determine the time of the above supplies for VAT purposes.
• SOLUTION
(a) As the invoice for the goods was issued before payment was made, the time of the supply is
the date on which the invoice was issued, which is 2 February 2021. The actual date of
payment of 31 March 2021 is irrelevant.
(b) As the payment for the goods was made before the issue of the invoice, the time of the
supply is 29 April 2021 when the payment was made. The actual date of delivery of the
goods is irrelevant.
THE BASIS OF ACCOUNTING FOR VAT : SECTION 15

• PAYMENT BASIS:
VAT on the payments basis is generally accounted for when payments are made
(purchases), and payments are received (sales).
Specified vendors may account for VAT on the payments basis if the vendor applied
to the Commissioner in writing. An example of such vendors is specified natural
persons or unincorporated bodies of persons where all members are natural
persons. These vendors can apply to be registered on the payments basis if the
total value of the taxable supplies in a 12-month period has not exceeded R2,5
million.
• Any vendor that is voluntarily registered for VAT purposes with the value of its
taxable supplies not exceeding R50 000 yet (but with a reasonable expectation to
exceed within 12 months), must register on the payments basis until R50 000 is
exceeded. In most cases, vendors registered on the payments basis still have to
account for supplies of goods (except fixed property) and services on the invoice
basis if the consideration in money exceedsR100 000.
THE BASIS OF ACCOUNTING FOR VAT : SECTION 15
EXAMPLE: PAYMENT BASIS.
A vendor, registered on the payments basis, supplied the following goods:
(a) On 2 February 2021 goods were delivered at one of the clients’ premises and
the invoice for R15 000 for the goods was issued on the same date. The payment
for the goods was received on 31 March 2021.
(b) On 29 April 2021 a client paid R50 000 for goods delivered on the same date.
The invoice for the goods was issued on 14 May 2021.
You are required to determine the time of the above supplies for VAT purposes;
SOLUTION:
(a) The time of the supply is the date the payment was received – that is, 31
March 2021.
(b) The time of the supply is the date the payment was received – that is, 29 April
2021.
VALUE-ADDED-TAX : DEFINITION OF A VENDOR
A ‘vendor’ is any person who is, or is required to be, registered under the
VAT Act. The definition of a ‘person’ includes not only an individual, but also
a company, a close corporation, a body of persons (whether vested with a
legal persona or not, for example a partnership), a deceased or insolvent
estate and a trust fund. It is clear from the above that not only registered
persons are vendors, but also every person that should have been
registered. It is thus important to know the registration requirements.
• Un-incorporated body of persons:
Although a partnership is not a separate person for income tax purposes, it
is a separate person for VAT purposes, and the partnership, not the
individual partners, should register as a VAT vendor (s 51). When a
partnership is dissolved as the result of a member leaving or a new partner
joining, and a new partnership is formed, the old and new partnerships are
regarded as one and the same vendor (s 51(2)). SARS regards a partnership
as an unincorporated body of persons for VAT purposes. Spouses married in
community of property are also regarded as an unincorporated body of
Output tax: Supply of goods or services (s 7(1))

VAT is levied if any of the following three situations arise:

1. Supply of goods or services
2. Importation of goods into South Africa or
3. Supply of imported services.
It is thus important to understand the different definitions to be able to
decide whether or not a specific transaction attracts VAT.
For “Supply of goods or services” to attract VAT, there should be
• Supply
• Of goods or services
• By a vendor
• In the course or furtherance of an enterprise
OUTPUY TAX : FIRST COMPONENT - SUPPLY
The first requirement for a transaction to attract VAT is that the transaction
should constitute a supply for VAT purposes.
• The definition of ‘supply’ includes a sale, rental agreement, an instalment
credit agreement, whether voluntary, compulsory or by operation of law,
irrespective of where the supply is effected (s 1(1) of the VAT Act). The
definition of ‘supply’ would also include the expropriation of property, this
being when a person’s property is taken in order to use it for a public
purpose. However, for a supply to occur, it appears that there must be at
least two persons involved, namely the supplier and the recipient of the
goods or services.
• The ‘recipient’ is the person to whom the supply is made. It is clear from
the definition of ‘supply’ that a supply also includes supplies under barter
exchange transactions. A barter transaction is when goods are supplied for
a consideration that is not money.
OUTPUY TAX : SECOND COMPONENT – SUPPLY OF GOODS OR SERVICES

The second requirement for a transaction to attract VAT is that the

supply should be either a supply of goods or a supply of services.
Goods’ are defined in s 1 as
 Movable property
 Fixed property
 Any real right in movable or fixed property, and electricity.
 The supply of ‘electricity’ is specifically included as part of the
definition of goods to clarify that electricity falls within the ambit of
goods and not services. VAT is calculated on the final price of the
electricity supplied, including the amount of the environmental levy.
The following are not included in the definition of ‘goods’:
OUTPUY TAX : SECOND COMPONENT – SUPPLY OF GOODS OR SERVICES

• Money (as defined in s 1): which includes coins or paper currency of

South Africa or any other country.
• Certain rights: These are rights arising from a mortgage bond or
pledge of goods and are excluded from the definition of ‘goods’.
• Revenue stamps: These are not included in the definition of ‘goods’,
except when acquired by stamp collectors.
The second requirement for a transaction to attract VAT is that the
supply should either be a supply of goods or a supply of services.
• The term ‘services’ is also defined very widely in s 1(1) and includes
the granting, cession or surrender of any right or the making available
of any facility or advantage.
OUTPUY TAX : SECOND COMPONENT – SUPPLY OF GOODS OR SERVICES

Services, for example, include hair dressing services, repair and plumbing
services as well as insurance and transport services. If a supply is not a supply
of ‘goods’ and also not specifically excluded in the definition of ‘goods’, the
supply will be the supply of a service.
• The third requirement for a transaction in South Africa to attract VAT is
that the transaction should constitute a supply of goods or services by a
vendor. If a person is a vendor, he has to levy VAT on his taxable supplies
(selling price), and input tax may be claimed on certain purchases and
expenses incurred in the course of making taxable supplies. If, on the
other hand, a person is not a vendor, VAT is not levied on his supplies
(the selling price of goods and services does not include VAT) and no
input tax can be claimed on the purchases or expenses.
Output tax: In the course or furtherance of an enterprise (s 7(1)(a))

The fourth requirement for a transaction to attract VAT is that the

transaction should constitute a supply of goods or services by a vendor
in the course or furtherance of an enterprise.
• An ‘enterprise’ is generally defined as any enterprise or activity carried
on continuously or regularly in South Africa or partly in South Africa by
any person in the course or furtherance of which goods or services
are supplied for a consideration whether for profit or not.
Certain activities are specifically included in the definition of ‘enterprise’
and others, although they comply with the requirements of the general
definition, are specifically excluded.
Output tax: In the course or furtherance of an enterprise (s 7(1)(a))
For an activity to be referred to as an enterprise for the purposes of VAT
computation, it must posses the following characteristics:
 Enterprise or activity carried on continuously or regularly
 Goods or services are supplied for a consideration : Goods or services supplied at
no charge (consideration) will not form part of the carrying on of an enterprise as
defined.
The term ‘consideration’ is defined as a payment in money or otherwise for the
supply of goods or services, whether voluntary or not, and whether by the person
who received the goods or services or not.
 A deposit on a returnable container is a consideration. Any other deposit,
whether refundable or not, is a consideration only if it is applied as such or if it is
forfeited. The value of a supply excludes VAT, and value plus VAT equals
consideration for a supply. Consideration=Value of goods or services plus Vat
 R115=R100 +R15
Output tax: In the course or furtherance of an enterprise (s 7(1)(a))

Therefore, consideration includes VAT, where applicable.

• Consideration = Value plus VAT
• If the consideration is not in money, but in the form of goods or services, the
open market value of such goods or services will be the consideration for the
supply.
The general definition of an ‘enterprise’ specifically includes the following:
• Anything done in connection with the commencement or termination of an
enterprise:
• The supply of electronic services and the facilitation of the supply of electronic
services from a place in an export country is specifically included in the definition
of an ‘enterprise’.
EXCLUSION FROM THE DEFINITION FROM AN ENTERPRISE:

The following do not constitute the carrying on of an ‘enterprise’ and are

specifically excluded from the general definition:
The supply of services by an employee to his employer for which he receives
remuneration.
No VAT is thus levied by an employee on his salary. Any independent
contractor, including a non-executive director does not receive remuneration
and is liable to account for VAT if the VAT registration threshold is exceeded.
A hobby
An exempt supply
The supply of commercial accommodation, if the total value of such supplies
does not exceed R120 000 for a period of 12 months.
Certain supplies made by branches or main businesses situated outside South
Africa.
VAT levied: Importation of goods (ss 7(1)(b) and 13)

VAT is levied if any of the following three situations arise:

 Supply of goods or services (s 7(1)(a)
 Importation of goods into South Africa (s 7(1)( b)), or
• Supply of imported services (s 7(1)(c):
In the case of the importation of goods into South Africa, VAT is levied at
importation and paid over to SARS. The VAT so levied is not defined as
output tax (s 1(1)), as the payment is not supported by a VAT return but
levied and paid upon entry into the Republic. The importer of the goods
must pay the VAT, even if he is not a vendor (s 7(2)).
Importation of goods from BLNS countries:
• The customs union member countries do not levy any customs duty on
imports from each other. VAT may however be charged.
VAT levied: Importation of goods (ss 7(1)(b) and 13)
There are designated commercial ports, i.e. the different border posts
through which imports are obliged to pass. VAT is collected at these
designated commercial ports.
• The ‘time of supply’ for goods imported from BLNS countries is the time
when goods enter South Africa. This is usually when goods physically
enter South Africa via a designated commercial port. VAT payable on
goods imported from BLNS countries is equal to 15% of the customs duty
value.
Importation of goods from other countries:
If goods are imported from other countries to South Africa, they
have to be cleared for home consumption by Customs and
Excise, which also collects the VAT.
Output tax: Zero-rated supplies (s 11)
All supplies are taxable at the rate of 15% unless they are taxed at 0% or are
specifically exempt. It is important to know exactly which supplies are taxed
at 0% and which are exempt (see 31.11). All the other supplies will be
taxable at the standard rate of 15%.
Supplies charged at the zero rate, often referred to as zero-rated supplies,
are taxable supplies although charged with VAT at 0%. These zero-rated
taxable supplies enable the vendor to claim all input tax on goods and
services acquired in connection with the zero-rated supply.
Exempt supplies are supplies that are not charged with VAT at all. These
differ from zero-rated supplies in that no input tax in connection with such
supply may be claimed.
• All zero-rated supplies are listed in s 11, namely goods in s 11(1) and
services in s 11(2). For example, VAT aims to tax local consumption of
goods and services. Goods exported are not usually consumed in South
Africa. Both goods and services exported are therefore zero-rated.
Output tax: Zero-rated supplies (s 11)
Zero-rated supply:
1. Exported goods:
2. Exported services (s 11(2) and (3))
Transportation : The rendering of an international transport service to passengers
or goods, by any mode of transport, is zero-rated, if transported from;
 A place outside South Africa to another place outside South Africa, or
 A place in South Africa to a place outside South Africa, or
 A place outside South Africa to a place in South Africa (s 11(2)( a)).
3. Exported services: Services rendered outside South Africa;
A service is zero-rated if it is physically rendered outside South Africa. The
place where the service is rendered is relevant for this zero-rate provision.
The residency of the person to whom the service is rendered is therefore not
relevant.
Output tax: Zero-rated supplies (s 11)

Exported services: Services to non-residents:

Services rendered to non-residents can be zero-rated even if the services
are rendered in South Africa. The services of arranging the supply of goods
to foreign ships or aircraft or transport of goods within South Africa for a
person who is not a resident of South Africa and is not a vendor are zero-
rated. Not only the services of arranging the supply of goods, but also the
services of arranging the supply of services to foreign ships or aircraft for a
person who is not a resident of South Africa and is not a vendor are zero-
rated.
The sale of a Business going concern:
To eliminate cash flow difficulties with the sale of a business as a going
concern, it is common practice to zero rate the sale of a going concern (ss
11(1)(e) and 18A and Interpretation Note No. 57). The disposal of an
enterprise as a going concern is a zero-rated supply if the parties agreed in
ZERO-RATEDSUPPLY: The sale of a going concern

writing that the enterprise, or part thereof, is disposed of as a going concern.

The following criteria should be met for the zero-rate to apply.
At the time of conclusion of the contract the parties have agreed in
writing that the enterprise will be an income-earning activity on the date
of its transfer. (The intention to transfer it as an income earning activity is
sufficient. The purchaser should not necessarily continue with the same
income-earning activity after the date of transfer.
All the assets necessary for carrying on the enterprise are disposed of by
the supplier to the recipient. (It is not required that all the assets be
disposed of; only those necessary for carrying on the enterprise. The
phrase ‘disposed of’ includes an outright sale as well as a lease or rental
of the assets necessary for carrying on of the enterprise.
At the time of the contract the parties have agreed in writing that the
consideration for the supply is inclusive of VAT at the rate of 0%.
The sale of a going concern

Both parties (supplier and recipient) must be registered vendors for VAT
purposes. The supplier must obtain and retain a copy of the recipient’s
Notice of Registration as proof (form VAT 103). If not a vendor, the purchaser
can register voluntarily based on the supplier’s history. The sale of a business
as a going concern is deemed to be a taxable supply of goods. The whole
business including any services (for example goodwill) is deemed to be
goods.
More than 50% taxable usage for the purposes of the going concern :
If more than 50% of the assets of the going concern were used for the making
of taxable supplies, the seller levies output tax at the rate of 0% on the supply.
Less than 50% of the selling price relates to the going concern: If the goods
or services of the enterprise were less than 50% applied by the seller for
purposes of the going concern, the selling price must be apportioned and only
to the extent that it relates to the going concern may it be zero-rated.
ZERO-RATED SUPPLY: OTHERS
• The following types of supplies are also classified as zero-rated. This list is not
exhaustive and other zero-rated supplies therefore exist:
The supply of fuel levy goods is zero-rated. For example: petrol and diesel,
including biofuels.
Certain basic foodstuffs are zero-rated, for example: brown bread, whole wheat
brown bread, cake wheat flour, white bread wheat flour, maize meal, samp, mealie
rice, rice, pilchards, milk and milk powder, fresh fruit and vegetables (including
mealies, but excluding popcorn), vegetable oil (excluding olive oil), eggs and lentils.
Dehydrated, dried, canned or bottled fruit and nuts would not qualify for the zero
rating.
The supply of gold coins, such as Krugerrands, which are issued by the Reserve
Bank are zero rated.
Paraffin for use as fuel for lighting or heating and not mixed or blended with
another substance is zero-rated
Zero-rated supply:
The supply of certain female sanitary products, namely sanitary pads and panty liners,
are zero-rated.
Services supplied directly in connection with land or any improvements to land, where
the land are situated in an export country is zero-rated.
Services comprising job-related training of employees (but not educational services
being an exempt supply) for the benefit of an employer who is not a resident and is
not a vendor, are zero-rated.
The charging of municipal rates (property rates and taxes) by a municipality is zero-
rated.
• The zero-rating of municipal rates is, however, not applicable where such rate is
charged as a flat rate to the owner of the rateable property for rates and other goods
and services (such as supplies of electricity, gas, water, drainage, disposal of sewage
and garbage), or
• Any person exclusively for the supply of the other goods and services as mentioned
above. Such flat rate will be taxed at the standard VAT rate of 15%.
Deemed supply: Fringe benefits s.8(3)
The seventh Schedule to the Income Tax Act are subject to both Income Tax for the
employee and output tax (VAT) for the employer:
Assets given to employees.
This refers only to assets given free of charge or at a price less than market value.
No VAT is however, applicable to assets supplied that were used for entertainment
purposes, zero-rated or exempt supply. The provision of certain fringe benefits to
employees by an employer that is a vendor is a deemed supply and is therefore
subject to VAT. This applies only to fringe benefits as set out in the Seventh
Schedule to the Income Tax Act.
Essentially, the output tax to be accounted for by the employer (vendor) is
intended to reverse a portion of the input tax that was previously claimed on those
goods or services by that vendor.
The following fringe benefits as set out in the Seventh Schedule to the Income Tax
Act are subject to both Income Tax for the employee and output tax (VAT) for the
employer:
Deemed supply: Fringe benefits s.8(3)

The right of use of an asset given to an employee (for example, the use of a
company car provided to an employee).
Services made available by the employer to the employee for private purposes.
If the fringe benefit relates to
• an exempt supply
• a zero-rated supply, or
• the supply of entertainment (for example meals).
There is no deemed supply and no output tax (VAT) payable on that fringe benefit.
Other employment benefits are not taxable fringe benefits in terms of the Seventh
Schedule
to the Income Tax Act and no output tax (VAT) is thus calculated thereon, for
example
cash salaries
All allowances (s 8(1) of the Income Tax Act), and
Broad-based employee share plans (ss 8B and 8C of the Income Tax Act).
Deemed supply: Fringe benefits s.8(3)

The following employment benefits are therefore not subject to VAT:

Cash allowances (for example entertainment, subsistence and travel
allowances) as these allowances are not fringe benefits in terms of the
Seventh Schedule to the Income Tax Act
Subsidies (supply of money)
Long-service awards in cash (money and thus not goods or services)
The supply of meals and refreshments (this is the supply of entertainment)
Free or cheap holiday accommodation (‘accommodation’ is defined as part
of entertainment)
Residential housing (exempt supply)
Interest-free and low-interest loans (financial service – exempt supply)
Pension and medical aid fund contributions (financial service – exempt
supply)
Deemed supply: Fringe benefits s.8(3)
Bursary schemes (supply of money – exempt supply)
International transport (zero-rated)
The supply of a motor car at less than market value, if the employer was
denied a deduction of input tax on the acquisition of the motor vehicle (s
8(14)(a)), and
Any fringe benefit to the extent that it is granted in the course of making
exempt supplies. For example, if a person that makes only exempt supplies
gives an asset to one of his employees free of charge, there is no output
tax on the fringe benefit as the employer did not claim any input tax.
Value of the supply: Fringe benefits:
• The consideration for the supply of a fringe benefit depends on the type of
fringe benefit. The same rule to determine the consideration for the supply
applies to all fringe benefits other than the right of use of a motor vehicle.
Different rules apply to a fringe benefit.
Fringe benefits other than the right of use of a motor vehicle
The consideration of the supply of a fringe benefit that is not related to the use of a motor vehicle
equals:
A × B, where
A = the cash equivalent of the benefit used for income tax purposes:
• B = the tax fraction
• EXAMPLE:
An employer purchases a watch for R1 150 (including VAT) to give to an employee as a fringe
benefit. The cash equivalent of the fringe benefit is the cost to the employer exclusive of VAT,
being R1 150 .
Calculate output tax in respect of the fringe benefit.
Input tax =15/115 * R1 150 =R150
SOLUTION:
Output tax:
The tax fraction × the cash equivalent (100/115 * R1 150 =R1 000
15/115 × R1000 = R130
Fringe benefit where the right of use of a motor vehicle is granted to an
employee.
The following three steps can be followed to calculate the output tax
regarding the right of use of a motor vehicle:
Step 1: Determine the value of the motor vehicle (excluding VAT and
finance charges). Take any reductions in the determined value into account.
Step 2 : Determine the consideration for the use of the motor vehicle (value
determined in Step 1 × 0,3% or 0,6%). If the input tax was denied when
the vehicle was purchased, use 0,3% and if not, use 0,6%.
Step 3: Deduct the following :
 If the input tax on the vehicle was claimed, all amounts paid by the
employee to the employer, excluding finance charges and fuel.
Fringe benefit where the right of use of a motor vehicle is granted to an
employee

(Amounts paid by the employee should be excluded as it relates to a

separate supply for value [thus not free use of motor car] on which VAT
will also be levied. No VAT will be levied on the finance charges
(consideration for an exempt supply) and fuel (zero-rated supply), and
this should thus not be deducted.)
 If the input tax on the motor car was denied, all amounts paid by the
employee to the employer, excluding finance charges, fuel and the
portion of the amount that relates to the fixed cost of the motor car.
The portion of the consideration that relates to the fixed cost of the
motor vehicle will not include any VAT as no input tax was claimed
when the vehicle was purchased.
 R85 if the employee bears the full cost of repairs and maintenance.
Fringe benefit where the right of use of a motor vehicle is granted to an employee

• Step 4: Multiply by the tax fraction to determine the output tax.

• Step 5: Multiply by the percentage of taxable usage.
Where there is a reduction in the determined value, the depreciation allowance
is calculated according to the reducing-balance method at the rate of 15% for
each completed period of 12 months from the date on which the vendor first
obtained such vehicle, to the date when the relevant employee was first
granted the right of use thereof.
EXAMPLE:
An employer grants an employee the right of use of a motor car. The employer
was unable to claim the input tax when the vehicle was purchased for R161 000
(including VAT). The employee bears the full cost of maintaining the vehicle.
Calculate output tax for one month in respect of the fringe benefit.
Fringe benefit where the right of use of a motor vehicle is
granted to an employee : EXAMPLE
• SOLUTION
Output tax:
• Step 1: R161 000 × 100/115 = R140 000
• Step 2: R140 000 × 0,3% = R420
• Step 3: R420 – R85 = R335
• Step 4: R335 × 15/115 = R43,70
• Step 5: R43,70 × 100% = R43,70 output tax payable
If the vehicle had not been a motor car but a delivery vehicle, the employer would have been
able to claim the VAT paid on the vehicle as input tax (R161 000 × 15/115 = R21 000), and
• output tax would have been calculated as follows:
• Step 1: R161 000 × 100/115 = R140 000
• Step 2: R140 000 × 0,6% = R840
• Step 3: R840 – R85 = R755
• Step 4: R755 × 15/115 = R98,48
• Step 5: R98,48 × 100% = R98,48 output tax payable
Fringe benefits: Consideration for use of employer vehicle : EXAMPLE

An employee is granted the use of a company-owned motor car (input

tax denied) with a determined value (excluding VAT) of R160 000, that
is fully used for taxable purposes. The employee pays R600 per month
that is allocated as follows:
Fuel ......................................................................................112
Insurance..............................................................................150
Maintenance.......................................................................... 70
Interest..................................................................................168
Fixed cost............................................................................ 100
Total ..................................................................................... 600
Calculate the VAT consequences of the above.
Fringe benefits: Consideration for use of employer vehicle : SOLUTION

Employer has to account for output tax on two separate supplies:

• (i) Output tax on deemed supply in respect of right of use granted to
employee:
Step 1: R160 000 (determined value already excludes VAT)
Step 2: R160 000 × 0,3% = R480
Step 3: R480 – R150 (insurance) – R70 (maintenance) = R260
• The fuel (zero-rated), interest (exempt), and fixed cost (input tax denied)
are not deductible.
• The R150 and R70 constitute a separate supply on which output tax is
levied.
Fringe benefits: Consideration for use of employer vehicle : SOLUTION

Step 4: R260 × 15/115 = R33,91

Step 5: R33,91 × 100% = R33,91 output tax per month payable
by the employer on the fringe benefit
(ii) Output tax on supply at value in respect of consideration
received:
The employer must also account for output tax on the
consideration paid by the employee to the
employer in respect of the insurance and maintenance. (The
employer probably claimed the VAT on these expenses paid by
him.)
R150 + R70 = R220 × 15/115 = R28,70 output tax
Fringe benefits: Consideration for use of employer vehicle : EXAMPLE

An employer grants an employee the right of use of a motor car. The employer
was unable to claim the input tax when the vehicle was purchased for R161 000
(including VAT). The employee bears the full cost of maintaining the vehicle.
Required: Calculate output tax for one month in respect of the fringe
benefit:
• SOLUTION :
Output tax:
Step 1: R161 000 × 100/115 = R140 000
Step 2: R140 000 × 0,3% = R420
Step 3: R420 – R85 = R335
Step 4: R335 × 15/115 = R43,70
Step 5: R43,70 × 100% = R43,70 output tax payable
Fringe benefits: Consideration for use of employer vehicle : SOLUTION CONTINUES

If the vehicle had not been a motor car but a delivery vehicle, the employer
would have been able to claim the VAT paid on the vehicle as input tax (R161
000 × 15/115 = R21 000), and output tax would have been calculated as follows:
• Step 1: R161 000 × 100/115 = R140 000
• Step 2: R140 000 × 0,6% = R840
• Step 3: R840 – R85 = R755
• Step 4: R755 × 15/115 = R98,48
• Step 5: R98,48 × 100% = R98,48 output tax payable
NOTE :
The determined value of the vehicle for income tax purposes is inclusive of
VAT. The determined value for VAT purposes, however, still excludes VAT
(GN 2835 defines ‘determined value’ as exclusive of VAT).
Fringe benefits: Consideration for use of employer vehicle :

• The rate of 0,3% is used if the employer was not entitled to claim input tax in
respect of a motor car as defined. The rate of 0,6% is used in all other
cases.
• The rates of 0,3% and 0,6% are per month. Therefore, if a vendor has a
two-month VAT period, the amount calculated should be multiplied by two.
When the employee pays anything for the right of use, a portion of this
amount could be deducted in the calculation of the consideration for the right
of use of a motor vehicle. This amount paid by the employee should be split to
determine the different items it relates to.
• In the case where the employee bears the full cost of maintaining the motor
vehicle, a deduction of R85 per month is allowed to establish the
consideration. (This is not applicable to fuel).
• Where there is a reduction in the determined value, the depreciation
allowance is calculated according to the reducing-balance method at the
rate of 15% for each completed period of 12 months from the date on which
the vendor first obtained such vehicle, to the date when the relevant
employee was first granted the right of use thereof.
DEEMED SUPPLY : CEASING TO BE A VENDOR S.8(2).

Although no actual supply of goods and services is made, the ceasing to be

a vendor triggers a deemed supply for VAT purposes. Output tax will become
payable on all goods and rights still owned by a person on the day he ceases
to be a vendor. This deemed supply is not applicable to goods in respect of
which input tax was denied, for example motor cars and entertainment.
DEEMED SUPPLY : INDEMNITY PAYMENTS:
• The reason for this deemed supply rule is as follows: if, for
example, a vendor’s trading stock is stolen and he receives cash
from his insurance company, he is effectively in the same
position as he would have been if he had sold the trading stock.
SARS wants the VAT on that disposal. Also, when a vendor pays
the insurance premiums under a short-term insurance policy, the
vendor will mostly be entitled to claim the input tax on the
premium.
DEEMED SUPPLY: Supplies to independent branches
• Some vendors make supplies to a foreign ‘independent branch’ or head office.
Strictly speaking, the vendor makes a supply to himself (being the same legal
entity). As VAT attempts to only tax the consumption of goods and services in
South Africa, the supply by the vendor to a foreign ‘independent branch’ or head
office is treated as a supply of goods or services to another person. This will apply
only if the branch or head office
• Is permanently situated outside South Africa
• It can be separately identified, and
• It has a separate accounting system.
• Deemed supply: Payments exceeding consideration (ss 8(27) and
16(3)(m))
• It is possible that a vendor could receive an overpayment for a standard-
rated taxable supply of goods or services.
Deemed supply: Payments exceeding consideration (ss
8(27) and 16(3)(m))
• The excess amount is deemed to be consideration for the supply of a
service. Output tax will be payable if this overpayment is not refunded
within four months s.8(27)). In the event that the overpayment is
refunded on a date after the output tax has been accounted for, the
vendor will become entitled to claim additional input tax (s 16(3)(m)).
Output tax: Exempt supplies (s 12)
An exempt supply is a supply on which no VAT is levied and no input tax relating
to the expenditure incurred in respect of these supplies may be claimed.
In South Africa, banks and insurance companies are the biggest providers of
financial services and some of these financial services are exempt . The reason
why financial services are exempt is because it is difficult to always determine
the value of a supply for VAT purposes. A person who or which makes only
exempt supplies is deemed not to be carrying on an enterprise and cannot
register as a vendor. If a person is registered because in addition to exempt
supplies he also makes taxable supplies, he can only claim input tax deductions
in respect of his taxable supplies.
Where the input tax relates to taxable and exempt supplies, it has to be
apportioned in the ratio of “taxable” to exempt turnover unless SARs approves a
different method. The most common financial services that are exempt include:
EXEMPT SUPPLIES: FINANCIAL SERVICES
The exchange of currency (s 2(1)(a)).
 The issue or transfer of a tradable liability or loan, for example a
debenture or government bond is exempt (s 2(1)(c)).When A borrows
R100 from B through the issue of a debenture, B in essence provides a
loan to A. This issue of the debenture does not attract VAT, as it constitutes
an exempt supply.
 Issue or transfer of ownership of a share or member’s interest is exempt
(s 2(1)(d)).The most common example of this is shares in a company or
member’s interests in a close corporation. Thus, when A sells his shares in
a Company to B, the sale of the shares will be an exempt supply, and no
VAT will be levied.
The provision of credit and paying of interest is exempt . When A borrows
R100 from B, B in essence provides a loan to A. This provision of the
loan does not attract VAT, as it constitutes an exempt supply. It is,
however, not only the principal loan but also the interest thereon that
will be a financial service and therefore exempt.
EXEMPT SUPPLIES: FINANCIAL SERVICES

The provision or transfer of ownership of a long-term insurance policy or the

reinsurance of such a policy, is exempt. This will include, for example, life
policies, endowment policies or funeral policies. The premiums and
proceeds on such policies are therefore exempt from VAT. The
administration and management fees in respect of a long-term insurance
policy are however standard-rated. Short-term insurance (for example car
insurance) is not ‘long-term insurance’ and is therefore not an exempt
supply. Short-term insurance will be a normal standard-rated supply.
The contributions and proceeds relating to membership of a retirement or
medical aid fund is exempt. The management of these funds is, however,
not an exempt supply.
The issue, acquisition, buying, selling or transfer of ownership of any
cryptocurrency is an exempt financial service. A cryptocurrency is a
decentralised digital currency that is not controlled by a central banking
system. Bitcoin is generally considered to be the firstdecentralised digital
currency.
EXEMPT SUPPLIES: FINANCIAL SERVICES
Any fee, commission or similar charge relating to an exempt financial service
will attract VAT at the standard rate. Similarly, where any fee is charged for the
giving of advice on any of the exempt financial services, this service will be a
taxable supply. For example, the bank charges on the overdraft account will
attract VAT at the standard rate, whereas the interest, that is the consideration
for providing the overdraft facility, will be exempt.
• The following items appeared on Soweto Spaza’s bank statements for
September:
• Internet banking fee ..............................................R92,00
• Service fee (bank charges) ...................................R184,00
• Transaction costs ...................................................R69,00
• Administration cost ................................................R23,00
• Interest charged on overdraft ..............................R116,40
• Interest received on positive bank balance .......... R83,20
EXEMPT SUPPLIES: FINANCIAL SERVICES

Indicate which of the above amounts include VAT and, if so, how much VAT is
included.
SOLUTION:
Internet banking fee (R92,00 × 15/115) ..................... R12
Service fee (R184,00 × 15/115) ............................... R24
Transaction costs (R69,00 × 15/115) ..................... R9
Administration costs (R23,00 × 15/115) ................... R3
Interest charged on overdraft (financial service ) Rnil
Interest received on positive bank bal.) Rnil
Note : Both interest paid and received represent the consideration for
financial services as defined, and are therefore consideration for exempt
supplies (s 12(a)).
Exempt supply: Residential accommodation (s 12(c)

The supply of a ‘dwelling’ under an agreement for the letting and

hiring thereof is exempt from VAT. A ‘dwelling’ is defined as any
building, premises or structure that is intended for use mainly as a
place of residence or home of any natural person including fixtures
and fittings belonging thereto and enjoyed therewith except where it
is used in the supply of commercial accommodation.
The above therefore implies that the letting of a house or flat to a
person who, in terms of a rental agreement, will use the house or flat
mainly for residential (domestic) purposes, is exempt from VAT.
Usually hotels will not qualify for the residential accommodation
exemption, as they supply taxable commercial accommodation.
Exempt supply: Residential accommodation (s 12(c)
The exemption will, however, also apply where housing or meals and
housing is supplied by an employer to his employee where
o The employee is entitled to occupy the accommodation as a benefit
of employment, or
o The employer operates a hostel or boarding establishment mainly for
its employees rather than for a profit.
This exemption is applicable to the supply of a dwelling under an
agreement for the letting thereof, and not applicable to the supply by
means of a sale. The normal rules apply regarding the sale of a
dwelling. If a non-vendor sells a dwelling, no VAT is levied. If a vendor
sells a dwelling, it will not attract VAT if it was previously used to earn
exempt rental income.
Taxable supply: Commercial accommodation
The supply of accommodation will not qualify for the exempt status if it is the
supply of commercial accommodation. Commercial accommodation is,
therefore subject to VAT at the standard rate.
Commercial accommodation refers to the supply of lodging or boarding and
lodging together with domestic goods and service. In order to understand the
meaning of commercial accommodation, it is important to first understand the
term ‘domestic goods and services’. (stop here 13/9/22).
Domestic goods and services’ are defined as any goods and services
provided in any enterprise 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, or water.
Taxable supply: Commercial accommodation
One distinguishing difference between residential accommodation and
commercial accommodation is that other ‘domestic goods and services’
(for example meals) are also sometimes included in the price of the use
of commercial accommodation.
• Persons supplying commercial accommodation with a value not
exceeding R120 000 in any 12-month period are not carrying on an
enterprise. Such persons will however be eligible for voluntary
registration only once the supplies exceed R120 000 for a 12-month
period.
• Value of the supply:
Commercial accommodation : It is important to distinguish between
short-term commercial accommodation (28 days or less) and longer-
term commercial accommodation (more than 28 days): Short-term
commercial accommodation (28 days or less):
Taxable supply: Commercial accommodation

Short-term commercial accommodation (28 days or less):

Output tax must be levied on the full value of the supply where
accommodation and domestic goods and services are supplied by a
hotel, boarding house or similar establishment intended for short-term
stay (for a period of 28 days or less).
• Longer-term commercial accommodation (more than 28 days):
Output tax must only be levied on 60% of the all-inclusive charge levied
on accommodation and domestic goods and services intended for
longer stays (more than 28 days). This 60% will apply from day one if
the period exceeds 28 days.
Taxable supply: Commercial accommodation

• Abel is the owner of Rest-a-While, a bed-and-breakfast (B & B) establishment

situated in the Natal Midlands. His total annual receipts from the bed-and-
breakfast business amount to R750 000. Most of the guests do not stay longer
than three nights at a time. It does sometimes happen that a guest stays for a
month at a time. Abel charges R220 per night (excluding VAT) for bed and
breakfast.
Explain to Abel the VAT consequences of running his bed-and-breakfast business:
• SOLN: The B & B business constitutes the provision of commercial
accommodation. As the annual receipts of the business exceed R120 000, Abel
can register voluntarily for VAT (still below the mandatory registration threshold
of R1 million. Should Abel decide to register, he will have to levy output
tax on the supply of the commercial accommodation (being a taxable
supply) as follows:
Taxable supply: Commercial accommodation

Guests staying for 28 days and less: 100% of the charge is subject to VAT at 15%
(for example three nights at R220 × 100% × 15% = R99 output tax), and
Gests staying for more than 28 days at a time: only 60% of the charge is subject
to VAT at 15% (for example 30 nights at R220 × 60% × 15% = R594 output tax).
Abel will be entitled to an input tax deduction for VAT paid on the acquisition of
goods and services for the purposes of the B & B business. This is because he is
making taxable supplies.
Should Abel decide not to register for VAT purposes, he does not have to account
for output tax, but then he will not be entitled to any input tax deductions.
• EXAMPLE: Jo Ndlovu is a property magnate and a vendor. During the
current tax period Jo earned the following amounts:
• Letting of townhouses (purely for residential purposes) ..................R42 000
• Short-term stay (less than 28 days) in bed and breakfast hotels (excluding
VAT)………………………………………………………………………………………………. R16 100
Taxable supply: Commercial accommodation

Board and lodging in boarding houses (all periods longer than 28 days –
excluding VAT) ....................................................................R30 000
• Calculate the output tax in respect of the income earned.
Solution:
Letting of townhouse, hiring of a dwelling, which is an exempt residential supply ..Nil
Jo will charge R42 000 in total (R42 000 + Rnil)
• Bed and breakfast, commercial accommodation
R16 100 × 15/115 ....................................................................R2 100.
(Jo will charge R18 200 in total (R16 100 + R2 100).
• Board and lodging, long-term commercial accommodation
R30 000 × 15% × 60% ...........................................................R2 700
(Jo will charge the lodgers R32 700 in total (R30 000 + R2 700).
DETERMINATION OF INPUT TAX:
‘Input tax’ is defined as to include the tax payable by a vendor to a supplier
for the supply of goods or services by the supplier to the vendor, or on the
importation of goods by the vendor.
• The ‘input tax’, as mentioned above, relates to VAT that was paid by the
vendor when acquiring goods or services and imported goods. When
goods or services are acquired from a vendor, VAT will be paid and a tax
invoice will be supplied. When goods are imported, VAT is levied, and this
amount can sometimes be claimed as input tax by a vendor. VAT can be
claimed as an input tax deduction only if VAT was paid by the vendor at
the standard rate or, in certain circumstances, on the purchase of
second-hand goods when no VAT was levied (that is, a notional or
deemed input tax deduction). No VAT may be claimed if the vendor does
not have a valid tax invoice or the required documentation to claim a
notional input tax deduction.
INPUT TAX: DENIAL OF INPUT TAX
• Input tax may not be claimed by a vendor for certain goods or services (s
17(2)). The input tax is denied even if the vendor paid VAT when the goods
or services were acquired and is going to use the goods or services for the
making of taxable supplies.
• Entertainment as defined (s 1(1)), includes the provision of food,
beverages, accommodation, amusement, recreation or hospitality of any
kind.
• In respect of entertainment expenses, there are cases where the input tax will
not be denied, these being:
Vendors in the business of supplying entertainment can claim input tax related to
their entertainment. They can only claim input tax as long as a charge is made by
the vendor for the entertainment and charge covers all direct and indirect
expenses and it is charge at market value.
DENIAL OF INPUT TAX-ENTERTAINMENT
A vendor supplying entertainment to an employee or connected person and a charge is
made to such person that covers all direct and indirect costs of such entertainment.
Any meal, refreshment or accommodation of a vendor, his employee or any self-
employed natural person who is required to be away from his usual place of residence
and usual place of business for at least one night.
Vendors operating taxable (not exempt) passenger transport services.
Vendors organizing seminars or similar events for reward.

Denial of input tax: Club membership fees and subscriptions:

• The input tax deduction is denied for any fees or subscriptions paid by the vendor
for the membership of any club of a sporting, social or recreational nature, for
example golf membership.
• The input tax is not denied if the payment is for the professional membership of an
employee, for example membership of the CA(SA) accounting profession in South
Africa.
DENIAL OF INPUT TAX ON MOTOR VEHICLES:

The input tax on the supply of a motor car through an acquisition or

rental transaction is also denied (s 17(2)(c)). A ‘motor car’ includes the
following five categories ;
• motor car
• station wagon
• minibus
• double-cab light delivery vehicle, and
• any other motor vehicle that is normally used on public roads has
three or more wheels and is constructed or converted wholly or
mainly for the carriage of passengers.
Input tax: Deemed input tax on second-hand goods :
• The VAT Act provides that a deemed input tax on second-hand goods may
be claimed. This deemed input tax can be claimed when second-hand
goods are acquired from a resident of South Africa and the goods are
situated in South Africa.
• The input tax is calculated by the application of the tax fraction to the
lesser of the purchase price, or open market value even though no VAT
has been paid.
• Example:
UNTU Ltd, a vendor for VAT purposes, acquired a second-hand delivery
bicycle from a non-vendor for use in its business. The purchase price of the
delivery bicycle was R630 and the open market value was R780. The
purchase price was paid in full.
Determine whether any input tax may be claimed in respect of the purchase:
Input tax: Deemed input tax on second-hand goods :

SOLUTION:
Because the vendor has purchased a second-hand bicycle from a person not
registered for VAT purposes, a deemed input tax credit can be claimed in
respect of the second-hand bicycle. The deemed input tax is based on the
lower of the consideration paid (R630) or open market value (R780).
The deemed input tax is calculated as follows:
• Tax fraction × consideration paid
• 15/115 × R630 = R82
Zero-rating of movable second-hand goods exported
• When second-hand goods are exported the zero-rating is in certain cases
not applicable and the standard rate will apply. This will be the case where
a deemed input tax has been claimed by that vendor or any other
connected person of that vendor. The reason for then levying VAT at the
standard rate is to cancel out the deemed input tax previously claimed.
• When such second-hand goods are exported, the value of the supply shall
be deemed to be equal to the original purchase price of the goods.
However, if the supplier purchased the goods from a connected person who
was also entitled to claim a deemed input tax on the second-hand goods,
the value of the supply will be the greater of :
• The purchase price of those goods to the supplier when purchased from
the connected person, and
• The purchase price of those goods to the connected person when the
goods were originally acquired.
Zero-rating of movable second-hand goods exported

ABC CC buys scrap metal from a non-vendor for R6 900 and claims a deemed input tax
deduction of R900 (R6 900 × 15/115).
Explain the VAT consequences if:
(a) ABC CC exports the goods for R7 500, and
(b) ABC CC exports the goods for R4 000.
SOLUTION:
(a) ABC CC will be required to account for output tax equal to the notional
input tax claimed of R900. The output tax is based on the purchase price
of R6 900, irrespective of the selling price of R7 500. However, if ABC CC
accounted for VAT at the standard rate of 15% in respect of the total
amount charged (R7 500 × 15/115 = R978), the purchaser, if a qualifying
purchaser, may claim the difference between the VAT paid to ABC CC
and the notional input tax deduction claimed by ABC CC (namely R978 –
R900 = R78) from the VAT Refund Administrator.
Zero-rating of movable second-hand goods exported
SOLUTION:
(b) ABC CC will again be required to account for output tax equal to
R900, although the selling price of the goods is less than the purchase
price. The output tax is based on the original purchase price,
irrespective of the selling price.
EXAMPLE:
A buys second-hand goods for R2 300 and claims a notional input tax
deduction of R300 (R2 300 × 15/115), then sells them to B, connected
person, for R1 702. B claims an input tax deduction of R222 (R1 702 ×
15/115) based on the tax invoice provided by A. B exports the goods for
R1 980.
Explain the VAT consequences in respect of the export.
Zero-rating of movable second-hand goods exported
SOLUTION 11:
B will be required to account for output tax of R300 (R2 300 × 15/115) which
is based on the greater of the price paid by the connected person (A) – R2
300; or the price paid by B – R1 702.
Irrecoverable debts (ss 16(2)(f) and 22)
• When a vendor has accounted for output tax in respect of a taxable supply and
all or part of the consideration subsequently becomes irrecoverable, the vendor
becomes entitled to an input tax deduction.
• The amount of this input tax deduction relates to the full amount of VAT levied on
the original supply in the same proportion as the amount of the irrecoverable
consideration written off relates to the total consideration.
• In order to claim an input tax deduction for irrecoverable debt, the following
documentary proof has to be retained: accounting records reflecting the balance
of the outstanding debt and amount of VAT written off proof that the VAT was
charged and declared in a VAT return. In order to claim an input tax deduction
for irrecoverable debt, the following documentary proof has to be retained:
Accounting records reflecting the balance of the outstanding debt and
amount of VAT written off proof that the VAT was charged and declared in a
VAT return.
Irrecoverable debts (ss 16(2)(f) and 22) : Example.

For accounting purposes, Talita (Pty) Ltd wrote off R4 635 as bad debts. This
amount comprises an amount of R2 852 (including VAT at 15%) owing by a local
debtor and an amount of R1 783 (including VAT at 0%) owing by an export sale
debtor.
Provide the journal entry for the above in the books of Talita (Pty) Ltd.
SOLUTION
• Dr Bad debts (R4 635 – R372) ..................................................... 4 263
• Dr Input tax ....................................................... 372 (R2 852 × 15/115)
• Cr Local debtor ........................................................................ 2 852
• Cr Export debtor (note 1) .......................................................... 1 783
• Bad debts written off and corresponding VAT adjustment.
NOTE :Please practice the questions in the “Tax workbook” available from the
short section in the school library. Thank you.