Tutorial Letter 103/0/2021 - Unisa · 2021. 2. 5. · TAX4861/103/0/2021 NTA4861/103/0/2021...

TAX4861/103/0/2021 NTA4861/103/0/2021

Tutorial Letter 103/0/2021

Advanced Taxation

Year module

Department of Financial Intelligence

This tutorial letter contains learning units 2 and 3 as well as self-assessment questions.

TAX4861 NTA4861

Bar code

2 TAX4861/103/2021

ORIENTATION ............................................................................................................................ 4

I. INTRODUCTION ............................................................................................................... 4

II. STUDY PROGRAMME AND TIME FRAME ..................................................................... 4

III. ABBREVIATIONS ............................................................................................................. 5

IV. BEANCOUNTER SCENARIOS ........................................................................................ 5

V. LECTURERS .................................................................................................................... 5

VI. IMPORTANT DATES FOR THIS TUTORIAL LETTER .................................................... 5

VII. ADDITIONAL RESOURCES ............................................................................................. 6

WORK PLAN FOR DAY 1 (23 FEBRUARY 2021) ...................................................................... 7

SECTION A ................................................................................................................................. 7

1 INTERPRETATION OF LEGISLATION ............................................................................ 7

2 DONATIONS TAX ............................................................................................................. 7

2.1 BACKGROUND ......................................................................................................................... 7

2.1.1 UNGC Principle 10 .............................................................................................................. 8

2.2 OUTCOMES OF THIS LEARNING UNIT ................................................................................... 8

2.3 BEANCOUNTER SCENARIO .................................................................................................... 8

2.4 CONTENT FOR LEARNING UNIT 2 .......................................................................................... 9

2.4.1 Study approach ................................................................................................................... 9

2.4.2 Table of Reference ............................................................................................................ 10

2.4.3 Sections in SILKE you may ignore .................................................................................... 11

2.5 LAW AMENDMENTS ............................................................................................................... 11

2.6 ADDITIONAL NOTES .............................................................................................................. 14

2.6.1 Framework for the calculation of donations tax .................................................................. 14

2.6.2 Impact of donations on other taxes .................................................................................... 15

2.7 OUTCOMES OF THE BEANCOUNTER SCENARIO ............................................................... 16

2.8 SUMMARY OF LU 2 ................................................................................................................ 16

2.9 LIST OF REFERENCES OF LU 2 ............................................................................................ 16

WORK PLAN FOR DAYS 2 - 5 (25 – 28 FEBRUARY 2021) .................................................... 17

3 VALUE-ADDED TAX (VAT) ............................................................................................ 17

3.1 BACKGROUND ....................................................................................................................... 17

3.1.1 UNGC Principle 10 ............................................................................................................ 17

3.2 OUTCOMES OF THIS LEARNING UNIT ................................................................................. 18

3.3 BEANCOUNTER SCENARIO .................................................................................................. 18

3.4 CONTENT FOR LEARNING UNIT 3 ........................................................................................ 19

3.4.1 Study approach ................................................................................................................. 19

3.4.2 Table of Reference ............................................................................................................ 20

TABLE OF CONTENTS

3 TAX4861/103/2021

3.4.3 Sections in SILKE you may ignore .................................................................................... 24

3.5 LAW AMENDMENTS ............................................................................................................... 24

3.6 ADDITIONAL NOTES .............................................................................................................. 25

3.6.1 Mind map representing an overview of VAT ...................................................................... 25

3.6.2 Mind map of the supply of goods and services – OUTPUT TAX ........................................ 27

3.6.3 Services - SILKE par 31.5.3 .............................................................................................. 27

3.6.4 Exempt supplies: Other (including transport of fare-paying passengers and their personal effects by road or rail) - SILKE par 31.11.4 ........................................................................ 28

3.6.5 Deemed supplies: Ceasing to be a vendor - SILKE par 31.12.1 ........................................ 29

3.6.6 Time and value of supply - SILKE par 31.15 and 31.16 ..................................................... 31

3.6.7 Basics of input tax - SILKE par 31.17 ................................................................................ 38

3.6.8 Input tax: Denial of input tax - SILKE par 31.21 ................................................................. 39

3.6.9 Input tax: Importation of goods - SILKE par 31.8 ............................................................... 40

3.6.10 Special rules: fixed property - SILKE par 31.24 ................................................................. 40

3.6.11 Adjustments arising from the change in the use of goods or services or supplies of going concerns or leasehold improvements - SILKE par 31.25 to 31.31 ..................................... 42

3.7 OUTCOMES OF THE BEANCOUNTER SCENARIO ............................................................... 47

3.8 SUMMARY OF LU 3 ................................................................................................................ 47

3.9 LIST OF REFERENCES OF LU 3 ............................................................................................ 47

WORK PLAN FOR DAYS 6 - 7 (01 – 02 MARCH 2021) ........................................................... 48

SECTION B – SELF-ASSESSMENT QUESTIONS .................................................................. 48

SECTION C – PRIOR YEAR TEST ......................................................................................... 101

Please note

Due to Unisa's print schedule, this tutorial letter had to be submitted by December 2020 so that you would receive it on time. The latest amendments had not yet been promulgated and this means that this tutorial letter was based on the Amendment Bills as of October 2020. This should not affect the content of this module. However, should there be any major changes between the Amendment Bills and the promulgated Amendment Acts, we will communicate these to you.

4 TAX4861/103/2021

I. INTRODUCTION This tutorial letter is divided into two learning units. Learning unit (LU) 2 deals with donations tax and LU 3 deals with VAT. The goal of this tutorial letter is to assist you in making the most of the time available to master the topics in this tutorial letter. Follow the guidelines and try to keep to the allocated time (remember that time allocations are based on the assumption that certain topics have already been covered in your undergraduate studies).

II. STUDY PROGRAMME AND TIME FRAME

Your time should be divided into two parts:

Obtaining the required knowledge (24 hours) This would entail working through this tutorial letter and the textbooks (SAICA Student Handbook and SILKE), underlining, making summaries and familiarising yourself with the VAT Act and the Income Tax Act (section A of this tutorial letter).

Application of knowledge and revision of difficult concepts (6 hours) This would entail the completion of the self-assessment questions (sections B and C of this tutorial letter).

We assume that you have three hours of study time on a weekday/night and 15 hours over a weekend. We have based the work plan in this tutorial letter on this assumption.

Day Date Topic Hours

1 Wednesday 24 February 2021 LU 1 – Interpretation and application of legislation in TL 102 (30 minutes)

3 LU 2 - Donations Tax in Section A (2 hours and 30 minutes)

Question 1 of Section B

2 & 3 Thursday & Friday

25 - 26 February 2021 LU 3 – VAT in Section A 6

4 & 5 Weekend 27 – 28 February 2021 LU 3 – VAT in Section A 15

6 & 7 Monday & Tuesday

1 – 2 March 2021 Section B: self-assessment questions (Questions 2 – 15)

6

30 hours

ORIENTATION

5 TAX4861/103/2021

III. ABBREVIATIONS

The list of abbreviations used in the tutorial letters is contained in TL 102. Please take note of the following additional abbreviation relevant to this tutorial letter:

Abbreviation Meaning of abbreviation

OMV Open market value

IV. BEANCOUNTER SCENARIOS Refer to TL 102 to meet the Beancounter family.

V. LECTURERS The following lecturers compiled this tutorial letter: Ms L Brits Ms A Heyns Ms M Ungerer Please contact any of the tax lecturers should you have questions regarding this tutorial letter. You may also send your queries (regarding administrative and academic matters) and comments via e-mail to [email protected] (note that e-mail correspondence is the preferred method of communication – refer to TL 101 in this regard). For queries regarding administrative matters, please contact the administrative officer at +27 12 429 2947. For queries regarding academic matters, you can contact any of the lecturers directly or you can contact the administrative officer. The administrative officer will put you in touch with the relevant lecturer on duty.

VI. IMPORTANT DATES FOR THIS TUTORIAL LETTER

Date of test 1: TUESDAY, 23 March 2021

The topics covered in both TL 103 and TL 104 as well as any relevant case law in TL 102 will be assessed in Test 1.

mailto:[email protected]

6 TAX4861/103/2021

VII. ADDITIONAL RESOURCES The following additional resources will be available at the start of your study week for each tutorial letter to assist you in understanding and applying the tax principles. Please note that the additional resources are merely an introduction to the topic and are NOT a substitute for working through the Tutorial Letter, SAICA legislation handbook and relevant textbooks.

Find summary slides on myUnisa.

? Additional questions are available on myUnisa.

Find pre-recorded lectures and recordings of live lectures on our YouTube channel – UNISA - TAX CTA Screencasts (https://www.youtube.com/channel/UCnSJpIUZeHNsRSYpyTR5_Dg)

https://www.youtube.com/channel/UCnSJpIUZeHNsRSYpyTR5_Dg

7 TAX4861/103/2021

WORK PLAN FOR DAY 1 (23 FEBRUARY 2021)

SECTION A

Time allocation for learning units 1 and 2:

Interpretation and application of legislation (LU 1) (TL 102) 0.5 hours

Donations tax (LU 2) 2.5 hours

Total 3 hours

Note that this is a lot of work to master in the allocated time, however most topics would have been covered in depth in your first year of postgraduate studies. You will probably not have time to study every section in detail again but will have to rely on your prior knowledge. Where necessary, you should refresh your memory regarding sections you already know.

1 INTERPRETATION OF LEGISLATION The content of LU 1 is contained in TL 102. LU 1 will provide you with the skills on how to interpret legislation.

Work through LU 1: "Interpretation and application of legislation" in TL 102. This should assist you in the optimal use of the Student Handbook.

2 DONATIONS TAX

2.1 BACKGROUND Donations tax is, although levied in terms of PART V of the Income Tax Act (sections 54 to 64), a separate tax from income tax. It is payable on the transfer of assets from one person (not necessarily a taxpayer) to another. Take note that donations tax could also affect the calculation of capital gains tax, where an asset (as opposed to cash) is donated. You therefore also have to refer to the applicable paragraphs in the Eighth Schedule to the Income Tax Act.

8 TAX4861/103/2021

2.1.1 UNGC Principle 10 The UNGC principles were introduced in TL102. Compliance with the laws and regulations is the basis on which the taxation legislation is founded. UNGC principle 10 states that businesses should work against corruption in all its forms, including extortion and bribery. The definition of corruption includes dishonest or fraudulent conduct. Tax evasion would fall within the ambit of corruption. UNGC principle 10 encourages entities to find a balance between the social obligation to pay taxes and tax planning, in order to minimise the ‘cost’ of these taxes for an entity within the ambit of the law. Since the making of donations are used by some entities as a means of tax evasion (by reducing their tax base), it is important to take note of the UNGC principle 10 when studying this unit.

2.2 OUTCOMES OF THIS LEARNING UNIT

After studying LU 2, you should be able to achieve the following outcomes:

identify a disposal of property as a donation or deemed donation, or as exempt from donations tax

calculate the donations tax payable on a donation

identify the person responsible for the payment of the donations tax and the time period that the donations tax must be paid

explain any other tax consequences (including VAT and capital gains) that may result from making a donation.

Before you start studying the detailed provisions of donations tax, you should first read the following scenario relating to the Beancounter family. As you study the applicable sections in the Income Tax Act, identify areas of concern that should be brought to the attention of the Beancounter family.

2.3 BEANCOUNTER SCENARIO Barry Beancounter is married in community of property to Bizzie Beancounter. Barry is a very charitable person, as he made a number of donations during the year.

He donated R40 000 cash to the Butterbean Family Trust, R20 000 cash to his lovely wife, Bizzie, and R20 000 cash to each of his children, Jelly and Soya Beancounter.

He also donated R5 000 to the B.E.A.N. political party.

Barry is considering whether or not to sell a property with a market value of R500 000 to the Butterbean Family Trust, funded by an interest-free loan account. This property is excluded from Barry and Bizzie’s joint estate. The journal entry will be recorded as follows in the financial records of the trust:

9 TAX4861/103/2021

Dr Property R500 000 Cr Loan account: B Beancounter R500 000

He also is also considering whether he should make another donation to the trust utilising the rest of his R100 000 annual exemption (remember there is an existing loan [see above] that the trust owes Barry).

All cash donations (except for the donation to Bizzie) were made (and in future will be made) from funds available in an investment account. This investment is included in Barry and Bizzie’s joint estate.

Barry is, however, uncertain about the donations tax and capital gains tax implications (if any) that may arise from the above donations he made during the year, as well as those that he is considering and he has therefore asked you to assist him.

Before attempting to assist Barry with his donations tax and capital gains tax query, you should first work through and master the applicable sections in the Income Tax Act relating to donations tax. The outcomes for the Beancounter scenario will be made available on myUnisa during your study week for this learning unit.

2.4 CONTENT FOR LEARNING UNIT 2

2.4.1 Study approach We provide you with a Table of Reference which contains the references to all the sections which must be studied in this learning unit together with a reference to the relevant paragraph in SILKE and a reference to additional notes provided (if any) in the tutorial letter, as well as an indication of whether a specific section is examinable or not. The Table of Reference is presented in such a way that you should use it to guide you through the content of the learning unit in this tutorial letter. You should therefore work your way through the content by starting at the top of the table and working your way through to the end. The ideal way to study tax is to first read the specific section in the Income Tax Act and then to study the relevant paragraph(s) in SILKE together with any additional notes on that section included in this tutorial letter. We recommend that you study any additional notes on the section first before working through the paragraph(s) in SILKE. Also work through the examples in SILKE, because the examples illustrate the application of the theory of a section. We are not ignorant of the fact that most of our students study part time. We therefore realise that you may not always have the time available to follow the above study approach fully, with specific reference to our recommendation that you first read a section in the Income Tax Act. However, you still need to flag and underline your Income Tax Act in order for you to benefit from the limited open book policy for the tests, the examination and the 2021 ITC (for TAX4862 students). SILKE has a Table of provisions towards the back (just before the Subject index). This is a handy table to use if you have a specific section on which you need more information. The table provides the paragraphs in SILKE which contain information on a specific section.

10 TAX4861/103/2021

2.4.2 Table of Reference

Reference to Income

Tax Act Topics

Reference to SILKE

Reference to notes in

the TL Examinable

Day 1: Wednesday 23 February 2021 (2.5 hours)

Sections 54 to 64

Donations tax

Framework for the calculation of donations tax 26.1 2.6.1 s 54 Levy of donations tax 26.1 – 26.2 Yes s 64 Rate of donations tax 26.2 2.5 Yes s 55 Definitions for purposes of this part 26.3 – 26.4 Yes s 58(1) Property disposed of under certain transactions

deemed to have been disposed of under a donation

26.5 Yes

s 58(2) No s 7C Loan or credit advanced to a trust by a

connected person (Effective 1 March 2017)

26.10 2.5 Yes (also

TL107)

s 7C(5)(a), (b), (c), (f) & (h) No

S 7D Calculation of amount of interest 26.10 Yes (also

TL107) s 56 Exemptions 26.6 2.6.2 Yes

s 56(1)(o) No s 57A Donations by spouses married in community of

property 26.7 Yes

s 57 Disposals by companies under donations at the instance of any person

26.8 Yes

s 62 Value of property disposed of under donations 26.9 – 26.9.1 Yes

s 62(1)(a)–(c): the value of limited interests in property and annuities will be given

26.9.2 – 26.9.4

s 59 Persons liable for the tax 26.11 Yes

s 60 Payment and assessment of the tax 26.11 Yes

s 61 Extension of scope of certain provisions of Act for purposes of donations tax

No

Other tax consequences of donations (refer below)

26.12

8th Sch Donations and Capital Gains Tax

Disposals and acquisitions

par 11(1) Disposals 17.7.1 Yes

Base cost

par 20 Base cost of asset (Only the basic principles)

Yes

par 22 Amount of donations tax to be included in base cost

17.8.7 Yes

Proceeds par 38 Disposal by way of donation, consideration not

measurable in money and transactions between connected persons not at an arm’s length price

17.9.5 Yes

11 TAX4861/103/2021

Reference to Income

Tax Act Topics

Reference to SILKE

Reference to notes in

the TL Examinable

Exclusions

par 62 Donations and bequests to public benefit organisations and exempt persons

17.10.2 Yes

Roll-overs

S 9HB Transfer of asset between spouses 17.10.3.3 Yes

Questions and examples

Work through Example 26.16 in SILKE 26.13

Do Question 10.1 in AQSAT

Do Question 1 in Section B of this TL

2.4.3 Sections in SILKE you may ignore

Note that the calculation of the value of limited interests is not part of the syllabus (SILKE – par 26.9.2 to 26.9.4). The value of limited interests in property will be provided in questions and assessments. You will be required to determine which value to use for the limited interests taking the provisos of section 62 into account.

You must also be able to recognise and define the meaning of a fiduciary interest, usufruct and bare dominium, as described in the first few paragraphs of par 26.9.2 in SILKE.

2.5 LAW AMENDMENTS The taxation laws are amended annually. These amendments are firstly published in the form of draft Bills and then as Bills. Only once the Bills have been passed through Parliament and once it is then assented to by the President, it is published as Acts. It is normally expected that the Bills will be enacted early in the following year. The study material in this tutorial letter is based on amendments as proposed in the Bills. The publishing of the Bills coincides with the Medium Term Budget Policy Statement (MTBPS) made by the Minister of Finance. The last MTBPS was made on 28 October 2020 and the following Bills, relevant to your studies, were published:

Rates and Monetary Amounts and Amendment of Revenue Laws Bill 26 of 2020;

Taxation Laws Amendment Bill 27 of 2020; and

Tax Administration Laws Amendment Bill 28 of 2020.

Use the following link1 to access the published Bills: https://www.sars.gov.za/Legal/Preparation-of-Legislation/Pages/Bills.aspx

The important proposed amendments which are applicable to this LU are summarised below. In some instances, we repeat amendments from previous years which were enacted for your reference.

1 'image: Flaticon.com'. The weblink icon has been designed using resources from Flaticon.com

https://www.sars.gov.za/Legal/Preparation-of-Legislation/Pages/Bills.aspx

12 TAX4861/103/2021

Relevant amendments contained in the Taxation Laws Amendment Bill 27 of 2020, are as follows:

Insertion in s 7C of the Income Tax Act:

Section 7C(1B) Where a natural person or at the instance of a natural person, a company that is a connected person in relation to that natural person in terms of paragraph (d)(iv) of the definition of ‘connected person’, subscribes for a preference share in a company in which 20 per cent or more of the equity shares are held (whether directly or indirectly) or the voting rights can be exercised by a trust that is a connected person in relation to that natural person or to that company, whether alone or together with any person who is a beneficiary of that trust— (i) consideration received by or accrued to that company for the issue of that preference share shall be deemed to be a loan for the purposes of subsection (3); and (ii) any dividend or foreign dividend accrued in respect of that preference share shall be deemed to be interest in respect of the loan contemplated in paragraph (i). Section 7C(6): “Preference share” means a preference share as defined in section 8EA(1). Effective date: on or after 1 January 2021. Where s 7C(1B) applies, and the consideration received by the company in exchange for the preference shares is deemed to be a loan, any dividend or foreign dividend accrued in respect of the preference shares will be deemed to be interest in respect of the loan. Therefore, the dividend or foreign dividend on the preference shares is compared to interest at the official rate of interest to determine any possible deemed donation (see example 26.13 in SILKE).

Amendment to the wording of section 8(4)(k) following subparagraph (iv):

Where a person donates an asset on which a deduction was previously allowed to that person, the person is deemed to have disposed of that asset at the market value of the asset at the date of the donation.

Effective date: 15 January 2020.

Amendment to the wording of section 18A(3A)(c):

Replacing the word “it” with the words “the immovable property” in the definition of “C” in paragraph (c).

Amendment to the wording of section 64(1)(a)(i):

The wording now makes it clear that only taxable donations must be included in the R30 million from 1 April 2018.

13 TAX4861/103/2021

Relevant amendments contained in the Rates and Monetary Amounts and Amendment of Revenue Laws Bill 1737 of 20198 and the Taxation Laws Amendment Bill 18 of 2019, are as follows:

Amendment of paragraph 38(1) of the 8th Schedule to the Income Tax Act:

Paragraph 38 stipulates that the transfer of assets by means of a donation, or for a consideration not in money, or to a connected person are deemed to be at market value.

However, paragraph 38 is subject to section 9HB. The wording of paragraph 38 has now been amended to correctly refer to section 9HB.

Words were further added to paragraph 38 that now refers to a connected person immediately prior to or immediately after that disposal.

Section 9HB deals with the roll-over provisions of assets between spouses and takes priority over paragraph 38. Therefore, assets transferred (donated) between spouses will not deemed to be at market value.

This amendment comes into operation on the date of promulgation of the Taxation Laws Amendment Act of 2019.

Amendment of paragraph 38(1)(b) of the 8th Schedule to the Income Tax Act:

The base cost of an asset received as a donation is also deemed to be the market value. This market value must be treated as “an amount of expenditure actually incurred” for the purposes of par 20(1)(a). Previously the paragraph stipulated “incurred and paid”. The words “and paid” have now been deleted.

This amendment comes into operation on the date of promulgation of the Taxation Laws Amendment Act of 2019.

14 TAX4861/103/2021

2.6 ADDITIONAL NOTES 2.6.1 Framework for the calculation of donations tax

References to the Income Tax

Act

NO

DID A RESIDENT DISPOSE OF THE PROPERTY?

Sections 1 and

54

YES

NO

WAS THIS PROPERTY DISPOSED OF UNDER ANY

DONATION OR DEEMED DONATION?

Sections 54, 55,

58 and 7C

YES

YES

IS THE DONATION EXEMPT FROM DONATIONS

TAX?

Section 56(1) and 56(2)(c)

NO

CALCULATE THE VALUE OF THE DONATION.

Section 62

CALCULATE THE TAXABLE DONATION

= VALUE OF DONATION LESS BALANCE OF EXEMPTION (not a natural person: R10 000 per

annum for casual gifts; natural person: R100 000 per annum)

(exemption applied in order that donations take effect)

Section 56(2)(a), (b) and section

60(2)

NO DONATIONS

TAX PAYABLE

CALCULATE DONATIONS TAX

TAXABLE DONATION x 20% or 25% (where the aggregate of donations exceed R30 million)

Section 64

Notes to the framework

1. Donations tax is payable on the fair market value of any property disposed of gratuitously or for less

than the fair market value by a South African resident. 2. Donations tax must be calculated separately on each donation as and when the donation takes place

and not at the end of the year of assessment (except for deemed donations in terms of section 7C).

15 TAX4861/103/2021

The R100 000 exemption, applicable to natural persons, and the R10 000, applicable to persons who are not natural persons, must therefore be applied in the order that the donations take place.

3. The R100 000 exemption, applicable to natural persons, applies to all property donated and is not

apportioned where the period of assessment is less than a full year. The R10 000 exemption, on the other hand, applicable to a donor that is not a natural person, only applies to casual gifts and it must be apportioned where the period in question exceeds or is less than 12 months.

Donations tax does not apply to non-residents, even if they donate South African assets.

Donations tax is payable by the end of the month following the month during which the donation takes effect (i.e. if a donation is made in January, the donations tax is payable by the end of February.

Do not confuse the section 18A deduction (deductible donations to certain organisations) from taxable income with the donations tax provisions. Even if no donations tax is payable on a specific donation, it does not mean that the specific donation may be deducted for normal tax purposes. Consider the provisions of section 18A to determine the deductibility for normal income tax purposes.

2.6.2 Impact of donations on other taxes A donation may affect many more items than merely donations tax. You may be required to consider the capital gains tax or normal tax (including income tax and capital gains tax) implications of a donation. Donations tax may therefore be combined/integrated with topics that will only be addressed in future tutorial letters, for example:

Meaning of “resident” – TL 104

Capital gains tax – TL 104

Trusts (section 7) – TL 107

Income tax (section 18A – deduction of donations to certain organisations) – TL 105, TL106 and TL 107.

With the amendment to the donations tax rate from 20% to 25% in the instance where a donation is made and the aggregate value exceeds R30 million, the question in a test or the exam will contain the necessary information to determine whether the higher donations tax rate of 25% applies. If no such information is given, the assumption is that the aggregate value does not exceed R30 million and the 20% donations tax rate is applicable.

In the questions contained in this tutorial letter the assumption is that the aggregate value of donations made, does not exceed R30 million. However, please take note that either of the rates can be tested in a test or the exam.

16 TAX4861/103/2021

2.7 OUTCOMES OF THE BEANCOUNTER SCENARIO

Read the Beancounter scenario again and make a rough summary of what your solution would be now that you have studied donations tax. You should be able to answer Barry Beancounter’s query on donations tax. Share your solution on the myUnisa discussion forum, then refer to the outcomes (solution) that will be made available on the Friday of your study week on myUnisa.

2.8 SUMMARY OF LU 2 This learning unit introduced you to the content in the Income Tax Act that is relevant to donations tax with the relevant law amendments. The table of reference under 2.4.2 was provided to guide you through the work. A framework for determining and calculating donations tax was provided to assist you in analysing donations tax scenarios. Remember to take a look at the additional resources available for this learning unit on myUnisa and YouTube. Ensure that you do not study donations tax in isolation and that you consider the impact of every donation on other taxes. Now you are ready to apply your donations tax knowledge by doing the questions in Sections B and C of this tutorial letter.

2.9 LIST OF REFERENCES OF LU 2 Parsons, et al. 2020. Advanced Questions on SA Tax 6th edition (2021). Cape Town, Juta.

SAICA. 2020. SAICA Student Handbook 2019/2020 Volume 3, Durban, LexisNexis.

Stiglingh, et al. 2020. ‘Chapter 17: Capital gains tax (CGT)’, Silke: South African Income Tax 2021, Durban, LexisNexis.

Stiglingh, et al. 2020. ‘Chapter 26: Donations tax’, Silke: South African Income Tax 2021, Durban, LexisNexis.

___________________________

END OF LEARNING UNIT 2

17 TAX4861/103/2021

WORK PLAN FOR DAYS 2 - 5 (25 – 28 FEBRUARY 2021)

Time allocation for learning unit 3 – VAT – 21 hours

3 VALUE-ADDED TAX (VAT) 3.1 BACKGROUND

After the completion of the first year of your postgraduate studies, you should have a basic knowledge of VAT. In this learning unit, you should concentrate on those areas that were not covered in your previous studies and master complex issues. While studying, ensure that you can also apply the theory to a practical situation. When you plan your study time, bear in mind the sections that are examinable in terms of the syllabus and those sections that are excluded from the syllabus (reflected in the Table of Reference (below) in this learning unit).

3.1.1 UNGC Principle 10 The UNGC principles were introduced in TL102. Compliance with the laws and regulations is the basis on which the taxation legislation is founded. UNGC principle 10 states that businesses should work against corruption in all its forms, including extortion and bribery. The definition of corruption includes dishonest or fraudulent conduct. Tax evasion would fall within the ambit of corruption. UNGC principle 10 therefore encourages entities to find a balance between the social obligation to pay taxes and tax planning, in order to minimise the ‘cost’ of these taxes for an entity within the ambit of the law. It is important to take note of the UNGC principle 10 not only when studying, but more importantly when applying the Value-Added Tax legislation in practice.

18 TAX4861/103/2021

3.2 OUTCOMES OF THIS LEARNING UNIT

After studying LU 3, you should be able to meet the following outcomes:

understand and be able to explain how the levying of VAT and the VAT system works;

identify whether a person needs to register as a vendor;

list the documentary requirements for a VAT transaction;

identify when and at what rate VAT is levied, including whether a transaction will be zero-rated or exempt;

identify and be able to apply the rules relating to deemed supplies;

identify transactions where input tax will be denied and

explain and be able to determine and apply the timing rules and value for a supply.

Before you start studying the detailed provisions of the VAT Act, read the following scenario relating to the Beancounter family. The scenario provided requires that you first carefully read the information provided. Then, as you study the different VAT provisions, identify areas of concern that should be brought to the attention of the Beancounter family.

3.3 BEANCOUNTER SCENARIO Bizzie Beancounter has decided to start her own business venture as a sole proprietor. She has located the perfect premises that is currently available for letting. She will start a dry-cleaning business in her own name (recognised as a process of manufacture by the Commissioner) on 1 May 2020 (with a February year-end). She will employ four permanent staff members (non-connected persons) and she herself will take care of the day-to-day management of the business. Bizzie will import two dry-cleaning machines from Europe, which will have arrived by 1 May 2020.

Bizzie has signed contracts with a few local restaurants to render dry-cleaning services to them with effect from May 2020. Her monthly turnover in terms of these agreements will be R85 000 for the first six months, increasing by 10% for every consecutive six-month-period.

However, Bizzie is uncertain about what (if any) VAT implications might arise from her business venture and she has asked you to identify all the VAT areas which may affect her business.

Six months have passed since your first meeting with Bizzie when she phones you to set a date for a second meeting. The dry-cleaning business is operating very successfully and Bizzie feels that it is time for one or two changes:

The rented premises has become too small for Bizzie’s business venture and she wants to buy a house in Justice Mahomed Street, Pretoria, from where she will operate the business. She will buy the house from Ancient Eve, a 72-year-old woman who can no longer manage the old residence on her own (Ancient Eve is not a VAT vendor). The house has a separate, one-bedroom flat, which Ancient Eve wants to rent from Bizzie after the sale. The flat occupies 10% of the floor space of the residence.

19 TAX4861/103/2021

Bizzie wants to incorporate a collect-and-deliver dry-cleaning service into the business and she will need to buy a delivery truck for this purpose. Peter a current employee will do all the driving for business purposes. He will also be able to use the vehicle for private purposes during evenings and over weekends. All expenses relating to the delivery truck will be paid by the business.

3.4 CONTENT FOR LEARNING UNIT 3

3.4.1 Study approach In this learning unit, we again provide you with a Table of Reference (below); however, we recommend that you study VAT in the sequence as set out in SILKE. We therefore provide you with this table, which divides the content of the SILKE chapter into the time available, together with references to additional notes in this tutorial letter. You should use this table to guide you through the content of this learning unit. Also, refer to the prescribed cases (indicated in the table) to be studied (refer to the relevant summaries in TL102).

Par in SILKE

Topic Additional

notes in the TL

Day 2: Thursday 25 February 2021 (3 hours)

31.1 Overview of VAT 3.6.1

31.2 Calculation of VAT

31.3 The accounting basis (s 15)

31.4 Tax periods (s 27)

31.5 Output tax (supply of goods and services) (s 7(1)) 3.6.2& 3.6.3

31.6 Vendor (ss 23, 50, 50A, 51(2) and 22 of the TAA)

31.7 Output tax (in the course or furtherance of an enterprise) (s 7(1)(a))

31.8 VAT levied – importation of goods (ss 7(1)(b) and 13) 3.6.9

31.9 VAT levied – imported services

CSARS v De Beers Consolidated Mines Ltd (74 SATC 330) TL 102

31.10 Output tax (zero rated supplies)

Interpretation note: No. 103 – The Value-added tax treatment of supplies of international and ancillary transport services

Stellenbosch Farmers’ Winery Ltd v CSARS [2012] (77 SATC 235) TL 102

Master Currency (Pty) Ltd v C: SARS [2013] 3 All SA 135 (SCA) TL 102

Interpretation note: No. 85 – The Master Currency case and the zero-rating of supplies made to non-residents

Interpretation note: No. 57 – Sale of an enterprise or part thereof as a going concern

31.11 The taxable supply of commercial accommodation & exempt supplies 3.6.4

Day 3: Friday 26 February 2021 (3 hours)

31.12 Output tax (deemed supplies) (ss 8 and 18(3)) 3.6.5

CSARS v British Airways PLC [2005] JOL 14066 (SCA) TL 102

31.13 Output tax (non-supplies) (ss 8(3), (4), (14), (25), 9(2)(b) and (c) and 10(11))

31.14 Output tax (no apportionment) (s 8(16))

31.15 Time of supply (s 9) 3.6.6

31.16 Value of supply (s 10(2)) 3.6.6

Interpretation note: No. 70 - Supplies made for no consideration

20 TAX4861/103/2021

Par in SILKE

Topic Additional

notes in the TL

Day 4 and 5: Weekend 27 – 28 February 2021 (15 hours)

31.17 Basics of input tax (ss 16 and 17) 3.6.7

31.18 Tax invoices (ss 16(2) and 20)

31.19 Debit and credit notes (s 21)

31.20 The determination of input tax (s 17)

CSARS v De Beers Consolidated Mines Ltd [2012] (74 SATC 330) TL 102

31.21 Input tax (denial of input tax) (s 17(2)) 3.6.8

Interpretation note: No. 82 – Input tax on motor cars

31.22 Input tax (second-hand goods) (ss 1, 18(8) and 20(8))

31.23 Special rules – instalment credit agreements

31.24 Special rules – fixed property 3.6.10

31.25 – 31.31

Adjustments – (ss 9(6), 10(7), 16(3)(h), 18(1), 18B, 18(4), 9(5), 18(2), 18(5), 18(6), 10(9), 8(14)(b), 8(14A), 9(10), 10(24), 18(9), 18A, 8(29), 9(12), 10(28), 18C, 16(2)(f) and 22)

3.6.11

31.32.1 Pre-incorporation expenses (s 19)

31.32.2 Agents (ss 8(20), 16(2) and 54)

31.33 Foreign electronic services (s 1 definition of enterprise, ss 23(1) and 54(2B))

31.34 The influence of VAT on income tax calculations

Work through examples 31.60 & 31.61 in SILKE.

3.4.2 Table of Reference The Table of Reference contains the references to all the sections in the VAT Act and TAA which must be studied in this learning unit as well as an indication of whether a specific section is examinable or not.

Reference to the

VAT Act Topics

Reference to SILKE

Examinable

Sections of the VAT Act

s 1 All definitions, except for the following: Various Yes

(It will be stated if a service is an “electronic service” or a person is an “intermediary”.) “association not for gain”, “Controller”, “customs authority”, “customs controlled area”, “customs controlled area enterprise”, “designated entity”, par (b)(i) – (v) of the definition of “enterprise”, proviso (vi), (viii), (x), (xi) & (xii) to the definition of “enterprise”, paragraph (d) of the definition of “exported”, “foreign donor funded project”, “grant”, “inbound insurance policy”, “international journey”, “licenced customs and excise storage warehouse”, “outbound insurance policy”, “public authority”, “SEZ”, “SEZ operator”, “share block company”, “Share Blocks Control Act”, “Special Economic Zones Act”, “storage warehouse”, “welfare organisation”

No

21 TAX4861/103/2021

Reference to the

VAT Act Topics

Reference to SILKE

Examinable

s 2 Financial services, only:

31.11.1 Yes

Debt security s 2(1)(c), issue, allotment or transfer of ownership of an equity security (d), provision of credit (f), provision of long-term insurance (i) and the issue, acquisition, collection, buying or selling or transfer of ownership of any cryptocurrency (o).

Rest of the section No

s 3 Determination of "open market value" Yes

s 4 Administration of VAT Act No

s 5 Exercise of powers and performance of duties No

s 6 Secrecy No

s 7 Imposition of VAT 31.5, 31.7, 31.8 & 31.9

Yes

Sub-section 7(3) No

s 8 Certain supplies of goods or services deemed to be made or not made

31.12, 31.13 & 31.14

Yes

Sub-sections (2A) – (2G), (5), (5A), (5B), (6), (13), (13A), 14(b), (14A), (17) – (20), (22) – (24), (26) & (28)

No

s 8A Sharia-compliant financing arrangements No

s 9 Time of supply 31.15 Yes

Sub-sections (2)(d), (3)(e), (3)(f), (9), (10) & (11) No

s 10 Value of supply of goods or services 31.16 Yes

Sub-sections (4A), (8), (14), (17), (17A), (21A), (22B), (24), (25) & (27)

No

s 11 Zero-rating 31.10 Yes

s 11(1) Supply of exported goods 31.10.1 Yes

Sub-sections (1)(a)(ii), (b) - (d), (f), (g), (hA), (m), (mA), (n), (p), (r) - (v)

No

s 11(2) Supply of exported services 31.10.2 Yes

Sub-sections (2)(g), (h), (j), (m), (n), (q), (s), (t), (u), (v), (x), (y)

No

s 11(3) Principle 31.10.2 Yes

s 12 Exempt supplies 31.11 Yes

Sub-sections (b), (d), (e),(f), (k), (l) & (m) No

s 13 Collection of tax on importation of goods, determination of value thereof and exemptions from tax 31.8 Yes s 13(2B) – value will be provided

Sub-sections (5) & (6) No

s 14 Collection of VAT on imported services, determination of value thereof and exemptions from tax

31.9 Yes

Sub-section (4) No

s 15 Accounting basis 31.3 Yes

Sub-sections (2)(a), (2A), (3) – (9) No

s 16 Calculation of tax payable 31.2 & 31.17 Yes

(excluding broad area exclusions, e.g. prizes and gambling) No

s 17 Permissible deductions in respect of input tax 31.20 & 31.21 Yes

Sub-section (2)(ix) No

s 18 Change in use adjustments 31.12, 31.25 – 31.28

Yes

Excluding turnover tax provisions & s 18(4)(a), (4)(b), (9), & 18(10)

No

22 TAX4861/103/2021

Reference to the

VAT Act Topics

Reference to SILKE

Examinable

s 18A Adjustments in consequence of acquisition of going concern wholly or partly for purposes other than making taxable supplies

31.29 Yes

s 18B Temporary letting of residential fixed property No

s 18C Adjustments for leasehold improvements 31.30 Yes

s 19 Goods or services acquired before incorporation 31.32.1 Yes

s 20 Tax invoices 31.18 Yes

s 21 Credit and debit notes 31.19 Yes

s 22 Irrecoverable debts 31.31 Yes

s 23 Registration of persons making supplies in the course of enterprises

31.6 & 31.33 Yes

Sub-section (3)(b)(ii)(AA), (3A) & (5) No

s 24 Cancellation of registration 31.6 Yes

s 25 Vendor to notify change of status No

s 26 Liabilities not affected by person ceasing to be vendor 31.6.1 No

s 27 Tax period (category will be given) 31.4 Yes

Sub-section (2) – (5) No

s 28 Returns and payments of tax No

s 29 Special returns No

s 31 Assessments No

s 32 Objections to certain decisions or assessments Yes

s 38 Manner in which tax shall be paid No

s 39 Penalty for failure to pay tax when due No

s 40C Liability of bargaining councils or political parties for tax and limitations of refunds

No

s 40D Liability for tax and limitations of refunds in respect of National Housing Programmes

No

s 41 Liability for tax in respect of certain past supplies or importations

No

s 41B VAT class rulings and VAT rulings No

s 44 Refunds No

s 45 Interest on delayed refunds No

s 46 Persons acting in a representative capacity No

s 50 Separate enterprises, branches and divisions 31.6 Yes

Proviso to section 50(1) No

s 50A Separate persons carrying on same enterprise under certain circumstances deemed to be single person

31.6 Yes

s 51 Bodies of persons, corporate or unincorporated (other than companies)

No

s 52 Pooling arrangements No

s 53 Death of vendor Yes

Insolvency of vendor No

s 54 Agents (excluding auctioneers) (It will be clear from the information that there is an agent/principal relationship)

31.32.2 Yes

Intermediaries (s 54(2B)) 31.33 Yes

Sub-section (2A)(b) No

s 55 Records No

s 58 Offences No

s 61 Recovery of tax from recipient No

s 64 Prices deemed to include tax Yes

23 TAX4861/103/2021

Reference to the

VAT Act Topics

Reference to SILKE

Examinable

s 65 Prices advertised or quoted to include tax Yes

s 66 Rounding-off of the tax No

s 67 Contract price or consideration may be varied according to rate of VAT

No

s 67A Application of increased or reduced tax rate No

s 67B Registration of motor vehicles prohibited in certain circumstances

No

s 68 Tax relief allowable to certain diplomats and diplomatic and consular missions

No

s 72 Arrangements and directions to overcome difficulties, anomalies or incongruities

No

s 73 Schemes for obtaining undue tax benefits No

s 74 Schedules and regulations No

s 75 Tax agreements No

s 78 Transitional matters No

s 78A Transitional matters: Turnover tax No

s 85 Repeal of laws No

s 86 Act binding on State, and effect of certain exemptions from taxes

No

s 86A Provisions relating to special economic zones No

s 87 Short title No Schedules to the VAT Act 1 Exemption: Certain Goods Imported in the Republic No 2 Part A No 2 Part B: Zero rate: Supply of goods consisting of certain

foodstuffs 31.10.4 Yes

2 Part C: Section 11(1)(w) of this Act 31.10.4 Yes

Interpretation notes Silke par

Interpretation Notes will no longer be included in the SAICA Student Handbook, but to the extent that an Interpretation Note creates a practice generally prevailing (refer to section 5 of the Tax Administration Act), the relevant extract will be provided in the test or exam.

Interpretation Notes are available at: https://www.sars.gov.za/Legal/Interpretation-Rulings/Interpretation-Notes/Pages/Numbers_1-20.aspx Binding General Rulings (BGR) are available at: https://www.sars.gov.za/Legal/Interpretation-Rulings/Published-Binding-Rulings/Binding-General-Rulings/Pages/default.aspx

Interpretation note: No. 30 (Issue 3). Date: 5 May 2014 – The supply of moveable goods as contemplated in section 11(1)(a)(i) read with paragraph (a) of the definition of “exported” and the corresponding documentary proof (Section 1(1), par (a) of the definition of exported”, sections 11(a)(i) and 11(3))

31.10.1.1

Interpretation note: No. 31. (Issue 4) Date: 9 March 2016 – Documentary proof required for the zero-rating of goods and services (Section 11(3) read with section 11(1) and (2))

31.10.2 & 31.10.4

Interpretation note: No. 42. (Issue 2) Date: 12 December 2016 – The supply of goods and services by the travel and tourism industry (Section 7(1)(a), 11(1)(a) and 11(2)(l))

31.10.2.3 & 31.21.3

Interpretation Note No. 52 (Issue 3) Date: 10 March 2014 – Approval to end a tax period on a day other than the last day of a month

31.4

Interpretation note: No. 56. (Issue 2) Date 31 March 2014 – Recipient created tax invoices; credit and debit notes (Sections 20(2) and 21(4)). See BGR 15 (Issue 2)

31.18

https://www.sars.gov.za/Legal/Interpretation-Rulings/Interpretation-Notes/Pages/Numbers_1-20.aspx

https://www.sars.gov.za/Legal/Interpretation-Rulings/Interpretation-Notes/Pages/Numbers_1-20.aspx

https://www.sars.gov.za/Legal/Interpretation-Rulings/Published-Binding-Rulings/Binding-General-Rulings/Pages/default.aspx

https://www.sars.gov.za/Legal/Interpretation-Rulings/Published-Binding-Rulings/Binding-General-Rulings/Pages/default.aspx

24 TAX4861/103/2021

Interpretation notes Silke par

Interpretation note: No. 57. Date: 31 March 2010 – Sale of an enterprise or part thereof as a going concern (sections 8(7), 8(16), 11(1)(e) & 18A)

31.10.3.1 & 31.10.3.2

Interpretation note: No. 70. Date: 14 March 2013 – Supplies made for no consideration (sections 1(1) definition of ‘enterprise’, ‘taxable supply’ ‘input tax’ and ‘consideration’, (sections 10(4), 10(23))

31.16.7

Interpretation note: No. 82. Date: 26 March 2015 – Input tax on motor cars (sections 1(1), 17(2)(c) & 18)

31.21.3

Interpretation note: No. 83. (Issue 2) Date 9 April 2015 – Application of sections 20(7) and 21(5) (Sections 20(4), (5), (7), 21(1) and (5)). See BGR 27

31.18

Interpretation note: No. 85. Date: 27 March 2015 – The Master Currency case and the zero-rating of supplies made to non-residents (section 11(2)(l))

31.10.2.3

Interpretation note: No. 92. Date: 24 October 2016 – Documentary proof prescribed by the commissioner (Sections 16(2)(f) and 16(3)(c) to (n))

31.17 & 31.18

Interpretation note: No. 103. Date: 14 September 2018 – The Value-added tax treatment of supplies of international and ancillary transport services (Section 11(2)(a), (b), (c), (d) & (e))

31.10.2.1

3.4.3 Sections in SILKE you may ignore

When working through chapter 31 in SILKE, you may IGNORE all paragraphs of the text with shaded headings. The following broad area exclusions from the SAICA syllabus relates to VAT: Special Economic Zones; Custom Controlled Areas; Municipalities, municipal entities, welfare organisations and organisations not for gain; and Donor funded projects.

3.5 LAW AMENDMENTS The important proposed amendments which are applicable to this LU are summarised below. In some instances, we repeat amendments from previous years which were enacted for your convenience.

Relevant proposed amendments to the VAT Act contained in the Rates and Monetary Amounts and Amendment of Revenue Laws Bill 26 of 2020, the Taxation Laws Amendment Bill 27 of 2020 and the Tax Administration Laws Amendment Bill 28 of 2020 respectively, are as follows:

Amendment to proviso (ii) of section 22(3):

The amendment makes it clear that where goods or services acquired on credit and where the creditor is not paid within 12 months of the tax period in which the deduction (input tax claimed) was made, the vendor must account for output tax at the tax fraction at the rate applicable at the time of such deduction. This makes provision for changes in the VAT rate, i.e., when the VAT rate increased from 14% to 15% on 1 April 2018.

Effective date: on or after 1 April 2021

25 TAX4861/103/2021

Amendments to the VAT Act contained in the Rates and Monetary Amounts and Amendment of Revenue Laws Bill 17 of 2019, the Taxation Laws Amendment Bill 18 of 2019 and the Tax Administration Laws Amendment Bill 19 of 2019 respectively, are as follows:

Amendment of section 8(25) of the VAT Act: The supplying and recipient vendor are deemed to be one and the same person in respect of certain company reorganisation transactions. Sub-paragraph (iii) was added to section 8(25). This has the effect that a fixed property asset-for-share and intragroup transaction will now also be regarded as a non-event for VAT: Where a supplier (vendor A) disposes of fixed property to a recipient (vendor B) and the parties agree in writing that the supplier (vendor A) will lease the fixed property from the recipient (vendor B) immediately after the supply. This amendment comes into operation on 1 April 2020

Amendment of section 11(1)(w) and Schedule 2 of the VAT Act:

Paragraph (w) has been added to section 11(1). This paragraph stipulates that sanitary towels (pads) as set out in Part C of Schedule 2 are now exempt supplies.

Part C was added to Schedule 2 and lists the type of sanitary towels that are zero rated. This amendment is deemed to have come into operation on 1 April 2019

Amendment of section 24(1) of the VAT Act:

The section has been amended to now also include foreign electronic services providers. Therefore, a foreign electronic services provider shall cease to be liable to register where the total value of the vendor’s taxable supplies in the period 12 months commencing at the beginning of any tax period will not be more than R1 million.

This amendment is deemed to have come into operation on 1 April 2019.

3.6 ADDITIONAL NOTES

3.6.1 Mind map representing an overview of VAT

In order to provide you with an overview of VAT and as a useful study tool, we include a mind map of the output and input tax provisions in the VAT Act on the following page.

26 TAX4861/103/0/2021

Mind map with overview of VAT

Person carrying on an enterprise NO

Final consumer YES Supply goods and services

Exempt supplies (sections 12 and 2)

No output tax levied

Taxable supplies (sections 1 and 7)

Standard rated supplies (15%) (section 7(1)(a))

Zero-rated supplies (0%) (section 11)

OUTPUT TAX

(section 7(1)(a))

LESS

INPUT TAX (section 7(1)

& section 1)

AMOUNT DUE TO OR

BY SARS

Adjustments (sections 18(1), 18(2), 18A, 18B, 18C and 22(2)

– (3A))

Deemed supplies (sections 8 and 18(3))

Time and value of supplies (sections 9 and 10) Mixed supplies (section 17(1))

Apportionment Adjustments (sections 18(4), 18(5), 18(9), 16(3)(h), 22(1), 22(1A), 22(4), 22(6) and 22(7))

Imported goods and services (sections 7(1)(b), 13 & 14))

Input tax deduction denied (section 17(2))

Notional input tax – second-hand goods (also fixed property) (section 1, definition of “input tax”, sub-par (b))

27 TAX4861/103/2021

3.6.2 Mind map of the supply of goods and services – OUTPUT TAX

3.6.3 Services - SILKE par 31.5.3 The definition of services is very broad and the supply of services typically include (without being limited to) the following:

royalties – granting the right to use intellectual property, that is, patents, trademarks and copyrights

sale of intellectual property

assignment, waiver or abandonment of a right to someone else, including the right of legal action

acceptance of a restraint, including agreeing not to act or to act in a particular way

acceptance of damages or compensation, including the cancellation of agreements

provision of professional services, including construction, legal, accounting and other similar services

provision of facilities by clubs, churches, charities and other non-profit organisations Please note that this does not mean that all of the above services are taxable supplies; merely that they will constitute services for the purposes of the VAT Act. The exclusion of “money” from the definitions of “goods” and “services” means that no VAT implications will arise in respect of its supply. This is important because it means that when goods are purchased from a vendor, the initial supply of the item will attract VAT, whereas the subsequent payment will not attract VAT.

OUTPUT TAX

(section 7(1)(a))

Adjustments (sections 18(1), 18(2), 18A, 18B, 18C and 22(2)–(3A))

Time and value of supplies (sections 9 and 10)

Supply of goods and services by a

vendor

Exempt supplies (sections 12 and 2)

No output tax charged

Taxable supplies (sections 1 and 7)

Standard rated supplies (15%) (section 7(1)(a))

Zero-rated supplies (0%) (section 11)

Deemed supplies (sections 8 and 18(3))

28 TAX4861/103/2021

3.6.4 Exempt supplies: Other (including transport of fare-paying passengers and their personal effects by road or rail) - SILKE par 31.11.4

Study section 12(g). Note that where transport services were taxed at 0% (in terms of section 11(2)(a)), this will take preference over the exemption (if it is transport by road or rail; transport by aircraft or boat is in any case a taxable supply). The information below is summarised from VAT Practice Note 7/1992.

Practice Notes are available at: https://www.sars.gov.za/Legal/Interpretation-Rulings/Pages/Find-a-Practice-Note.aspx

For the exemption to apply, the following criteria must be met:

Passengers (travelling by road or rail) must pay a fare.

The supplier of the transport service must operate the vehicle himself (not a courier).

These two requirements will be discussed in more detail. Fare-paying passengers Where the operator of the vehicle (in which passengers are transported) charges a consideration for the service, the passengers will be regarded as fare-paying. The passengers themselves, or a third party, may pay a specified fare either on boarding the vehicle or on purchasing a ticket prior to travel. The exemption does not apply where passengers are not charged a fare. If, for example, a mine were to provide transport by road for its miners from their lodgings to the mine, the mine would be entitled to claim the input tax paid in connection with the supply. This is because it will not constitute an exempt supply, as the miners do not pay a fee. Operation of a transport business In order to qualify for the exemption, the supplier of the transport service must be the operator of the vehicle in which the passengers are transported. The supplier need not necessarily be the owner of the vehicle or even the employer of the driver but must be commercially responsible for the transporting of the passengers. Where the supplier of the vehicle does not operate it himself, but rents or hires it to a third party, who uses it for the transport of passengers, the exemption does not apply. The reason for this is that the supply constitutes the hire of the vehicle and not that of a transport service and is therefore standard rated. Should the supplier also provide the services of a driver, however, the supply will constitute an exempt supply in most cases, and not a standard-rated supply. Each situation must be judged on its own facts and the use of the words “hire” or “charter” in an agreement is not conclusive as to the nature of the transaction. The decisive factor in determining whether an exempt transport service or a taxable rental transaction is supplied will usually be to whom the driver is ultimately accountable. If the driver were accountable to the owner of the vehicle, an exempt transport service would be supplied in the absence of factors to the contrary. By contrast, if the driver were accountable to the recipient, the supply would be taxable in most instances. In practice, SARS interprets this provision in a broad manner.

https://www.sars.gov.za/Legal/Interpretation-Rulings/Pages/Find-a-Practice-Note.aspx

29 TAX4861/103/2021

Examples of exempt transport services

Scheduled commuter bus services, intercity bus services and tourist bus transport – The distance covered or duration of the service is irrelevant.

Ambulance services – This is transport of patients in an ambulance for a consideration.

Tour buses or trains – The transport of passengers by a tour operator, irrespective of whether a specific fee is charged for transport or whether it is incorporated into the total fee for the tour. In the latter case, the total fee will have to be apportioned between the taxable supplies and the exempt passenger transport service. If the fee is not apportioned, the full amount of the fee is subject to VAT at the standard rate.

Airport/hotel transfers – This involves the transport of patrons to and from an airport by a hotel or equivalent supplier, provided a specific fee is charged for the service. Where, however, the service is provided as a courtesy to patrons without a specific amount being charged, the hotel will not be regarded as supplying exempt passenger transport.

Transport of employees or pupils – This is the transport of employees or pupils on behalf of an employer or school, irrespective of whether the consideration charged by the operator is a fixed or variable amount based on the number of employees actually transported. This, however, does not include the case where the employer hires the vehicle and undertakes the transport of the employees himself, for no consideration.

Examples of taxable transport services (not exempt)

Passenger transport by air or sea

Courier services and the transportation of parcels by road, rail or sea

Game viewing excursions

Passenger transport, where no fare is charged, for example, where an employer provides transportation to and from the place of work to employees and no consideration is charged

Passenger transport, where the transport fee is incorporated into the total charge for a composite supply and the total charge is not apportioned between taxable and exempt supplies

Transport rental and hiring services, if the services of a driver are not included

Zero-rated transport services, for example, passenger transport by road or rail to an export country

3.6.5 Deemed supplies: Ceasing to be a vendor - SILKE par 31.12.1 If the delivery vehicle in SILKE example 31.16 (Mr Filemon Balewa) were used to make 40% taxable supplies, Filemon would only have claimed input tax on purchase of the delivery vehicle (assume purchase was on/after 1 April 2018) of R180 000 x 15/115 x 40% = R9 391. Filemon would still have to account for output tax, however, when ceasing to be a vendor on 100% of the lesser of cost (including VAT) (R180 000) or open market value (R118 000), although the asset was only used 40% for taxable purposes, due to section 8(16). Section 8(16) provides that, if a vendor acquires goods only partly for the making of taxable supplies and then subsequently supplies the goods, the vendor will be deemed to make a 100% taxable supply of the goods. In the SILKE example, the output tax payable would thus be (R118 000 – R3 000) x 15/115 = R15 000, but the vendor would be able to make an input tax adjustment for the exempt portion under section 16(3)(h). Therefore, R118 000 (lower of adjusted cost and open market value) x 15/115 x 60% = R9 235 input tax will be claimable. If a person (who ceases to be a vendor) disposes of any goods or rights after the cancellation of his/her registration (and thus after the deemed supply has been accounted for), the person will not carry on an enterprise for VAT purposes and no VAT will be due on the supply of the goods or rights. Where the assets, forming part of a vendor’s enterprise, are, prior to cessation of registration, distributed to shareholders as a dividend in specie, no VAT will be payable, as the supply will be made for no consideration. Should the recipient, however, be a connected person in respect of the vendor and not be entitled to a full input tax credit had VAT been payable, VAT will have to be levied on the open market value of the dividend in specie (i.e. the value of supply rule for connected persons). The distribution of assets by a person in the form of a dividend in specie subsequent to the cessation of registration has no

30 TAX4861/103/2021

VAT implication, as the supply has not been made in the course or furtherance of an enterprise, the enterprise having ceased. The supply will therefore not be a taxable supply. The general rules for deregistration (for VAT purposes) will not apply where a person ceases to be a vendor because of death or insolvency, provided the enterprise is thereafter continued by or on behalf of his/her executor or trustee.

A deemed disposal for VAT purposes arises when a person ceases to be a VAT vendor (section 8(2)). Output tax is calculated by multiplying the lesser of the cost (including VAT) and the open market value by the tax fraction. However, section 8(2)(v) provides that this shall not apply to assets where output tax has already been accounted for in terms of section 22(3). In terms of section 22(3), when ceasing to be a vendor, outstanding creditor balances, on which input tax were claimed, are treated as follows:

Outstanding for longer than 12 months: No adjustment for VAT on these balances is made when ceasing to be a vendor, since section 22(3) stipulates that a VAT vendor be required to account for output tax if he/she has not paid the full consideration for a supply within 12 months. This liability for output tax is therefore due to the non-payment of the creditor for 12 months and not because of the cessation of the enterprise. However, if the vendor has not yet accounted for the output tax on cessation, the adjustment should be made at that time.

Outstanding for less than 12 months: At the date of the cessation of the enterprise, output tax is payable on outstanding creditor balances that are not older than 12 months. The value of these supplies is the outstanding balance of the creditor (section 22(3) (proviso (ii)(bb)).

31 TAX4861/103/2021

3.6.6 Time and value of supply - SILKE par 31.15 and 31.16 The word “value” used in section 10 is confusing as the amount actually described in section 10 is “consideration”. It is important to understand the difference between value and consideration. Value excludes VAT. Consideration includes VAT. As the amount described in section 10 is actually consideration, the amount given in the table below should be multiplied by 15/115 in order to obtain the VAT amount.

We provide you with a concise summary of the Time and Value of supply rules below. Note that a separate table is provided later in this learning unit for the time and value of supply adjustments (sections 18, 18Aand 18C).

Supply Time Amount of the consideration

General rule Invoice basis The earlier of

the date an invoice is issued, or

the time of payment / consideration received by the supplier

(section 9(1)) Payment basis The time of payment / consideration received by the supplier (To claim an input tax deduction, the vendor must be in possession of a valid tax invoice – see SILKE 31.18)

Consideration = Value + VAT, or

Value = Consideration – VAT Consideration will be

consideration in money = money value

consideration not in money = open market value (section 10(2) & (3))

32 TAX4861/103/2021


Connected persons Goods removed – time of removal Goods not removed – time made available to recipient Services – time services performed If payment is received or an invoice is issued before the day on which a return is submitted for the tax period in which goods were removed, made available or services performed, the general rule (section 9(1)) will apply (section 9(2)(a)) If the recipient vendor would have been entitled to make a deduction of the full input tax in respect of that supply and the consideration cannot be determined at the time the supply is deemed to be made the general rule (section 9(1)) will apply and not section 9(2)(a).

Open market value if a supply is made by a vendor for no consideration or for a consideration less than open market value or if the whole of the consideration cannot be determined at the time of the supply and the recipient would not have been able to claim the full input tax deduction (fringe benefits excluded) (section 10(4)) (The recipient will not be able to claim a full input tax deduction if the recipient is not a vendor or if the recipient is a vendor but does not make 100% taxable supplies.)

Fringe benefits (included in gross income (par (i) of the definition), read with the Seventh Schedule excluding: - exempt supplies - zero rated supplies - entertainment

The time at which the benefits become liable to employees’ tax in terms of the Income Tax Act (it is the month in which employees’ tax is payable on the benefit or the month that it is included as part of remuneration) (section 9(7))

The cash equivalent (which excludes finance charges and VAT) of the benefit, for normal tax purposes, except were the benefit is the right of use of a motor vehicle. Then: if input tax deduction was denied: 0.3% of determined value (excluding VAT) of motor vehicle per month if input tax deduction was not denied: 0.6% of determined value (excluding VAT) of motor vehicle per month (Refer to SILKE 31.12.4.2 for additional information.) (section 10(13) and Government Gazette 22 Nov 1991)

Game viewing vehicle or hearse, where input was claimed on conversion and then supplied or used for another purpose (section 8(14)(b) or 8(14A))

When supplied or utilised for another purpose (section 9(10))

Consideration in money equal to the open market value (section 10(24))

33 TAX4861/103/2021


Credit agreements Day after the last day at which the recipient may exercise his right to terminate the agreement (after cool-off period of 5 days) (section 9(2)(b))

General rule (section 10(2) & (3))

Instalment credit agreement (suspensive sale agreement and a lease)

Earlier of

time of delivery, or

time of payment received (section 9(3)(c))

Cash value, as defined in section 1 (including VAT and excluding finance cost) (section 10(6))

Rental agreement or services supplied under any agreement which provides for periodic payments

Deemed successive supplies Each successive supply deemed to take place at the earliest of when

payment becomes due, or

payment is received (section (9(3)(a))


Goods supplied progressively or periodically or directly in the construction, repair, improvement, erection or manufacture under any agree-ment where consideration is paid in instalments or pe-riodically

Deemed successive supplies Each successive supply deemed to take place at the earliest of whenever

any payment in respect of any supply becomes due and is received, or

any invoice relating only to that payment is issued

(section (9(3)(b))


Instalment credit agreements, repossessions and surrender of goods

Day at which goods are repossessed or surrendered (section 9(8))

Cash value of outstanding debts on goods repossessed or surrendered (excluding finance cost) (section 10(16))

Goods supplied under an agreement other than an instal-ment credit agreement or rental agreement and consideration is contingent on a future event

Deemed successive supplies – Each successive supply deemed to take place at the earliest of when

any payment in respect of the supply is due or received and claim to the extent that any payment has been made, or

an invoice relating to the supply is issued (section (9(4)(a))


34 TAX4861/103/2021


Services supplied under an agreement and consideration is contingent on future event

Deemed successive supplies – Each successive supply deemed to take place at the earliest of when

any payment in respect of the supply is due or received and claim to the extent that any payment has been made, or

an invoice relating to the supply is issued (section (9(4)(b))


Supplies to foreign branches Date at which goods are delivered to independent branch, or service is performed (section 9(2)(e))

Lesser of

cost to vendor (including VAT) of acquisition, manufacture, assembly, construction or production, or

open market value of supply (section 10(5))

Ceases to be a vendor Immediately before the person ceased to be a vendor (sections 8(2) and 9(5))

Lesser of

cost to vendor (including VAT) of acquisition, manufacture, assembly, construction or production of goods or services, or

open market value of supply (section 10(5))

Indemnity payments The date of receipt of payment by the vendor or date paid to another person (section 8(8))

Apply the tax fraction to consideration received in money (section 8(8))

Second-hand goods acquired from a vendor (excluding fixed property)

General rule (section 9(1))


Notional input tax in respect of second-hand goods (excluding fixed property) situated in the Republic of South Africa and acquired from a non-vendor

Claim to the extent that payment has been made (section 16(3)(a)(ii)(aa) & 16(3)(b)(i))

The lesser of

consideration in money, or

open market value (irrespective of whether the supply takes place at arm’s length or between connected persons) (section 1 – definition of input tax, sub-paragraph b(i))

35 TAX4861/103/2021


Export of second-hand goods where a notional input tax had been claimed


Consideration limited to the purchase price of the goods to the exporter. Note that the purchase price is not reduced by the notional input tax which has been claimed (section 10(12))

Imports of goods Vendors registered on the invoice or payment basis can only claim the input tax once the imported goods are released in terms of the Customs and Excise Act (thus, no longer at the date of payment). (sections 16(3)(a)(iv) and 16(3)(b)(ii)) VAT charged and collected by Customs and Excise at designated border post (point of entry into the RSA. (section 13(1))

Imports of goods from BLNS countries for home consumption Value for customs duty purposes Imports from other countries for local consumption Value for customs duty purposes Plus: 10% of value for customs duty purposes Plus: Any duty levied in terms of the Customs and Excise Act These amounts are the only ones in this table which represent "VALUE" and not "CONSIDERATION" and they should therefore be multiplied by 15% to get the VAT amount (section 13(2))

Imported services (Services supplied by a director are excluded, as they entail remuneration and are not a supply.)

The imported service is deemed to take place at the earlier of

the date at which an invoice is issued, or

when payment is made The recipient must declare the imported service and pay the VAT to the Commissioner within 30 days of the receipt of the imported service. (section 14(2)) Note that VAT is only payable on imported services if the imported service is made to a resident of RSA and only to the extent that such services are utilised or consumed otherwise than for the making of taxable supplies. No VAT is payable on exempt or zero-rated supplies or supplies where the value does not exceed R100 per invoice.

The greater of

the value of the consideration, or

open market value (section 14(3))

36 TAX4861/103/2021


Fixed property acquired from a vendor

The earlier of the

date of registration in the deeds office, or

date of any payment for supply (section 9(3)(d))

General rule (section 10(2) & (3)) (Input tax should only be accounted for to the extent that payment of the consideration has been made or received. (section 16(3)(a)(iiA)) (Note: Output tax of the seller will also be limited to the extent of payment received (section 16(4)(a)(ii)).)

Fixed property (second-hand goods) acquired from a non-vendor

The earlier of the

date of registration in the deeds office, or

date of any payment for supply (section 9(3)(d))

Claim notional input tax by applying a tax fraction to the lesser of

consideration given in money, or

open market value x % taxable supplies (section 1 – definition of input tax, sub-paragraph (b)) However, notional input tax may only be claimed once the fixed property has been registered in the name of the vendor and it is then limited to the extent of payment of the purchase consideration. (section 16(3)(a)(ii)(aa) read with section 16(3)(a)(ii)(bb)(A))

Commercial accommodation (Refer to SILKE par 31.11.3)


Domestic goods and services supplied at an all-inclusive charge for an unbroken period exceeding 28 days attract VAT at 15% on 60% of the value of the supply. If the period is not more than 28 days, VAT is payable at 15% on the full value (100%). Domestic goods and services or other goods and services not included in the all-inclusive charge will attract VAT at 15% on the full value (100%) of the supply (section 10(10)).

Entertainment General rule (section 9(1))

Where a vendor makes any supply of entertainment and an input tax deduction was denied in terms of section 17(2), the value of such supply shall be deemed nil. (section 10(21))

Nil-value supplies General rule (section 9(1))

Where any supply is made for no consideration, the value of that supply shall be deemed nil. (section 10(23))

37 TAX4861/103/2021


Excess payments received and not refunded within four months of receipt (section 8(27))

Deemed to be the last day of the tax period during which the four-month period ends. (section 8(27))

Output tax payable: Excess portion x 15/115 (section 10(26)) Note: If the excess payment is refunded at a date after the output tax has been accounted for, the vendor will become entitled to claim an additional input tax credit in the tax period refunded. (section 16(3)(m))

Leasehold improvements (section 8(29))

On the date of completion of the leasehold improvements. (section 9(12))

The value is deemed to be nil. (section 10(28))

Prizes or winnings on betting transactions

The tax period in which the prize or winnings are paid out

The input tax claimable will be an amount equal to 15/115 x any amount paid as a prize or winnings. Note: If, however, the prize or winnings constitute goods or services, the input tax must be limited to the tax initially incurred when acquiring the goods or services. (section 16(3)(d) and 10(17))

38 TAX4861/103/2021

3.6.7 Basics of input tax - SILKE par 31.17

Framework for input tax References to the VAT

Act

NO

WAS A VENDOR CHARGED VAT ON THE SUPPLY OF GOODS OR SERVICES BY A SUPPLIER?

Section 1

YES

NO

WILL THE GOODS OR SERVICES BE CONSUMED, USED OR SUPPLIED IN THE COURSE OF MAKING TAXABLE SUPPLIES?

Section 17(1)

YES

YES

IS THE DEDUCTION OF THE INPUT TAX DENIED?

Section 17(2)

NO

WILL THE GOODS OR SERVICES BE CONSUMED, USED OR SUPPLIED 100% IN THE COURSE OF MAKING TAXABLE SUPPLIES?

Section 17(1)

NO

YES

DETERMINE THE PORTION OF USE IN THE COURSE OF MAKING TAXABLE SUPPLIES.

IS ITS INTENDED USE TO MAKE TAXABLE SUPPLIES 95% OR MORE?

Section 17(1)(i)

YES

NO

NO AMOUNT OF INPUT TAX MAY BE CLAIMED.

APPORTION AND CLAIM ONLY THE AMOUNT OF INPUT TAX THAT RELATES TO INTENDED TAXABLE USE.

CLAIM FULL AMOUNT OF INPUT TAX.

39 TAX4861/103/2021

3.6.8 Input tax: Denial of input tax - SILKE par 31.21

Goods or services acquired by a vendor for purposes of entertainment The following is a list of goods or services, which would be classified as being acquired for the purposes of entertainment (and therefore, an input tax deduction will be denied), provided the vendor is not in the business supplying entertainment (i.e., restaurant):

staff refreshments such as tea, coffee, other beverages and snacks and the utensils related thereto (e.g., cups, teapots, water coolers, etc.)

food and other ingredients purchased in order to provide meals to staff, clients and business associates

catering services acquired for staff canteens and dining rooms

equipment and utensils used in the kitchen

furniture and other equipment and utensils used in the canteen, staff room and dining rooms

Christmas lunches and parties, including the hire of venues

golf days for customers and clients

entertainment of customers and clients in restaurants, theatres and night clubs

An input tax deduction is allowed for all entertainment (as opposed to only meals or refreshments) supplied by a vendor on board of a ship or an aircraft (input tax will not be denied) if it is ancillary to the travel, supplied at no additional charge and the supply of the transport service is a taxable supply (refer to section 17(2)(a)(iii)).

Motor cars (section 17(2)(c))

The following interpretation note is available and provides more detailed guidance and examples with regards to the input tax on motor cars:

Interpretation Note 82 - Input tax on motor

When a motor car is rented it will constitute the supply of a motor car to the vendor and therefore the vendor will be denied an input tax deduction in respect of the rental of the motor car. Therefore, if a vehicle is rented at an airport for a short period for business travel purposes, it is still regarded as the supply of a motor car and input tax will be denied, even though the motor car is used for enterprise purposes. Medical or dental schemes (section 17(2)(d))

This is an additional category, not mentioned in the prescribed textbook, where an input tax deduction will be denied. Medical-aid societies may not charge VAT on any medical or dental goods or services supplied by them and they will not be entitled to claim any input tax in respect of any medical or dental goods or services acquired by them.

Usually, if an input tax deduction in respect of the acquisition by the vendor of goods was denied in terms of section 17(2), the vendor will not have to account for output tax on a subsequent supply of these goods. The one exception to this rule is the supply of the right of use of an asset, as contemplated in paragraph (2)(b) of the Seventh Schedule to the Income Tax Act, which will constitute a supply for VAT purposes (for example, the right of use of a motor car).

40 TAX4861/103/2021

3.6.9 Input tax: Importation of goods - SILKE par 31.8

Take note that, although these sections are treated under output tax in SILKE, it is a tax charged on the products, which is payable by the vendor. It is therefore rather part of input tax (being paid and claimed back by the vendor) and not as output tax.

The following is an example of the VAT payable on the importation of goods:

OPTION A

Entered other than from BLNS countries and entered for

home (domestic) consumption

OPTION B Entered from BLNS

countries

R R

Customs value 100 100

Add-on (10% of customs value) 10 Nil

Customs/ import duties 10 Nil

120 100

VAT 15% x R120 = R18 15% x R100 = R15

3.6.10 Special rules: fixed property - SILKE par 31.24 Chapter 31.24 summarises the situation where fixed property is bought as a taxable supply (VAT is charged). Chapter 31.24, however, also refers to a situation where fixed property is bought from a non-vendor (therefore, not a taxable supply – transfer duty is payable), but the purchaser is a registered vendor. The following illustration summarises the consequences if transfer duty is payable:

41 TAX4861/103/2021

Fixed property transactions where transfer duty is payable

Is the supply in respect of fixed property?

YES

Should the supplier charge VAT?

(Is the supplier a VAT vendor?)

YES NO

Refer to SILKE par 31.24.2 and 31.24.3.1

Transfer duty is payable by the purchaser based on the purchase price

Is the purchaser a registered vendor?

YES NO

Will the purchaser be using the fixed property, either wholly or

partially for purposes of making taxable supplies?

May not claim any input tax

YES NO

• The notional input tax, which the vendor may claim, is not limited to the transfer duty payable on

the property. It will be calculated as 15/115 x the lesser of cost or open market value of the fixed property (definition of “input tax” in section 1).

• The time of supply will be the earlier of any payment or date of registration of the property. Note,

however, that the notional input tax will only be claimable to the extent that payment has been made of the purchase consideration and then only if the fixed property has already been registered in the name of the vendor when the deduction of the notional input tax is made (section 16(3)(a)(ii)(aa), read together with section 16(3)(a)(ii)(bb)(A)).

42 TAX4861/103/2021

REMEMBER The purpose for which the fixed property is acquired determines whether input tax or notional input tax can be claimed on the acquisition of the property. If the property is acquired for the supply of residential accommodation under an agreement for the letting and hiring thereof (including residential accommodation for the employees, directors or shareholders of the company free of charge or at a rent charged to other tenants), no input tax can be claimed on the acquisition of the property as it was acquired to make exempt supplies (non-taxable supplies). If the property is acquired for the sale thereof or used for taxable enterprise activities, input tax will be deductible as the property was acquired for the making of taxable supplies. If the property was acquired to make exempt supplies and it is thereafter supplied (sold), no output tax will be levied on the supply as the supply is that of property that was used to make exempt supplies and exempt supplies are excluded from the definition of an enterprise. If the property was acquired to be sold, it will be a taxable supply and output tax will be levied on the supply.

3.6.11 Adjustments arising from the change in the use of goods or services or supplies of going concerns or leasehold improvements - SILKE par 31.25 to 31.31

Below is a summary of the adjustments to input or output tax due to: - a change in the use of goods or services; - a supply of a going concern; or - the completion of leasehold improvements.

The table will provide you with a reference to a relevant example for the application of that specific section.

43 TAX4861/103/2021

ADJUSTMENTS TO OUTPUT TAX DUE TO CHANGE IN USE / SUPPLY OF A GOING CONCERN / LEASEHOLD IMPROVEMENTS

Section Time Calculation

Section 18(1) (100% or less taxable 0% taxable) Goods and services acquired wholly or partially for taxable supplies subsequently applied wholly for private, exempt or non-taxable supplies or for purposes where an input tax would be denied (Example in SILKE 31.25)

The time the goods are so applied

(section 9(6))

15/115 x open market value

(section 10(7) or 10(8))

Section 18(2)

(Capital goods taxable supplies, for example, 60%→ 40%) Reduction in the use of capital goods or services in the making of taxable supplies (Examples in SILKE 31.27)

The adjustment must be made on the last day of the year of assessment or on the last day of February, if not a tax-payer for income tax purposes

(section 18(6))

15/115 x the lesser of

adjusted cost (including VAT), or

open market value on the last day of the year of assessment

(section 10(9)) x reduction in % taxable use (No adjustment is required if the cost of the asset [excluding VAT] is less than R40 000, or if the decrease in apportionment ratio is 10% or less.)

Section 18(3)

(Fringe benefits) Vendor supplies an employee or office holder with a fringe benefit as contemplated in paragraph (i) of the gross income definition, read together with the Seventh Schedule to the Income Tax Act. (This section does not apply if the supply is an exempt or zero-rated supply or if it is the supply of entertainment) (Examples in SILKE par 31.12.4)

The time at which the benefits are included as part of the employee’s remuneration (section 9(7))

15/115 x the cash equivalent of the benefit for normal tax purposes, except were the benefit is the right of use of a motor vehicle (section 10(13))

44 TAX4861/103/2021

ADJUSTMENTS TO OUTPUT TAX DUE TO CHANGE IN USE / SUPPLY OF A GOING CONCERN / LEASEHOLD IMPROVEMENTS


Section 18A The purchaser acquires an enterprise as a going con-cern (zero rated) wholly or partly for non-taxable supplies. (No adjustment if taxable supplies 95% or more) (Example in SILKE par 31.29)

The tax period in which the enterprise was supplied to the purchaser

(section 18A(3))

The part of the total cost to the vendor of acquiring the enterprise that is attributable to the intended non-taxable use (excluding any portion of the cost for which an input tax would have been denied in terms of section 17(2)) x 15%

(section 18A(2))

Section 18C

Lessor is deemed to have made a taxable supply where input tax would have been denied or to the extent that the goods were used to make exempt supplies, at the time of the completion of the improvements by the lessee.

When the leasehold improvements are completed.

(section 9(12))

Adjustment to output tax in accordance with the formula: A x B x C. Where A = the tax fraction, B = the amount of the improvements as stipulated in the agreement or if no amount is stipulated, then the open market value of the improvements; and C = the percentage of supplies made other than taxable supplies (e.g. exempt supplies).

45 TAX4861/103/2021

ADJUSTMENTS TO INPUT TAX DUE TO CHANGE IN USE


Section 18(4) (100% non-taxable 100% or less taxable supplies) Goods or services acquired for non-taxable purposes are subsequently wholly or partly applied for making taxable supplies (including second-hand goods where no notional input tax was claimed initially). (Example in SILKE 31.26) (Note that section 18(4) will also apply when a non-vendor becomes a vendor.)

The tax period in which the change takes place

15/115 x lesser of adjusted cost (including VAT), or open market value at conversion date

(section 18(4) & 10(4)) x % taxable use x (in the case of second-hand goods) the ratio that the amount paid bears to the total consideration in money, expressed as a percentage (95% or more taxable use deemed to be 100% taxable use)

Section 18(5)

(Capital goods taxable supplies, for example, 40% 60%) Increase in the taxable use of capital goods or services (Examples included in SILKE 31.27)

The adjustment must be made on the last day of the year of assessment or on the last day of February, if not a taxpayer for income tax purposes

(section 18(6))


adjusted cost (including VAT), or

open market value on the last day of the year of assessment

(section 18(5) & 10(4)) x increase in % taxable use (No adjustment is required if the cost of the asset [ex-cluding VAT] is less than R40 000, or the increase in apportionment ratio is 10% or less.)

Section 18(9)

(Input tax denied on purchase or import of a motor car converted to a game-viewing vehicle or a hearse) Motor car where input tax was denied in terms of section 17(2)(c) on acquisition or importation and subsequently converted to a game-viewing vehicle or hearse (Example in SILKE 31.28)

The tax period in which conversion takes place

(section 18(9))


open market value, or

adjusted cost inclusive of VAT of the motor car on the day before that conversion took place (section 18(9))

Section 16(3)(h)

(Less than 100% taxable supplies supplied or 100% non-taxable supplies) Goods or services acquired partly for making taxable supplies, subsequently supplied by a vendor or applied wholly for non-taxable purposes (Example in SILKE 31.25)

The date at which the goods are deemed to be supplied

(section 9(6))

15/115 x the lesser of open market value, or adjusted cost inclusive of VAT

(section 16(3)(h)) x percentage use for non-taxable purposes for period before the adjustment

46 TAX4861/103/2021

Refer to the definition of “adjusted cost” in section 1 of the VAT Act. It is defined to include VAT, i.e., it is the cost price where VAT has been charged or would have been charged if VAT was applicable at the time of the supply of the goods or services.

In comparing the open market value with the adjusted cost of an asset, the question arises whether the “adjusted cost” includes VAT at 14% if the asset was purchased at 14%, or at 15%. Although the VAT Act is not explicit in this regard, SARS’ guidance with regard to change in use adjustments is that the VAT rate applicable at the date of the time of supply in terms of the change in use, must be applied. Thus, if goods were purchased before 1 April 2018 and there is a subsequent change in use after 1 April 2018, the adjusted cost will include VAT at a rate of 15%. One will thus compare the adjusted cost that includes VAT at 15% with the open market value that also includes VAT at 15%.

Refer to the value of supply rule in section 10(5) that determines that the supply shall be deemed to be made for a consideration in money that equals the lesser of cost to the vendor (including VAT) of acquisition, manufacture, assembly, construction or production of goods or services, or the open market value of the supply (refer to para 3.6.8 and 3.6.11 of this tutorial letter). We are of the opinion that, for the purposes of comparability, the VAT to be included in the calculation of cost to the vendor, must equal the VAT that is included in the open market value. Therefore, where the open market value includes VAT at 15%, VAT at 15% must be included in the cost to determine the value of the deemed supplies (i.e., supplies to foreign branches and ceasing to be a vendor).

47 TAX4861/103/2021

3.7 OUTCOMES OF THE BEANCOUNTER SCENARIO

Read the Beancounter scenario again and make a rough summary of what your solution would be now that you have studied donations tax. You should be able to answer Barry Beancounter’s query on donations tax. Share your solution on the myUnisa discussion forum, then refer to the outcomes (solution) that will be made available on Friday of your study week on myUnisa. After you have studied this learning unit, you should be able to answer Bizzie Beancounter’s queries.

You should now write down all the VAT implications relating to the Beancounter scenario. You need not provide detailed references to specific sections, but rather just a list of all the different provisions, which will have an effect on Bizzie Beancounter in starting her new dry-cleaning business.

3.8 SUMMARY OF LU 3

This learning unit introduced you to the content in the Value-Added Tax Act and the relevant law amendments. The table of reference under 3.4.2 was provided to guide you through the work. A framework for determining and calculating VAT, as well as a summary of the time and value of supply, was provided to assist you in analysing VAT related scenarios. Remember to look at the additional resources available for this learning unit on myUnisa and YouTube. Ensure that you do not study VAT in isolation and that you consider the impact of VAT on all applicable transactions. Now you are ready to apply your VAT knowledge by doing the questions in Sections B and C of this tutorial letter.

3.9 LIST OF REFERENCES OF LU 3 Parsons, et al. 2020. Advanced Questions on SA Tax 6th edition (2021). Cape Town, Juta.

SAICA. 2020. SAICA Student Handbook 2019/2020 Volume 3, Durban, LexisNexis.

Stiglingh, et al. 2020. ‘Chapter 31: Value-added tax (VAT)’, Silke: South African Income Tax 2021, Durban, LexisNexis.

___________________________

END OF LEARNING UNIT 3

48 TAX4861/103/2021

WORK PLAN FOR DAYS 6 - 7 (01 – 02 MARCH 2021)

SECTION B – SELF-ASSESSMENT QUESTIONS

PURPOSE STATEMENT AND OUTCOMES:

In SECTION B, you will find self-assessment questions, for you to attempt and mark yourself. Use the questions to assess your own knowledge, competencies and take responsibility for your own learning experience. The questions will also assist you to identify shortcomings in your knowledge and also serve as a measure of your understanding.

Two days (6 hours) have been allocated to work through Section B. However, for your benefit we have provided you with more questions. Furthermore, a few additional questions will be uploaded on myUnisa, during the revision week before the test.

QUESTION AQSAT CONTENT MARKS/ TIME

1 10.2

Donations tax (given that the following values apply):

the value of the annuity in note 1 = R523 358

the value of the annuity in note 2 = R130 840

(assume that this annuity is in excess of the

maintenance payments in note 1)

the value of the usufruct in note 4 = R2 518 662

Assume that all the donations were made in the 2021

year of assessment

8/12

2 16.26 VAT (calculation and discussion) (Types of supply, timing, VAT registration)

26/39

3 16.27 VAT (discussion on registration and calculation) (Types of supply, deemed supplies, connected persons)

17/26

4 16.28 VAT (discussion on purchase of property and calculation) (Types of supply, deemed supplies, instalment credit agreements, connected persons) (Where not specifically stated, all amounts include VAT.)

22/33

49 TAX4861/103/2021


5 16.29 VAT (discussion) (registration issues) (All persons mentioned in question are RSA residents. Assume that the transactions took place in the 2021 year of assessment.)

17/22

6 13.9 VAT (discussion and calculation) (Types of supply, connected persons, instalment credit agreement, imports)

30/45

7 16.30 VAT (discussion and calculation) (Sale of going concern)

23/35

8 16.31 (only case 1)

VAT (calculation) (Apportionment of input) (Calculate apportionment – note that % income from office rental in relation to % income from rental of flats and houses is constant)

15/22

9 13.4 VAT (calculation) (fringe benefits) Assume Bigsky purchases only from other vendors.

16/24

10 provided VAT (discussion) (zero rated, exempt and standard rated supplies, registration and deregistration requirements)

40/60

11 provided VAT (calculation and discussion) (purchase of motor car; fringe benefit; indemnity payment, travel, entertainment, second-hand goods, commercial accommodation and registration requirements) Donations Tax (calculation and discussion)

40/60

Total marks / time

254 marks (6.4 hours)

Additional questions


12 provided Donations Tax (calculation) VAT (calculation and discussion) (second-hand goods, services rendered, entertainment, subsistence allowance, commercial accommodation)

14/21

13 provided VAT (calculation) (second-hand goods, purchase of property, time of supply and fringe benefits)

20/30

14 provided Donations Tax (discussion) VAT (calculation) (deregistration, travel, debtors and creditors)

20/30

50 TAX4861/103/2021

15 provided VAT (discussion and calculation) (commercial accommodation, time value of supplies, deregistration, purchase of going concern, deemed supplies, overpayment)

30/45

16 provided VAT (Types of supply and timing)

20/30

17 Provided VAT - Test 1/2018 (extract) VAT (calculation) (Apportionment of input)

20/30

18 Provided VAT & Donations Tax – Test 1/2019 (extract) VAT (calculation & discussion) Donations tax (calculation)

20/30

1. In terms of the definition of “open market value” in section 1(1) of the VAT Act, open market value always includes VAT. Therefore, even if the question states that all amounts exclude VAT the open market value will always include VAT as open market value is defined in the VAT Act.

2. The amounts in the Trial Balance, Statement of Profit and Loss and Other Income (Income Statement) and Statement of Financial Position (Balance Sheet) of a vendor always exclude VAT in respect of items on which output tax was levied or in respect of items on which input tax was paid and could be claimed.

3. With the recent amendment to the donations tax rate from 20% to 25% in the instance where a donation is made and the aggregate value of that donation and any other value of taxable donations exceed R30 million, the information in a test or an exam will contain the necessary information to determine whether the higher donations tax rate of 25% applies. If no such information is given, the assumption is that the aggregate value does not exceed R30 million and therefore the 20% donations tax rate is applicable.

In the questions contained in this tutorial letter the assumption is that the aggregate value of donations made, does not exceed R30 million. However, please take note that either of the rates can be tested in a test or the exam.

4. The following assumptions are made unless specifically stated or implied otherwise:

All transactions are between VAT vendors and non-connected persons

Vendors make only taxable supplies and are registered on the invoice basis

51 TAX4861/103/2021

QUESTION 1 - SOLUTION (AQSAT 10.2) 8 marks John Grove

Donation

Value R

Exemption R

Taxable Donation

R

Donations Tax @ 20%

(s 64) R

1) R8 000 annuity to sister (s 62(1)(b)) 523 358 (523 358) - - (1)

Exemption is under section 56(2)(c) (the annuity qualifies as bona fide maintenance payments)

2) Further annuity – not for maintenance;

therefore (s 62(1)(b)) exemption under section 56(2)(b) relating to the R100 000 exemption permitted to each taxpayer annually 130 840 (100 000) 30 840 6 168 (2)

Note: the assumption is that this amount is in excess of the sister's maintenance requirements

3) Proceeds from sale of shares – donated

portion 100 000 (100 000) - - (1)

As this donation arises from proceeds from the sale of a foreign asset inherited from a non-resident, the amount is exempt under section 56(1)(g)(iii)

4) Usufruct in farm to nephew (s 62(1)(a))

(R100 000 exemption ito section 56(2)(b) already used) 2 518 662 - 2 518 662 503 732 (1)

5) Donation exempt in terms of

section 56(1)(d) – no donation had taken place as the donee has not enjoyed any benefit – not to be confused with donation in contemplation of death, donatio mortis causa (section 56(1)(c)).

1 500 000 (1 500 000) - - (1)

Note: The donee (Joe) will not obtain any benefit under the donation until the death of the donor (John). The deciding factor here is not the anticipation of death. Rather, the donor merely undertakes to donate an asset to the donee upon the donor's death. When John dies, the farm will be included in John's deceased estate (for estate duty purposes) and then transferred to Joe as the heir, it is therefore not subject to donations tax.

6) Gifts 10 000 - 10 000 2 000 (1)

Do not confuse the R10 000 exemption granted to non-natural persons (s 56(2)(a)) with the R100 000 exemption to natural persons (s 56(2)(b)) R100 000 already uti-lised.

7) Public Benefit Organisation 10 000 (10 000) - - (1)

Exemption under section 56(1)(h) that refers to section 10(1)(cN) which in turn refers to section 30 (relating to public benefit organisations)

Total donations tax 511 900 8

Note: As donations tax is payable by the end of the month following the month in which the donation was made, donations tax should be calculated separately and chronologically for each donation made.

52 TAX4861/103/2021

QUESTION 2 – AQSAT 16.26 26 marks Solution to question 16.26 in AQSAT is provided in AQSAT and therefore not reproduced in this tutorial letter. QUESTION 3 – AQSAT 16.27 17 marks Solution to question 16.27 in AQSAT is provided in AQSAT and therefore not reproduced in this tutorial letter. QUESTION 4 – AQSAT 16.28 22 marks Solution to question 16.28 in AQSAT is provided in AQSAT and therefore not reproduced in this tutorial letter. QUESTION 5 – SUGGESTED SOLUTION (AQSAT 16.29) 17 marks

1. NO John is making a supply, but he does not sell used cars on a regular or continuous basis,

i.e. he is not carrying on an enterprise (see definition, Section 1). The fact that he made a profit is not relevant. (Section 23(1)) (2)

2. NO Mary does not have to register in terms of s 23(1)(a) until her commission exceeds R1 million in a period of 12 months. She also does not have to register in terms of s 23(1)(b) as she does not have taxable supplies in terms of a contractual obligation exceeding R1 million in writing for the coming period of 12 months. Mary may, however, apply for voluntary registration if she so desires. This decision would depend on various considerations, inter alia, whether a considerable amount of her inputs attract VAT and whether her customers are VAT registered. (2)

3. NO Mike does not have to register. Although total taxable supplies will exceed R1 million (R900 000 + R200 000), R200 000 was as a result of an abnormal circumstance of a temporary nature. Mike can, however, apply for voluntary registration if he so desires. This decision would depend on various considerations, inter alia, whether a considerable amount of his inputs attract VAT and whether his customers are registered for VAT. (Section 23(1)) For clients who are non-vendors, it would be beneficial if he does not register, as they will receive the service for 15% less.

(2) 4. NO Only the company as a whole may register, as the taxable supplies for a 12-month

period exceeds R1 million. (Section 23(1) and s 50(1) and (2)). Even though the restaurants operate separately from one another, schedules of income and expenditure do not represent sufficient independent accounting systems for each restaurant to be registered separately. (2)

5. a) It is compulsory for XYZ to register as a VAT vendor at the end of the month during which the taxable supplies exceed R1 million OR at the beginning of the month where the total value of the taxable supplies in terms of a contractual obligation in writing exceed R1 million in the coming 12 months.

XYZ is a person and it is carrying on an enterprise. As the turnover can reasonably be expected to exceed R50 000 within 12 months from date of registration, the company may register voluntarily (s 23(3)(b)(ii)). However, s 23(3)(b)(ii) is subject to s 15(2B) and therefore, XYZ must account for VAT on the payments basis from date of registration until the value of supplies exceed R50 000. XYZ must account for VAT on the invoice basis from the commencement of the tax period immediately following the tax period when the total value of the taxable supplies has exceeded R50 000 (s 15(2B)). (2)

53 TAX4861/103/2021

QUESTION 5 – SUGGESTED SOLUTION (continued) b) Provided the branches' accounting systems are independent, Bigco can request

separate registration for some or all of its branches. Bigco itself must also register if the value of its taxable supplies (including the taxable supplies of the branches) exceeds R1 million in the previous 12-month period OR at the beginning of the month where the total value of the taxable supplies in terms of a contractual obligation in writing exceed R1 million in the coming 12 months. (s23(1) and s50(1) and (2)).

(2) 6. YES To ascertain whether Books.net should register as a vendor in South Africa, it should

firstly be determined whether Books.net is carrying on an enterprise in or partly in the Republic in terms of the definition of ‘enterprise’ in section 1(1) of the Act.

Included in the definition of enterprise (paragraph (b)(vi)) is the supply of electronic services by a person from a place in an export country where at least two of the following circumstances are present: (aa) the recipient is a resident of the Republic; or (bb) any payment was done via a bank registered in terms of the Bank Act; (that means a South African Bank); or (cc) the recipient of those electronic services has a business, or residential or postal address in the Republic. (2)

Therefore, Books.net is carrying on an enterprise in the Republic. (1) Following this, it must be ascertained whether Books.net meets the threshold for

compulsory registration as a VAT vendor: (1) In terms of section 23(1A) a person who carries on an enterprise in terms of para-

graph (b)(vi) to the definition of an enterprise will be liable for registration at the end of the month when the total value of the taxable supplies exceeds R1 000 000 (R50 000 prior to 1 April 2019). (1)

Books.net will therefore be liable to register as a VAT vendor by 31 December 2020.

17

54 TAX4861/103/2021

QUESTION 6 – SUGGESTED SOLUTION (AQSAT 13.9) 30 marks

PART A - Hurricanes Ltd 1. Because both Hurricanes and Tornadoes are vendors, it is irrelevant, whether or not the goods

are new or second-hand. (1)

Further, because Hurricanes and Tornadoes are connected persons, s10(4) should be considered. Although the consideration is less than the open market value, Tornadoes will be entitled to a deduction of the full amount of the input. S10(4) therefore does not apply, but the general value of supply rule in s10(2) & (3) applies. (1)

The amount of the input for Tornadoes is therefore, R100 000 x 15% = R15 000. (1)

S9(1) stipulates that the time of supply is the earlier of the date of invoice or the date when any payment of the consideration is made. In this instance it is on 1 April 2021. However, because Hurricanes and Tornadoes are connected persons, s9(2)(a) should be considered. Because the date of invoice and/or date of any payment is after the delivery date, s9(2)(a) applies and the time of supply is 20 March 2021. (2)

As all VAT consequences would have been dealt with in March, there is no further effect in April.

2. The connected person rule cannot apply since the seller (Hurricanes) is not a VAT vendor. Since Hurricanes is not a registered VAT vendor the second-hand goods rule will apply for Tornadoes. (1)

Thus, VAT is claimable on the lower of consideration (R100 000) or open market value (120 000), part (b) of the definition of input tax, and to the extent to which payment has been made (s16(3)(a)(ii)(aa)). (1)

Since no portion has been paid in March, no VAT input may be claimed in that month. A VAT input may be claimed in April in respect of the payment made, i.e. 40% x R100 000 x 15/115 = R5 217 input tax claimable by Tornadoes. (2)

9

PART B - Sledgehammer (Pty) Ltd

1. The agreement is an Instalment Credit Agreement (section 1, definition of instalment credit agreement), as:

payments are made in instalments over a period in the future

the sum of money includes finance charges stipulated in the agreement

the aggregate of amounts payable exceeds the cash value of the supply, and

Sledgehammer does not become the owner merely by virtue of delivery. (4) Time of supply is the earlier of date of delivery (7 April 2021) and payment of consideration

(8 April 2021) (Section 9(3)(c)). The deposit is applied in settlement of the debt and therefore it is consideration. Therefore, the time of supply is 7 April 2021. (2)

Input tax is claimable upfront on the 'cash value' of the supply (Section 10(6)). This is calculated as follows:

R Total collectible (R6 000 x 24 months) 144 000 (1) Less: finance charges (20 000) (1)

Cash value 124 000

Input tax = 15/115 x R124 000 = 16 174 (1)

55 TAX4861/103/2021

QUESTION 6 – SUGGESTED SOLUTION (AQSAT 13.9) (continued) 2. VAT is payable to SARS on the importation, based on the customs duty value, calculated as

follows: Customs duty value + customs duty + 10% of customs duty value, multiplied by 15%. (s13(2)(a)). This amount is claimable as input tax (s7(1)(b) and s16(3)). (2)

R220 000 + R22 000 + R15 000 = R257 000 x 15% = R38 550. (2)

3. Input tax may be claimed by Meerkat on the following:

All these expenses were incurred for enterprise purposes to make taxable supplies.

Air ticket R1 250 x 15/115 (local) = R163 (1)

A local flight within South Africa is a standard rated supply. Input tax can be deducted. (1)

Hotel accommodation R750 x 15/115 = R98 (1)

The supply of accommodation in a hotel is a supply of commercial accommodation at the standard rate. Output tax would have been levied on the full value of the supply in terms of s10(10), because it is for a stay of 1 night (28 days or less, therefore 60% in terms of s10(10) does not apply). (1)

Car hire - input is denied ito s17(2)(c) (1)

Meals, drinks and other food and beverages

These expenses qualify as entertainment expenses on which input tax is denied (s17(2)(a)), however the portion for Neal is excluded from the denial (s17(2)(ii)), because it is for the personal subsistence of an employee (Neal) who had to spend a night away from his usual place of residence.

(2)

Therefore, R820 x 15/115 = R107 (1)

21

56 TAX4861/103/2021

QUESTION 7 - SUGGESTED SOLUTION (AQSAT 16.30) 23 marks Asti Ltd 1. The sale should not be zero-rated as not all conditions as required by section 11(1)(e) have been met.

The requirements are as follows:

1. Both parties must be VAT vendors (Asti Ltd and Spumante Ltd are both VAT vendors). (1)

2. The supplier and recipient must agree in writing that such enterprise is disposed of as a

going concern. They have done this. (1)

3. All the assets necessary for carrying on the enterprise must be disposed of. It is not clear

from the information provided whether this has been done. (1)

4. The parties must agree in writing that the consideration includes VAT at zero percent. The

agreement does contain such a clause. (1)

5. The parties must agree, in writing, that the enterprise will be an income-earning activity on

the date of transfer. The agreement does not contain such a clause. Thus, it does not meet the requirements of a sale as a going concern.

(1)

5

2. Outputs

R Inputs

R

Sales to vendors R280 000 x 15% 42 000 (1)

Sales to non-vendors R114 000 x 15% 17 100 (1)

Rent paid (See note 1 below) R15 000 x 15% 2 250 (1)

Insurance premium (portion is applicable to the motor car. Is deductible, as it is not a supply of a motor car) R3 000 x 15% 450 (1)

Repairs R6 400 x 15% 960 (1)

Insurance payment (s 8(8) – repairs, not total reinstatement)

R5 500 x 15/

115 717 (1)

Sale of going concern zero-rated - (1)

Deemed disposal on deregistration: Assets on hand after sale at lesser of cost (incl VAT) and open market value x 15/115 (s 8(2) read with

s 10(5)) (See note 2 below):

Trading stock 20 000 - 4 000 (transaction 1) - 1 500 (transaction 2) - 10 000 clause 3)

= 4 500 units @ R40 x 115/100 (1.15) = 207 000 (3)

Computers (lower of cost incl VAT (R30 000 x 1.15 = R34 500) or OMV (R33 000))

33 000

(2)

Patent (lower of cost incl VAT(15 000 x 1.15 = R17 250) or OMV (R100 000))

17 250 (2)

Motor car input tax denied (Section 17(2)(c)) - (1)

257 250

x 15/115 = 33 554 (1)

Sale of patent and computers after deregistration no effect, as no longer registered VAT vendor. - (1)

Total output tax and input tax 93 372 3 660

Net VAT payable: 89 712 (1)

Part 2 18

Total 23

57 TAX4861/103/2021

QUESTION 7 – SUGGESTED SOLUTION (AQSAT 16.30) (continued) Note 1:

As the rent includes rates, the input is based on the full amount charged. If rates are paid separately and directly to the municipality, no VAT would have been levied, and therefore no input tax could have been claimed.

Note 2:

In applying the value of supply rule of s10(5) in respect of assets purchased prior to the change in the VAT rate, VAT has been added back (output tax) at a rate of 15% in order to give effect to the intention of this section. An argument may exist for a strict interpretation of the section using 14% for items purchased prior to 1 April 2018. We will follow the interpretation of adding back VAT @ 15% to the original cost until the issue is clarified.

QUESTION 8 – SUGGESTED SOLUTION (AQSAT 16.31) 15 marks

CASE 1 - Propco CC

VAT effects

The R90 000 received from the tenants of the flats has no VAT, being an exempt supply (s12). The rental on the offices is subject to VAT of R7 500 (R57 500 x 15/115). The lessees of the offices are therefore paying VAT, which will be claimed by them as an input if they are vendors.

Taxable supplies are therefore: R50 000 / (R50 000 + R90 000) = 35.71% (2)

Propco's VAT return for the period will be as follows: R

Output tax Offices (taxable supply) - R57 500 x 15/115 7 500 (1)

Flats (exempt supply) 0 (1)

Input tax Advertising – offices (relates to taxable supplies only, therefore claim 100% input tax) - R5 600 x 15/115 x 100%

(730)

(1)

Advertising - residential properties (used to make exempt supplies) 0 (1)

Salaries and wages (employment not an ‘enterprise’ as defined) 0 (1)

Painting – flats (used to make exempt supplies) 0 (1)

Painting – offices (relates to taxable supplies only, therefore claim 100% input tax) - R11 200 x 15/115 x 100%

(1 461)

(1)

Audit fees (relates to taxable and exempt supplies, therefore apportion input tax) - R2 240 x 15/115 x 35.71%

(104)

(2)

Computer (relates to taxable and exempt supplies, therefore apportion input tax) - R8 960 x 15/115 x 35.71%

(417)

(2)

Office expenses (relates to taxable supplies only, therefore claim 100% input tax)

- (R336 + R112) = R448 x 15/115 x 100%

(58)

(1)

Cleaning contract (relates to taxable supplies only, therefore claim 100% input tax) - R3 360 x 15/115 x 100%

(438)

(1)

Amount due to SARS 4 290

15

58 TAX4861/103/2021

QUESTION 9 – SUGGESTED SOLUTION (AQSAT 13.4 – provided in the textbook) 16 marks QUESTION 10 40 marks Mr B P Sasoil recently acquired a filling station in Pretoria and provides you with the following calculation of his income and expenditure (which were exclusively acquired from registered vendors and solely expended for the purposes of the business) for his first month of trading: INCOME R Sales - 270 000 litres of fuel @ R16,50/l .................................................................. 4 455 000 - 18 000 litres of diesel @ R15,60/l ................................................................ 280 800 - Oils, lubricants etc. ........................................................................................ 23 200 - Quick shop .................................................................................................... 7 500

4 766 500 EXPENDITURE Purchases - 300 000 litres of fuel @ R12,22/l ................................................................. 3 666 000 - 25 000 litres of diesel @ R11,00/ l ................................................................ 275 000 - Oils, lubricants etc. ........................................................................................ 17 000 - Quick shop (see below)................................................................................. 12 000 Interest on bank overdraft ................................................................................................... 23 000 Cash wages .............................................................................................................. 30 000 Rental of property .............................................................................................................. 48 000 Telephone .............................................................................................................. 1 000 Annual membership fee – Automobile Association ............................................................. 750 Electricity and water ............................................................................................................ 2 000

4 074 750 Mr Sasoil also intends to acquire certain used furniture from his father-in-law for an amount of R8 000 (market value) which will be used as office equipment in the business. This furniture was previously used by his father-in-law for domestic purposes. Mr Sasoil acquired a delivery vehicle for the filling station under an instalment credit agreement. The cash cost of the delivery vehicle was R228 000 (inclusive of VAT). He will pay monthly instalments of R5 000 (including VAT) over a 60-month period. The finance charges will amount to R72 000. Mr Sasoil will com-mence using the delivery vehicle in the first month of trading, even though his first instalment will only be paid on the first day of the second month of trading. The trading stock in the quick shop consists of various types of cold drinks, bottled water, sweets and chips, as well as milk, bread (brown and white) and basic grocery items like canned food, eggs, maize meal and instant noodles. Half of the trading stock and sales will consist of standard rated supplies (50%) and the other half of zero-rated supplies (50%). Due to his limited knowledge of VAT and the administrative burden this could bring about, Mr Sasoil has informed you that he does not wish to register voluntarily as a VAT vendor. However, he is optimistic about the prospects of not registering especially in the light of suffering an estimated "loss" of R147 250 during his first month of trading. After listening to a radio talk show on the VAT implications for businesses, Mr Sasoil approaches you with certain questions in this regard:

59 TAX4861/103/2021

QUESTION 10 (continued)

REQUIRED: Marks

(a) Explain the significance of distinguishing between standard rated supplies, zero-rated

supplies and exempt supplies.

4

(b) Indicate which of these supplies (as mentioned in (a)) are applicable to supplies made

by Mr B P Sasoil’s business.

4

(c) State the requirements for mandatory registration and indicate whether he does in fact

meet them.

4

(d) On the assumption that he has to register, indicate (with reasons) which payments (if

any) would be taken into account in calculating the deduction for input tax claimable in

his first return (no calculations required).

22

(e) On the assumption that he has to register, indicate (with reasons) whether he may/

should opt for any particular tax period in terms of the VAT Act.

6

60 TAX4861/103/2021

QUESTION 10 – SUGGESTED SOLUTION (a) The Value-Added Tax Act provides for two types of supplies namely taxable supplies and exempt supplies.

Taxable supplies are charged with VAT at either the standard rate (currently 15%) or the zero rate (0%). Exempt supplies, on the other hand, are not charged with any output tax at all (hence exempt). However, in this case (exempt supplies) such person (supplier) would also not be able to claim any input tax credit for VAT paid on supplies made by other vendors to him [whereas this is permissible in the case of making taxable supplies (i.e. supplies at standard rate and zero rate)].

Thus, although no VAT is actually levied both in the case of zero-rated and exempt supplies, there is an important distinction in that VAT is effectively charged (be it at the rate of 0%) in the case of zero-rated supplies, whereas no VAT will be charged in the case of exempt supplies. This would mean that an input tax credit would only be claimable in the case of goods and/or services acquired for the making of zero-rated supplies with no similar concession where goods and/or services are acquired for the purposes of making exempt supplies. (2) It should further be noted that the requirements to register as a vendor under the Value-Added Tax Act would only be applicable to persons making taxable (standard or zero rated) supplies (section 23(1)). (2)

(b) Both fuel and diesel sales relate to fuel levy goods and constitute zero-rated supplies (section 11(1)(h))

while the sale of oils, lubricants etc. constitute supplies at the standard rate. Quick shop’s sales are 50% sales at the standard rate and 50% at the zero rate (basic foodstuff, e.g. brown bread, milk, eggs and maize meal). Thus, all supplies are taxable supplies (50% at the standard rate and 50% at the zero rate). (4)

(c) Any person making taxable supplies, the total value of which exceeds R1 000 000 for any twelve-month

period, is liable to register for VAT purposes (section 23(1)). Thus, notwithstanding the fact that the standard rated supplies appear not to exceed this limit ((R23 200 + (R7 500 x 50%)) x 12 = R323 400). All zero-rated supplies ((R4 455 000 + R280 800 + (R7 500 x 50%)) x 12 = R56 874 600) should also be taken into account. The total taxable supplies, amount to R57 198 000 (R323 400 (standard rated) + R56 874 600 (zero-rated)). Mr Sasoil is therefore liable to register as a vendor for VAT purposes. Also, note that the prospects of profits are of no concern and that the issue revolves around the value of taxable supplies. (4)

(d) (i) Purchase of fuel and diesel

As already mentioned, these are zero-rated supplies which means that no VAT was paid on its acquisition by Mr Sasoil (VAT was levied at zero per cent). Thus, no input tax can be claimed. (2) (ii) Purchase of oils, lubricants etc.

The VAT paid on its acquisition will be claimable as input tax as it will be used exclusively for the purpose of making taxable supplies. (1)

(iii) Purchase of quick shop stock

The VAT relating to standard rated supplies made to Mr Sasoil can all be claimed as it will be used to make taxable supplies. However, as no VAT would be payable on zero rated supplies (basic foodstuffs) to him, input tax can be claimed on these supplies to him, at zero percent (effectively no input tax claimed). (2)

61 TAX4861/103/2021

QUESTION 10 – SUGGESTED SOLUTION (continued)

(iv) Interest on bank overdraft

This relates to an exempt supply (being a financial service (section 12(a)) and thus no VAT is payable and/or claimable by the recipient of such service. (2) (v) Cash wages

Any rendering of a service by an employee to his employer in the course of his employment is not deemed to be the carrying on of an enterprise by that employee (rendering the service) to the extent that remuneration is paid or payable to such employee (not being an independent trade carried on) (section 1, definition of an enterprise). Due to the fact that cash wages constitute "remuneration", these services are not taxable supplies and thus no input tax is claimable by Mr Sasoil. (2)

(vi) Rental of property

The rental of business premises should be distinguished from accommodation in a dwelling (which could be an exempt supply (section 12(c)). The rental of business premises is a taxable supply (standard rate) and thus an input tax credit may be claimed for VAT paid on such supply, as it will be used solely to make taxable supplies. (2)

(vii) Telephone

These constitute payments for the supply of goods and services at the standard rate (i.e. taxable supplies) and therefore an input tax credit may be claimed as it will be used exclusively for the purpose of making taxable supplies. (1)

(viii) Membership fee

An input tax deduction is denied for any membership fee or subscription paid by the vendor to any club of a sport, social or recreational nature (section 17(2)(b)). As this is not membership of such a club, it would not be prohibited. (2)

(ix) Electricity and water

These constitute payments for the supply of goods and services at the standard rate (i.e. taxable supplies) and therefore an input tax credit may be claimed as it will be used exclusively for the purpose of making taxable supplies. (1)

(x) Furniture

Mr Sasoil's father-in-law will not charge any VAT on the sale of the furniture as such supply will not be made in the course or furtherance of an enterprise (used for domestic purposes by him). Although no actual amount of VAT is payable by Mr Sasoil on its acquisition, the VAT Act provides for the claiming of a deemed input tax credit on second-hand goods acquired from a non-vendor (section 1, definition of input tax, paragraph (b)), but only to the extent that payment has been made (section 16(3)(a)(ii)(aa)) if registered on the invoice basis and section 16(3)(b)(i) if registered on the payment basis). (3)

62 TAX4861/103/2021

QUESTION 10 – SUGGESTED SOLUTION (continued)

(xi) Instalment credit agreement

For an instalment credit agreement, the consideration in money for the supply is deemed to be its cash value. The delivery vehicle is not a “motor car” as defined in section 1 (no input tax can be claimed for the acquisition of a “motor car”). The purchaser will be able to claim input tax being the total of the VAT based on the cash value at the earlier of the date of delivery or when any payment is received by the supplier. The cash value excludes finance charges (finance charges are exempt from VAT, because it is a supply of a financial service). Thus, Mr Sasoil will be able to claim an input tax deduction in respect of the full cash value during his first month of trading (when the vehicle was delivered, even though no payment has been made yet). (4)

(e) The VAT Act (section 27) allows a vendor a limited choice regarding tax periods as he may apply in

writing for one-month tax periods (Category C), six month tax periods (Category D) or twelve month tax periods (Category E). Unfortunately, Category D (six-month tax periods) is not available to Mr Sasoil as this will only apply in the case of farmers. Neither will Category E (twelve-month tax periods) be available as it can only apply in the case of certain inter-group charges made on an annual basis.

Mr Sasoil will have to apply for category C as the total value of his taxable supplies is, at this stage,

likely to exceed R30 million per annum (the R30 million is applicable (compulsory) for Category C). Output tax (at the standard rate) will have to be levied on the sales of oils, lubricants and 50% of the

items in the quick shop, whereas input tax may be claimed on the acquisition of these items as well as on rental of the full property, the telephone, electricity and water accounts, the membership fee, purchase of the furniture and the acquisition of the delivery vehicle (full amount claimed in respect of first tax period). This should lead towards an excess of input tax over output tax and eventually a refund to Mr Sasoil in respect of every tax period.

Category C requires a VAT return to be submitted on a monthly basis, its application would boost his

cash flow as the refund (by the Commissioner) of any excess input tax over and above output tax would be received on a monthly basis. (6)

40

63 TAX4861/103/2021

QUESTION 11 40 marks PART A You are a tax manager in a firm of auditors. It is your responsibility to answer the VAT related e-mail queries received by your employer from clients. QUERY 1 7 marks Benefit (Pty) Ltd purchased a double cab bakkie for R385 000 during January 2021 and granted the use thereof as a fringe benefit to the marketing manager on 1 February 2021. The marketing manager is obliged to bear the full cost of maintaining the vehicle. Benefit (Pty) Ltd requested you to briefly discuss and calculate the VAT implications of this transaction and to provide them with the corresponding journal entries relating to the VAT implications of the transaction. QUERY 2 9 marks Pivot CC purchased and brought into use a single cab “bakkie” during January 2021. The vehicle is used to do maintenance work at the corporation’s rental properties. Pivot CC owns various commercial and residential properties, which it leases to lessees. The leasing of commercial properties amounts to 40% of the corporation’s total turnover and the leasing of residential properties to the other 60%. The cost price of the “bakkie” amounted to R285 000 and was financed by way of a lease agreement at Finbank. The monthly instalments amount to R6 725 is payable over 48 months from January 2021. The monthly insurance premium for the vehicle amounts to R824 and is payable from January 2021. This vehicle was stolen at one of the corporation’s rental premises on 15 January 2021. The corporation was indemnified for the loss by their insurance company and received an amount of R280 000 from the insurance company on 25 January 2021. Pivot CC requested you to briefly discuss and calculate all the VAT implications of these transactions. QUERY 3 9 marks Mrs Smith is a sole trader and trades as Sandy’s Fashions. She is registered for VAT on the invoice basis. She incurred the following business-related expenses during January 2021 and wants to know whether she may claim the input tax on these expenses as well as the amount that may be claimed. She requested that you provide her with a reason if the input tax on an item may not be claimed.

Expenses incurred R

Salaries paid to employees Fuel cost for the delivery vehicle (This vehicle is only used for making deliveries to customers) Costs incurred when travelling overseas and staying over for two days in Milan, Italy to purchase trading stock: Return air fare Hotel bill Meals and refreshments Costs incurred when travelling and staying over for three days in Cape Town, South Africa to attend a local fashion show as it is due to the nature of her business required of her to attend fashion shows: Return air fare Vehicle rental Hotel accommodation bill Meals and refreshments Monthly bus tickets for those employees who travel to work by bus

22 000

3 240

8 720 8 620 3 325

2 820 1 650 4 820 1 530 1 220

64 TAX4861/103/2021

QUESTION 11 (continued) QUERY 4 6 marks Traders (Pty) Ltd purchased second-hand goods to the value of R186 000 from a non-vendor during January 2021 with the purpose of reselling it as trading stock. The purchase price of the second-hand goods was still outstanding on 31 January 2021 and was only settled during May 2021. Traders (Pty) Ltd requested you to briefly discuss and calculate the VAT implications (if any) of this transaction and to provide them with the corresponding journal entries relating to any VAT implications of this transaction. QUERY 5 3 marks B&B (Pty) Ltd commenced trading as a guesthouse during December 2020. The turnover for December was much higher than expected and amounted to R52 000 (excluding VAT). During January 2021 the accountant calculated that the turnover of the corporation would exceed R120 000 by the end of February 2021. The accountant of the corporation requested your advice on whether the corporation could voluntarily register as a vendor as the turnover exceeded R50 000 during December 2020. PART B 6 marks Mr Mojapelo is 78 years of age. As he is experiencing bad health, he does not expect to live much longer. He owns a number of assets, which he wants to donate to his family as he feels he does not have any need for them and would like his family to enjoy the ownership and use of these assets even before his death. He did not make any donations during the 2021 year of assessment and the total donations that he has made in his lifetime amounted to R175 000 on 30 November 2020. He intends to make the following donations:

Date of proposed donation

Person Asset Cost price

Market value

R R

01/12/2020 His wife to whom he has been mar-ried out of community of property for 50 years.

Fixed property 780 000 1 800 000

15/12/2020 His son Antique motor vehicle 35 000 75 000

20/12/2020 His daughter Motor vehicle 120 000 95 000

65 TAX4861/103/2021

QUESTION 11 (continued) PART A

REQUIRED Marks

Answer the queries as set out in Part A. Ensure that you do the following for every query:

Indicate in all instances whether you are dealing with input tax or output tax;

address the time and value rules;

provide reasons for your answers;

show all calculations; and

round off all amounts to the nearest Rand. When answering the queries, you may assume that all:

transactions are concluded between registered vendors;

amounts include VAT;

vendors have a one-month tax period;

documentary requirements are met; and

vendors make only taxable supplies, except where stated or implied otherwise.

34

PART B

REQUIRED Marks

Advise Mr Mojapelo on the donations tax implications of the transactions mentioned in Part B. Furthermore, suggest at least one strategy to him to minimise his donations tax liability. Motivate your answers with reasons and show all calculations. You may ignore the Capital Gains Tax consequences of these transactions.

6

66 TAX4861/103/2021

QUESTION 11 - SUGGESTED SOLUTION PART A The layout of the solution contains a suggested thinking pattern, which you may apply when answering a VAT question. The layout forces you to consider all the issues that must be addressed when answering VAT related queries. Remember, however, to always read the REQUIRED part thoroughly and to answer the question accordingly. QUERY 1 Benefit (Pty) Ltd Purchase of double cab bakkie Input tax: Input tax was paid on the acquisition and the vehicle will be used to make taxable

supplies. (Section 17(1) and definition of input tax in section 1) Denied : Yes. As the double cab bakkie is a motor car as defined, the input tax is denied.

(Section 17(2)(c) and definition of motor car in section 1) (2) Journal entry R R Dr Vehicles / Assets 385 000 Cr Bank / Creditor 385 000 (1) Being the purchase of double cab bakkie. Granting of fringe benefit Output tax: Deemed output tax on fringe benefit. (Section 18(3)) (1) Amount (value): The tax fraction will be applied to the value of the deemed supply being ((R385 000 x 100/115 x 0.3%) – R85) x 15/115 = R119 per month. 0.3% is used as the

input tax was denied on the vehicle. (Section 10(13) and Government Notice 2835, 22 November 1991) (2)

Apportionment: No apportionment as only taxable supplies is made. (Section 17(1)) Time: The time of supply of the transaction is when the benefit becomes subject to employees’

tax that is end February 2021 and then monthly thereafter. (Section 9(7)) (1) Journal entry R R Dr Employee expense / Salaries 119 Cr Output tax 119 (1) Being the deemed output tax on a fringe benefit of a vehicle granted to an employee. Comments 1. Input tax may be claimed on goods or services purchased or obtained, if those goods or services are

used to MAKE TAXABLE SUPPLIES or mixed supplies. This principle must not be confused with the income tax principle relating to ‘gross income’, namely ‘in the production of income’.

2. It is very important to know what is included in the term ‘motor car’ for VAT purposes. Make sure you

study the definition in section 1 carefully. 3. The sequence in which the amount of the deemed output tax on the fringe benefit is calculated is

important. The R85 must be deducted BEFORE the tax fraction (15/115) is applied. (8) Max 7

67 TAX4861/103/2021

QUESTION 11 - SUGGESTED SOLUTION (continued) QUERY 2 Pivot CC Purchase of single cab bakkie Input tax: Input tax was paid on the acquisition and the vehicle will be used to make both taxable

supplies and exempt supplies (mixed supplies). (Section 7(1)(a) or section 17(1) and definition of input tax in section 1)).

Denied: No. As the single cab bakkie is not a motor car (as defined in section 1), the input tax is not denied (section 17(2)(c)). (1)

Amount (value): R285 000 x 15/115 = R37 174. (1) As the purchase price was financed by way of a lease, which is an instalment credit

agreement (as defined in section 1), the value of the supply is the cash value of the supply. (Par (b) of the definition of instalment credit agreement and section 10(6)).

Apportion: R37 174 x 40% = R14 870 as the bakkie is used to make both taxable and exempt supplies (mixed supplies). Only the portion that relates to making taxable supplies can be claimed (section 17(1)). (1)

Time: Timing rule - earlier of time of delivery or time any payment is made – thus when the first instalment is paid or on the delivery date – therefore claimable in January 2021. (Par (b) of the definition of instalment credit agreement and section 9(3)(c)). (1)

Monthly insurance premium paid Input tax: Input tax was paid and the vehicle will be used to make both taxable supplies and exempt

supplies (mixed supplies). The input tax on the insurance premium in respect of the taxable supplies may therefore be claimed (section 7(1)(a) or section 17(1) and definition of input tax in section 1).

Denied: No. Amount (value): R824 x 15/115 = R107. (1) Apportion: R107 x 40% = R43 (section 17(1)). (1) Time: General rule – earlier of date of invoice issued or time of any payment. During the month

when the insurance premium is due, thus monthly from 1 January 2021 (section 9(1)). Insurance indemnity payment Output tax: An insurance indemnity payment is a deemed supply if received for an asset on which input

tax was NOT DENIED, therefore deemed output tax must be accounted for on the indemnity payment received (section (8)(8)). (1)

Amount (value): R280 000 x 15/115 = R36 522. (1) Apportion: Yes. Only have to account for output tax to the extent that the indemnity payment relates

to taxable supplies (section (8)(8)). This is an exception to the general rule (regarding no apportionment of output tax), which is only applicable to fringe benefits, indemnity payments and section 18(1) adjustments.

Therefore – R36 522 x 40% = R14 609. (1) Time: When the indemnity payment is received – on 25 January 2021 (section (8)(8)). Comment Students generally tend to forget about apportionment when dealing with input tax. It is a very important concept for VAT purposes and must be understood. A vendor may only claim input tax to the extent that the goods or services are used to make taxable supplies. Thus, if mixed supplies are made, certain input tax amounts must be apportioned. (Remember in this regard the de minimus-rule (section 17(1)(i) – no apportionment if taxable supplies are 95% or more). 9

68 TAX4861/103/2021

QUESTION 11 - SUGGESTED SOLUTION (continued) QUERY 3 Mrs Smith trading as Sandy’s Fashions

Expense item Reason / Calculation R

Salaries paid to employ-ees

Services rendered by employees are not part of definition of enterprise – no VAT (Proviso (iii)(aa) of the definition of enterprise in s 1).

-

(1) Fuel cost No VAT paid - zero rated (Section 11(1)(h) & (hA)) - (1) Travel to Milan: Return air fare No VAT paid – international travel by air is zero rated

(Section 11(2)(a)).

-

(1) Other overseas costs Expenses paid in foreign country (hotel bill and meals and

refreshments) – no South African VAT paid.

-

(1) Travel to Cape Town: Return air fare Local travel by air - standard rated supply – R2 820 x 15/115

(section 7(1)(a) or section 17(1) and definition of input tax in section 1).

368

(1) Vehicle rental Standard rated supply – denied input (section 17(2)(c) – it is

irrelevant that the motor car is rented and not acquired – the motor car was supplied).

-

(1) Hotel accommodation bill Standard rated supply – R4 820 x 15/115 (section 7(1)(a) or

section 17(1) and definition of input tax in section 1 together with the exclusion from entertainment as in section 17(2)(a)(ii)).

629

(1)

Meals and refreshments Standard rated supply – R1 530 x 15/115 (section 17(2)(a)(ii)).

200 (1)

Monthly bus tickets Travel by road or rail of fare paying passengers in South Africa – exempt supply (Section 12(g))

-

(1)

9

Comments 1. Salaries paid to employees do not attract VAT, as the rendering of services by an employee to an

employer is specifically excluded from the definition of ‘enterprise’. No marks will be awarded if you submit that it is exempt, zero rated or denied.

2. Regarding the return air fare for the overseas and local travel as well as the monthly bus tickets, refer to

SILKE par 31.11.4 and the first remember block in that paragraph. This explains the differences between the VAT implications of these types of expenses very well.

3. If a vendor spends money in a foreign country, he does not pay South African VAT and can therefore not

deduct input tax on these expenses. 4. Whether a motor car (as defined) is purchased or rented on a day-by-day basis is irrelevant. The input

tax is denied, as the motor car was supplied.

69 TAX4861/103/2021

QUESTION 11 - SUGGESTED SOLUTION (continued) QUERY 4 Traders (Pty) Ltd Second-hand goods purchased from non-vendor Input tax: No input tax was paid, but the company may claim deemed (notional) input tax as second-hand goods were purchased from a non-vendor (definition of second-hand goods and input tax in section 1). (1) Denied: No. Amount (value): R186 000 x 15/115 = R24 261. (1) Apportion: No apportionment as only taxable supplies are made (section 17). Time: Deemed input tax on second-hand goods may only be claimed to the extent that payment of the purchase price has been made. This input tax may thus only be claimed in May 2021 when the purchase price is paid (section 16(3)(a)(ii)(aa)). (1) Journal entry Dr Trading stock purchased 161 739 (1) Dr Vat control account 24 261 (1) Cr Creditor 186 000 (1) Being the deemed input tax on second-hand goods purchased from a non-vendor. Comment No VAT expense is incurred when goods are purchased from a non-vendor. Notional input tax may, how-ever, be claimed on second-hand goods purchased from a non-vendor, but only to the extent of payment. In this case no payment had been made by 31 January 2021, therefore the VAT control account was debited and not the VAT input account. There are very specific requirements. Make sure you know what they are. Refer to SILKE par 31.22. 6 QUERY 5 B&B (Pty) Ltd Registration requirements

For a person to register as a VAT vendor, that person must supply goods or services in the course or furtherance of an enterprise (section 23).

Although B&B (Pty) Ltd does supply goods and services, the supply of commercial accommodation is specifically excluded from the definition of an enterprise if the value of such supplies does not exceed R120 000 for a period of 12 months or is not reasonably expected to exceed R120 000 in a period of 12 months. (Proviso (ix) of the definition of enterprise). (1)

Only once the value of the supplies exceed or is expected to exceed R120 000 (during January 2021), will B&B (Pty) Ltd be regarded as carrying on an enterprise. (1)

Thus, even though the turnover exceeds R50 000 during December 2020 (the normal threshold for voluntary registration), a guesthouse supplies commercial accommodation and a different rule is applicable. During December 2020 the guesthouse made taxable supplies of R52 000 but there was still no expectation that the value of supplies would exceed R120 000 in a period of 12 months. Therefore, the company may not register as a vendor during December 2020. (1)

70 TAX4861/103/2021

QUESTION 11 - SUGGESTED SOLUTION (continued)

It was only in January 2021 that there was an expectation that the value of the supplies made by the company in a twelve-month period would exceed R120 000, therefore during January 2021 the com-pany could have applied for voluntary registration (section 23(3)(b)).

To determine the R120 000, VAT must be excluded from turnover. 3 PART B Mr Mojapelo may donate assets for the benefit of his wife (on 1 December 2020) without incurring any donations tax liability, as such donation is exempt from donations tax, provided the couple are not permanently separated (s 56(1)(b)). (1) The antique motor car that Mr Mojapelo wants to donate to his son (on 15 December 2020) will be a taxable donation. As the value of the donation (R75 000) will be less than the R100 000 (section 56(2)(b)) annual exclusion, Mr Mojapelo will not incur any donations tax liability on 15 December 2020. (2) The motor vehicle that he wants to donate to his daughter (on 20 December 2020) is also a taxable donation. Mr Mojapelo will incur a donations tax liability on this donation, as follows: (1) R95 000 – (R100 000 – R75 000) = R70 000 x 20% = R14 000. (2) Donations tax is payable by the end of the month following the month in which the donation takes effect, therefore it will be payable before the end of January 2021. He could consider donating only the antique motor vehicle to his son during this year of assessment ending on 28 February 2021 and donating the motor vehicle to his daughter during the following year of assessment in March 2021 and therefore not incur any donations tax liability. He can also consider donating the motor vehicle to his daughter in terms of a donatio mortis causa (s 56(1)(c)) or a donation in terms of which the donee will not obtain any benefit under the donation until the death of the donor (s 56(1)(d)) just in case he dies before he can donate the motor vehicle to his daughter during March 2021. Any other workable and legal alternative (2 marks). Comments 1. Remember to discuss each donation separately. 2. There was no indication in the information given in the question that the donations to the children had

anything to do with their maintenance. An exemption of these donations with that as a reason was not considered as correct.

6 40

71 TAX4861/103/2021

QUESTION 12 14 marks Dani Greeff is the financial director of Safe in the Sun (Pty) Ltd. Safe in the Sun (Pty) Ltd is a resident company that manufactures suntan products specifically formulated for the harsh African climate (classified as a ‘process of manufacture’ by SARS). These products are sold nationwide in stores. Safe in the Sun (Pty) Ltd has a December year-end and is a vendor for Value-Added Tax (VAT) purposes (that only makes taxable supplies) with a one-month tax period. All amounts exclude VAT, if applicable, and all parties are registered VAT vendors, unless specifically stated otherwise. Dani needs to address the following six queries that the financial accountant brought to her attention: Query 1:

On 1 March 2021 Safe in the Sun (Pty) Ltd donated suntan products with a cost price of R20 000 and a market value of R27 500 to a local community project (which is not a registered Public Benefit Organisation (a PBO)). You can assume that this is the first donation made by Safe in the Sun (Pty) Ltd in the current financial year of assessment.

On 15 June 2021 Mr Wave, the sole shareholder, instructed the stock store manager to donate suntan products with a cost price of R1 000 and a market value of R1 250 to his son’s cricket team before their winter tour to Durban. There was no advertisement benefit derived from the donation.

On 15 September 2021 Safe in the Sun (Pty) Ltd donated suntan products with a market value of R5 000 (and a cost price of R4 500) to the Sunshine Children’s Home (a registered PBO).

Query 2: On 2 May 2020, Safe in the Sun (Pty) Ltd purchased a second-hand delivery van from a non-vendor for R119 700 and paid the full amount immediately. Notional input tax was claimed in the May 2020 tax period. After using the delivery van for a year, the company decided on 1 May 2021 to sell it to one of their clients in Swaziland for R105 000. Query 3: Safe in the Sun (Pty) Ltd incurred the following advertising and marketing expenses during March 2021:

R3 500 on an advertising campaign to introduce clients to their new factory shop on the Ballito beach front; and

R4 000 on food and drinks for the grand opening of the new factory shop. Query 4: Safe in the Sun (Pty) Ltd had to send three employees to Cape Town for 6 months. Safe in the Sun (Pty) Ltd let three fully furnished rooms for them at a holiday resort (a VAT vendor) for the 6-month period. The holiday resort charged them R3 000 per room per month. The employees enjoyed some of their meals in the restaurant and the cost of these meals for all three employees amounted to R2 750 for the month of March 2021. The company received the following statement for March 2021:

Description Total R

3 x Rooms @ R3 000 9 000 Meals 2 750 Subtotal VAT @ 15%

11 750 1 763

Total 13 513

72 TAX4861/103/2021


REQUIRED Marks

(a)

Calculate all the donations tax implications of query 1 for Safe in the Sun (Pty) Ltd and indicate when the donations tax, if any, will be payable. Address every dona-tion in your answer, even if another person is liable for the donations tax.

5

(b)

Calculate the VAT consequences of query 2 for the March 2021 tax period for Safe in the Sun (Pty) Ltd. Show your calculations and round off to the nearest Rand.

1

(c)

Provide the accounting journal(s) that should be recorded in the books of Safe in the Sun (Pty) Ltd regarding query 3. You can assume that the services were pro-vided by one of the company’s creditors, Advert & Marketing Ltd, and that they issued only one invoice including both services rendered and goods supplied. No journal descriptions are required in your solution, but you should give a short reason for your treatment.

4

(d)

Discuss, with reasons, whether you agree with the resort’s VAT treatment of the transaction in query 4. If you disagree with the VAT treatment, also provide the correct VAT treatment of the transaction in your answer. Support your discussion with calculations.

4

73 TAX4861/103/2021

QUESTION 12 – SUGGESTED SOLUTION

(a) Query 1: 1 March 2021: R Donation to local community project (valued at market value (section 62(1)(d)) 27 500 (1) Annual exemption (s 56(2)(a) is not available as the value of the donation exceeds R10 000(does not qualify as a casual gifts) - 27 500 Donations tax payable @ 20% (section 64) 5 500 (1) Payable by the end of the following month (section 60), thus not later than 30 April 2021 (1) 15 June 2021: Donation to cricket team (valued at market value (section 62(1)(d)) 1 250 In terms of section 57 (deemed to be donated by Mr Wave, who may be liable for the donations tax) (1 250) (1) No donations tax payable by Safe in the Sun (Pty) Ltd nil

Note: Mr Wave will be liable for any donations tax on the R1 250, but may utilise his annual exemption of R100 000, if still available. 15 September 2021 Donation to PBO; therefore exempt (section 56(1)(h)) (1) 5 (b) Query 2: Output tax: Sale of delivery van to Swaziland – 15/115 (not zero-rated, export of second-hand goods and a notional input tax was claimed on purchase) x R119 700 (value equal to original cost price) (section 10(12). The cost cannot be reduced with the value of the deemed input VAT even if it was claimed) = R15 613 (1) (c) Query 3:

Debit R

Credit R

VAT input (R3 500 x 15%) 525 (1) Advertising and marketing expenses (R3 500 + R525) + (R4 000 + 15%) 8 100 (1) Creditors (Advertising & Marketing) 8 625 (1) The input tax will be denied on the food and drinks for the grand opening since these are entertainment expenses as defined (section 17(2)(a)). Input tax can therefore only be claimed on the advertising campaign (R3 500).

(1)

Total 4

74 TAX4861/103/2021

QUESTION 12 – SUGGESTED SOLUTION (continued) (d) Query 4:

The accommodation will be classified as commercial accommodation as defined in section 1. (1) Since domestic goods and services (fully furnished rooms) are supplied at an all-inclusive charge for an unbroken period exceeding 28 days (for a 6-month period and March has 31 days), the room charge will attract VAT at 15% on 60% of the value of the supply. (1) For March 2021 the total charge of R9 000 will attract VAT as follows: R9 000 x 60% x 15% = R810 and not VAT at 15% on the full R9 000 as was done by the resort. (1) Since the meals are charged separately, it will not fall within the special rules for commercial accommo-dation and VAT will be charged on 100% of the value, which was the case on the account, thus: R2 750 x 15% = R413. (1) The total VAT charged should therefore only be R1 223 (and not R1 763). The total account will therefore amount to R11 750 plus R1 223 (VAT charged (R810 + R413)), which will equal R12 973. (4)

14

75 TAX4861/103/2021

QUESTION 13 20 marks All taxpayers referred to are South African residents, unless stated otherwise. Sable (Pty) Ltd (not a Small Business Corporation) is in the construction business. The company has a 31 December year-end and is registered for VAT purposes as a vendor on the invoice basis, with one monthly tax periods. All amounts in this part of the question include VAT (where applicable) and all purchases have been made from registered VAT vendors, unless indicated otherwise. Issue 1 Transaction 1: On 3 February 2021 Sable (Pty) Ltd purchased a property, situated in South Africa, from a South African resident (a non-vendor for VAT purposes) at the market value of R5 000 000. The company paid a deposit of R1 000 000 to the seller on the same day. The balance of the purchase price was paid to the seller on 31 March 2021, the date of registration of the property in the name of Sable (Pty) Ltd. Transfer duty of R387 500 was paid on the date of registration. The company purchased the property with the intention of developing a building consisting of shops on the ground floor and 11 identical two-bedroom flats on the first and second floor. The shops represent 25% of the total square metres of the building and the flats the other 75%. The South African Revenue Services accepted this ratio for VAT apportionment purposes. Transaction 2: By 15 August 2021, the building was completed. The total construction cost amounted to R20 000 000. This includes R1 200 000 that was paid to casual labourers. Transaction 3: Since 1 September 2021, 10 of the flats have been let in terms of a 24-month agreement at R5 000 each per month. Rent is payable in advance on the first of each month. Transaction 4: Rent of R100 000 was received in respect of the shops during the year of assessment ending 31 December 2021. R10 000 of the R100 000 represents prepaid rent while rent of R15 000 was still outstanding on 31 December 2021. In terms of the rental agreement rent is payable in advance on the first of each month. Issue 2 From 1 February 2021 to 31 May 2021 the managing director of Sable (Pty) Ltd had the exclusive use of a Toyota Fortuner (a “motor car” as defined in section 1 of the VAT Act) which the company purchased on 1 January 2021 for a cash cost of R304 950 from a motor dealer. The company paid R1 800 for fuel during this period. No maintenance expenses were incurred in respect of the vehicle during this period. The vehicle is used solely for the making of taxable supplies.

76 TAX4861/103/2021

QUESTION 13 (continued) Issue 3 During March 2021 the building (refer to issue 1) was sold to Tackle CC for R30 000 000, being the open market value. Sable (Pty) Ltd received the full amount of the purchase price on 30 April 2021, the day that the property was registered in the name of Tackle CC. The sale of the property does not constitute the sale of a going concern in terms of section 11(1)(e) of the VAT Act.

REQUIRED Marks

(a) Calculate the VAT implications in respect of all the transactions in issue 1. Clearly indicate if the VAT that you calculated is input or output tax. If any transaction has no VAT effect, provide a reason. Ignore the time of supply.

7

(b) In respect of issue 1, transaction 1, discuss the time of supply and the tax period(s) during which the VAT should be accounted for.

3

(c) Provide all the journal entries in respect of issue 2. Provide reasons for the VAT con-sequences in your journal description.

7

(d) Calculate the VAT implications of issue 3. Assume current legislation remains unchanged in the future periods.

3

Source: Unisa TAX4861 Test 1 2013 (adapted)

77 TAX4861/103/2021

QUESTION 13 – SUGGESTED SOLUTION PART A (a) Transaction 1: Notional input tax: (R5 000 000 x 15/115) x 25% = R163 043 Refer to (b) for discussion of timing rule.

(2)

Transaction 2: Construction cost – input tax – ((R20 000 000 - R 1 200 000) x 15/115) x 25% = R613 043. No input tax is claimable in respect of the casual workers as remuneration is excluded from the definition of an enterprise (section 1, definition of an enterprise).

(2) Transaction 3: Rent flats – no VAT – exempt supply (residential) (section 12(c))

(1)

Transaction 4: Rent shops – output tax (½) – (R100 000 + R15 000) (1) x 15/115 (½) = R15 000

(2) 7

(b) Second-hand property was acquired from a non-vendor; therefore, notional input tax can be claimed, (par (b) of the definition of input tax in section 1).

The time of supply in terms of section 9(3)(d) is the earlier of the date of registration of the property in the name of the company or the date of any payment.

However in terms of section 16(3)(a)(ii)(aa), input tax can only be claimed to the extent that payment was made.

(1)

A deposit of R1 000 000 was paid on 3 February 2021; However one must further look at section 16(3)(a)(ii)(bb), which determines that input tax can only be claimed once registration of the property has taken place.

(1) Therefore, the full input tax can only be claimed on 31 March 2021. (1)

3

(c) Debit Credit R R Vehicle 304 950 (½) Bank 304 950 (½) Purchase of vehicle – input tax denied in terms of section 17(2)(c) as it is a “motor car” as defined.

(1)

Employee’s cost 415 (½) Output tax 415 (½) Output tax on fringe benefit (motor car provided to employee) (R304 950 x 100/115) x 0.3% x 15/115 x 4 months = R415.

(3)

Fuel 1 800 (½) Bank 1 800 (½) Fuel is zero-rated (section 11(1)(h)). (1)

Maximum 8 7

78 TAX4861/103/2021

QUESTION 13 - SUGGESTED SOLUTION (continued) (d) Output tax: R30 000 000 x 15/115 x 100% = R3 913 043

(1)

Section 16(3)(h) adjustment Input tax Lower of adjusted cost ((R5 000 000 (½) + ((R20 000 000 – R1 200 000) (½) = R23 800 000) or OMV (R30 000 000), therefore R23 800 000 x 15/115(½)) x 75% (½)) = R2 328 261 section16(3)(h).

(2) 3

79 TAX4861/103/2021

QUESTION 14 20 Marks PART A 12 marks Dynamic Developments CC (“the CC”) is registered as a Category A vendor on the invoice basis for VAT purposes. The CC is a residential property developer. Its main business, i.e. 80%, is to develop and sell completed residential units in the course of making taxable supplies. The CC also makes exempt supplies (20%) by letting townhouses for residential purposes. Due to the adverse economic climate, the CC’s taxable supplies dropped well below the compulsory registration threshold of R1 million during the preceding 12 months. The CC therefore decided to de-register for VAT purposes. The CC was deregistered on 6 February 2021. The following list comprised the assets and liabilities of the CC on 1 February 2021:

Note

Cost (excluding

VAT) R

Open market value

R

Assets

Sale of house 1 1 300 000 1 450 000

Dump truck – used on the CC’s construction sites solely for taxable supply purposes (purchased prior to 1 April 2018)

680 000

650 000

Debtors 2 ? ?

Liabilities

Creditors 3 ? ?

Notes: 1. The CC has been trading from a house that it had purchased from a non-vendor for an amount of

R1 300 000 on 10 January 2018. Transfer duty of R15 000 was paid in respect of the acquisition of this house. The CC paid the full purchase price of R1 300 000 on 15 February 2018 on the date of registration of the house into its name. The CC claimed the full notional input tax that it was entitled to in its March 2018 tax period. The house was used for the purposes of the CC’s business operations, i.e. for the administration and management of its residential development operations, as well as the letting of its residential townhouses. On 1 February 2021, six days prior to deregistration, the CC sold this house to a non-vendor at the open market value of R1 450 000. The CC received the entire R1 450 000 three days later, i.e. on 4 February 2021. Registration of the house in the name of the new owner took place on 20 March 2021.

2. The following is the debtors’ age analysis on the CC’s services rendered on credit, in the construction and development of the residential properties:

30 days 60 days 90 days Total

Amount (R) including VAT 40 300 25 250 11 700 77 250

The CC was of the opinion that all the 90 days outstanding debtors would not be recoverable and consequently wrote these debtors off on 2 February 2021. The CC did not charge any interest on outstanding accounts.

80 TAX4861/103/2021

QUESTION 14 (continued) 3. The following is the creditors’ age analysis:

30 days Older than 370 days Total

Amount (R) including VAT 27 890 12 222 40 112

All these creditors were vendors and none of the supplies were exempt or zero-rated. The creditors older than 370 days are already outstanding for more than 12 months, but no VAT adjustment has yet been accounted for.

PART B 8 marks Query 1 Plane Sailing (Pty) Ltd is a South African airline company, registered as a Category C vendor on the invoice basis. The following income and expenses relate to the company’s April 2021 tax period (all amounts exclude VAT):

R

Income:

1. Sales – air tickets: local 880 000

2. Sales – air tickets: international 2 300 550

Expenditure:

3. Entertainment supplied on board (i.e. meals and refreshments of R670 828, as well as movies and electronic games of R120 439)

(791 267)

Query 2 Plane Sailing (Pty) Ltd has a December year-end. On 30 January 2021, the company donated an amount of R100 000 to a newly established child welfare organisation (not yet registered as a public benefit orga-nisation). PART A

REQUIRED Marks

Calculate Dynamic Developers CC’s input tax and output tax arising from its decision to deregister as a vendor. Address all transactions relating to the CC’s assets and liabilities in the relevant tax period. Also, address any items not subject to VAT. Support all your calculations with reasons, by referring to the relevant legislation. Mark allocation: ● Calculations (8 marks)

● Section numbers (ignore time of supply) (4 marks)

12

81 TAX4861/103/2021

QUESTION 14 (continued) PART B Query 1

REQUIRED Marks

Provide the accounting journals that should be recorded in the books of Plane Sailing (Pty) Ltd regarding the income and expenditure items listed in respect of its April 2021 tax period. Support your journal entries by referring to the relevant legislation.

6

Query 2

REQUIRED Marks

Discuss the donations tax implications, if any, for Plane Sailing (Pty) Ltd in respect of the donation made in query 2, in respect of its 2021 year of assessment.

2

(Source: Unisa TAX4861 Test 1 2014)

82 TAX4861/103/2021

QUESTION 14 – SUGGESTED SOLUTION PART A Output

tax R

Input tax R

Sale of house: R1 450 000 x 15/115 x 100% 189 130 (1) Section 7(1)(a) / Section 8(16) deemed supply (no apportionment) (1) Section 16(3)(h) adjustment Lower of adjusted cost (R1 300 000 x 115/100 (although acquired prior to 1 April 2018 the adjustment is done at the current VAT rate) = R1 495 000) or OMV (R1 450 000), therefore R1 450 000 x 15/115 x 20%

37 826

(4) Upon acquisition, the CC was only entitled to 80% of the input tax (= 80% taxable supplies). Can now claim input tax adjustment for the exempt portion, i.e. 20%.

Deemed supply in terms of section 8(2) on ceasing to be a vendor: (1) Dump truck – R650 000 (lesser of cost incl VAT (R680 000 x 115/100=R782 000) and OMV R650 000) (s 10(5))) x 15/115

84 783

(2)

Debtors – irrecoverable debts (output tax previously levied) R11 700 x 15/115

1 526

(1)

Section 22(1) Not section 22(1A) that relates to factoring of debtors

(½)

Remaining debtors No deemed supply i.t.o. section 8(2), as output tax already accounted for on issue of invoice

-

(1) Creditors older than 12 months – R12 222 x 15/115

1 594

(1)

Section 22(3) – output tax adjustment as a result of non-payment of creditors for 12 months and no adjustment has yet been accounted for

(½)

Creditors – balance of creditors R27 890 x 15/115

3 638

(1)

Section 22(3) proviso (ii)(dd)(BB) – immediately before the CC ceased to be a vendor

(½)

14½

Max 12

83 TAX4861/103/2021

QUESTION 14 – SUGGESTED SOLUTION (continued) PART B QUERY 1 – Journal entries Debit

R Credit

R

1. Dr Bank 1 012 000 (½) Cr Sales – local air tickets 880 000 (½) Cr Output tax (R880 000 x 15%) 132 000 (½) (taxable supply/standard rated – section 7(1)(a))

No mark for not zero/exempt supply (½)

2. Dr Bank 2 300 550 (½) Cr Sales – international air tickets 2 300 550 (½) (zero-rated services – section 11(2)(a)) (½)

3. Dr Entertainment expenses 791 267 (½) Dr Input tax (R791 267 x 15%) 118 690 (½) Cr Bank 909 957 (½) Input tax not denied on entertainment costs in terms of

section 17(2)(a) proviso (iii)

(1)

6

QUERY 2 – Donation discussion Plane Sailing (Pty) Ltd will be liable for donations tax on the donation made to the child welfare organisation, as it is not a registered public benefit organisation and there is thus no specific exemption available in respect of the R100 000 donated. It also does not constitute a casual gift and the general exemption under section 56(2)(a) therefore does not apply. The company will therefore be liable for donations tax on the amount of R100 000 x 20% = R20 000, payable by no later than 28 February 2021 (by the end of the month following the month during which the donation was made – section 60(1)).

(1)

(1) (1)

3

Max 2

84 TAX4861/103/2021

QUESTION 15 30 marks All amounts reflected below exclude VAT, where applicable (unless specifically stated otherwise) and all transactions are between registered VAT vendors. Kim was the owner of Enjoy-your-Stay, a guesthouse situated in Durbanville in the lovely Western Cape Province, South Africa. Enjoy-your-Stay was a profitable small enterprise that had an annual turnover exceeding R100 000. Kim was registered for VAT on the invoice basis as a category B vendor (with two-monthly tax periods ending on the last day of the months of February, April, June, August, October and December). She charged a standard all-inclusive daily charge of R325 (bed and breakfast included) during the entire year. Kim’s sister, Kourtney, owns a small audit and tax consulting firm, Accounting Expertise Inc. Accounting Expertise Inc. has a December year-end and is also a Category B VAT vendor registered on the invoice basis. Accounting Expertise Inc. has twelve women permanently employed and four of these women have had babies within the last three years. During Accounting Expertise Inc.’s prior financial year, Kourtney identified the need to establish a crèche on the premises in order to accommodate her company’s working mothers. The new crèche, namely Kids Excel Crèche, opened its doors on 1 January 2021 on the premises of Accounting Expertise Inc. for the toddlers of the company’s staff. Due to the crèche’s running costs, the school fees are charged at a market related rate. Kourtney ran the school from inception but found it very burdensome to manage both her company and the crèche. Kourtney therefore decided to approach Kim, who was a former pre-primary schoolteacher, as to whether she would be interested in the position of school principal of Kids Excel Crèche. Kim loves children and decided to sell her guesthouse and take up the position of principal at the crèche. As a result, Kim decided to sell her guesthouse business and deregistered as a VAT vendor on 20 August 2021. The following information relates to the guesthouse: 1. Kim’s last invoices were issued on 30 June 2021 to the following clients:

(a) Mr Lazi who stayed in the guesthouse for three days during June 2021, and (b) Ms Innocent who stayed in the guesthouse from 1 June 2021 until 30 June 2021.

2. Kim managed to sell her guesthouse business on 18 August 2021 (see below) and she deregistered as a vendor with effect from 20 August 2021. The debtors’ age analysis on 18 August 2021, for the services rendered on credit, was as follows:

30 days 60 days 90 days Total

Amount (R) including VAT 13 000 3 575 2 275 18 850

Note that all outstanding debtors related to short-term stays (it is for periods of 28 days and less). Kim was of the opinion that the 90 days outstanding debtors amounting to R2 275 would not be recoverable and consequently wrote the amount off on 19 August 2021. Kim did not charge any interest on outstanding accounts.

85 TAX4861/103/2021


The creditors’ age analysis on 18 August 2021 was as follows:

30 days Total

Amount (R) including VAT 8 200 8 200

All these creditors were vendors and the supplies were neither exempt nor zero-rated.

Kim sold her Enjoy-your-Stay guesthouse business to Fashionable Enterprises (Pty) Ltd (not a connected person) at the open market value of R1.5 million. Fashionable Enterprises (Pty) Ltd is a category C registered vendor. Kim and Fashionable Enterprises (Pty) Ltd agreed in writing that the guesthouse business be disposed of as a going concern, as provided for in section 11(1)(e) of the VAT Act. Assume that all the requirements of section 11(1)(e) of the VAT Act were met. The entire business was disposed of, except for the debtors and creditors. Also, note that Kim had been entitled to claim input tax previously in respect of all assets disposed of under the going concern sale. The full consideration was settled by Fashionable Enterprises (Pty) Ltd on the transaction date.

3. Fashionable Enterprises (Pty) Ltd carries on business, not by means of supplying accommodation,

but it runs its clothing and jewellery boutique from the guesthouse premises. One of the rooms in the (former) guesthouse is let in terms of an agreement, at a nominal rental charge, by Fashionable Enterprises (Pty) Ltd to one of its employees, who is managing the boutique. No domestic goods or services are provided to such employee, but merely low-cost lodging as a benefit of employment. The room occupied by the employee comprises 10% of the floor space and the remaining 90% is used for the boutique. Fashionable Enterprises (Pty) Ltd has obtained prior approval from SARS to use the floor space method for the purposes of apportionment.

4. Kim commenced working at Kids Excel Crèche on 1 September 2021. Accounting Expertise Inc.’s

turnover for its 2021 year of assessment amounted to R3 920 000, of which R313 600 was earned in school fees from the crèche and R3 606 400 was derived from its audit and tax consulting business. Its supplies are apportioned on the turnover-based method.

Accounting Expertise Inc. derived the following income and incurred the following business-related

expenditure during its two-month tax period ended 31 December 2021:

Note R Income: Audit fees 360 640 Tax compliance & consulting fees 4.1 240 427 School fees earned in respect of Kids Excel Crèche 52 267 Sale – coffee machine (solely used by the accounting firm staff) 4.2 1 400 Expenditure: Salaries 4.3 228 660 Property rates on the entire business premises 1 510 Electricity and water (one account, usage by accounting firm & crèche) 1 380 Telephone expense 4.4 2 460 Refund of excess payment 4.5 3 000

86 TAX4861/103/2021

QUESTION 15 (continued) Notes: 4.1 Included in the fees of R240 427, is a fee of R38 000 in respect of services rendered to Offshore

Plc, a foreign company that has its effective place of management in the United Kingdom. Offshore Plc is considering investing in immovable property in South Africa and requested an opinion from Accounting Expertise Inc. regarding the South African tax implications that would arise from such an investment.

4.2 Accounting Expertise Inc. purchased the coffee machine from Coffee-at-its-Best (a non-related

vendor) in November 2018 for R2 022.

4.3 The salaries of R228 660 were paid as follows:

R58 200 to Kim and two teachers at Kids Excel Crèche, and

R170 460 to the personnel working in the accounting and tax practice.

4.4 The telephone bill relating to the crèche amounted to R560 and the balance of R1 900 related to

the audit and tax practice. 4.5 On 15 October 2021, Accounting Expertise Inc. issued a tax invoice to one of its South African

clients for accounting services rendered. The invoice was for the amount of R5 500 (including VAT) and the client inadvertently paid R8 500 on 31 October 2021. Accounting Expertise Inc. refunded the overpayment (excess) of R3 000 to the client on 30 November 2021.

(Source: Unisa TAX4861 2014 (adapted))

QUESTION 15 - REQUIRED

REQUIRED Marks

1. Discuss the VAT treatment for Kim of the invoices issued to Mr Lazi and Ms Innocent

respectively (refer note 1); in respect of the tax period ended 30 June 2021.In your

discussion, refer to the time and value of supply rules and support your discussion by

providing calculations.

6

2. Calculate the input and output tax in respect of note 2 with regards to Kim.

Support your calculations with brief reasons and with reference to the relevant

legislation.

6

3. Discuss, supported by calculations, the VAT implications for Fashionable Enterprises

(Pty) Ltd in respect of the purchase of the going concern for R1.5 million (refer notes

2 & 3).

5

4. Calculate the VAT payable by Accounting Expertise Inc. or refundable by SARS to the

company for the two-month tax period ended December 2021 (refer note 4). Show all

your calculations and motivate your answer (with a reason) where no VAT can be

claimed, or where supplies are zero rated or exempt.

Round off all amounts to the nearest Rand.

13

87 TAX4861/103/2021

QUESTION 15 - SUGGESTED SOLUTION

1. Kim supplied commercial accommodation as defined in section 1 of the VAT Act. (1)

Kim had to levy output tax on the supply of the commercial accommodation (being a taxable supply) as follows:

(1)

Mr Lazi who stayed in the guesthouse for three (3) days: 100% of the charge was subject to VAT at 15%; thus, 3 x R325 × 100% × 15% = R146 ,25. Output tax of R146,25 was thus payable to SARS in the tax period ended 30 June 2021, since the time of supply is the earlier of the date of the issue of an invoice or when payment is received and in this case, the invoice was issued on 30 June 2021.

(2)

(1)

Ms Innocent who stayed for 30 days (more than 28 consecutive days – thus, value of supply is in terms of section 10(10) of the VAT Act): only 60% of the charge was subject to VAT at 15%; thus 30 days x R325 × 60% × 15% = R878 output tax. The output tax was payable to SARS on 30 June 2021, i.e. the last day of the tax period ended 30 June 2021 (time of supply is the earlier of the date that the invoice is issued or when payment is received).

(1) (1)

(1)

8

Max 6

2. 1. Going concern: Output tax

R Input tax

R

R1 500 000 x 0% (zero rated) x 100% - (1)

2. Deemed supplies in terms of section 8(2) on ceasing to be a vendor:

(1)

Debtors No deemed supply (output tax already accounted for on issue of invoice), except for irrecoverable debts written off:

Debtors – irrecoverable debts R2 275 x 15/115

-

297

(1)

(1)

Section 22(1) (1)

Creditors – balance of creditors R8 200 x 15/115

1 070

(1)

Section 22(3) proviso (ii)(dd)(BB) – immediately before Kim ceased to be a vendor

6

3. As it is a going concern purchase, it is zero rated and Fashionable Enterprise (Pty) Ltd has thus paid no input tax and there is no input tax credit to be claimed.

(1)

(Note that since the transaction was subject to VAT, even though at 0%, transfer duty will not be payable).

88 TAX4861/103/2021

QUESTION 15 – SOLUTION (continued) Fashionable Enterprise (Pty) Ltd must account for a section 18A adjustment to output tax, since the concern was acquired as a 100% taxable supply at a rate of 0%, but it will be used partly for purposes other than making taxable supplies (10% used for exempt supply of boarding and lodging at nominal rent – residential accommodation (section 12(c)).

(1)

(1)

The adjustment will be: R

Full cost of the going concern purchase 1 500 000 Less: % intended to be used for taxable supplies (commercial – 90%) (1 350 000)

(or R1 500 000 x 10%) 150 000 (1)

Section 18A adjustment to output tax (15% thereof) payable to SARS 22 500 (1)

5

4. Output tax (Input tax) R

Audit fees: R360 640 x 15% 54096 (1)

Tax compliance & consulting fees: (R240 427 – R38 000) x 15% 30 364 (1)

Tax consulting fee of R38 000 paid to Offshore Plc – zero rated supply (section 11(2)(l))

(none of exceptions under s 11(2)(l)(i) – (iii) applies)

- (1)

School fees earned in respect of Kids Excel Crèche – exempt supply (supply of childcare by a crèche, section 12(j))

- (1)

Sale – coffee machine: non-supply (section 8(14)(a)) (input tax was denied upon purchase of coffee machine, as it relates to

entertainment, section 17(2)(a))

- (1)

Salaries - excluded from the definition of an “enterprise” (proviso (iii)(aa) of the definition of “enterprise”)

- (1)

Property rates on the entire business premises – zero rated supply (section 11(2)(w))

-

(1)

Electricity and water - input tax only claimable in respect of taxable supplies; thus, apportion between taxable supplies (accounting and tax consulting practice) and exempt supply (supply of childcare by crèche).

Exempt supply: R313 600 / R3 920 000 = 8% Taxable supplies: R3 606 400 / 3 920 000 = 92% Thus, input tax claim in respect of electricity and water: R1 380 x 92% x 15%

(190)

(2)

Telephones – can claim in respect of bill of R1 900, i.e. R1 900 x 15% Telephone bill of R560 for crèche – exempt supply (supply of childcare by

crèche, section 12(j))

(285) -

(1) (1)

Refund of excess payment: R3 000 – no VAT effect (deemed supply only after 4 months i.t.o. s 8(27))

- (1)

VAT payment due by Accounting Expertise (Pty) Ltd to SARS 83 985 (1)

13

89 TAX4861/103/2021

QUESTION 16 20 marks Background information: Lexum (Pty) Ltd is a resident company with a December year-end. The company is registered for Value-added Tax (VAT) with two-month tax periods ending on the last business day of January, March, May, July, September and November, respectively. Lexum (Pty) Ltd requires your assistance with the following transactions that took place during the company’s 2020 year of assessment. All amounts exclude VAT, unless stated otherwise. Office building: Lexum (Pty) Ltd purchased a second-hand building, consisting of 10 similar offices for cash at its market value of R1 000 000 (R100 000 for each office) from a non-vendor. The amount was paid on 10 March 2021. The building was registered in the name of the company on 15 March 2021. The building was acquired with the intention of letting eight offices to tenants for business purposes. The other two offices would be converted to residential units and would be let in terms of 12-month rental agreements. During April 2021 Lexum (Pty) Ltd converted the two offices into two bachelor flats at a cost of R57 000 (including VAT) each. The eight offices were let by Lexum (Pty) Ltd for R10 000 (including VAT) each per month (payable in advance on the first of each month) from 1 May 2021. On 31 December 2021, one tenant was in arrears in respect of his December 2021 rental payment. The two bachelor flats were let in terms of 12-month agreements for R4 500 each per month from 1 June 2021. Motorboat: On 1 April 2021, Lexum (Pty) Ltd purchased a 15-meter motorboat for R79 800 (including VAT). The company uses the boat to take its clients out to sea for deep-sea fishing at no charge. Motor car: On 1 May 2021 Lexum (Pty) Ltd purchased a second-hand Honda Jazz (a motor car, as defined in the VAT Act) for R120 000 (excluding VAT) cash from a motor dealer (a registered vendor for VAT purposes). An employee, employed in a division of the business that makes only taxable supplies, had the free use of the vehicle from 1 May 2021 to 31 December 2021. The company paid the monthly insurance premiums and all maintenance and repair expenses in respect of the vehicle. Delivery vehicle: Lexum (Pty) Ltd acquired a delivery vehicle on 30 June 2021 (date of delivery of vehicle at the business premises). The vehicle was acquired in terms of an instalment credit agreement, as defined in section 1 of the VAT Act. In terms of the instalment credit agreement the purchase price of the delivery vehicle is payable in 36 monthly instalments of R5 633 each, payable from 1 July 2021. All instalments were paid on time.

90 TAX4861/103/2021

QUESTION 16 (continued) The instalments were calculated as follows:

R Purchase price 130 000 Plus: VAT 19 500 Plus: Interest 53 280 Value of agreement 202 780 Monthly instalments (over 36 months) 5 633


REQUIRED: Marks

(a)

Calculate the VAT consequences that arise in respect of the information provided under the heading “Office building”. Clearly indicate whether the VAT calculated is input or output tax. Also indicate the specific date when any input tax can be claimed (only mentioning the tax period will not be sufficient). If no input or output tax arises in respect of any event discussed in the information, provide a reason. Reference to legislation is not required.

8

(b)

Discuss, with reference to VAT legislation, the VAT implications in respect of the purchase of the motorboat.

1

(c)

(i) (ii)

Provide the VAT journal entry in respect of the free use of the Honda Jazz by the employee. You do not need to provide the journal narration, but all calculations should be shown clearly. Discuss, with reasons and reference to VAT legislation, why the input tax is denied in respect of the acquisition or rental of a motor car (as defined in the VAT Act) but not in respect of the insurance, maintenance or repair of a motor car (as defined in the VAT Act).

4 3

(d)

(i) (ii)

Discuss the time of supply rules in respect of an instalment credit agreement and indicate the amount of input tax that Lexum (Pty) Ltd can claim in respect of the delivery vehicle and the specific date when the input tax became claimable. Assume that Lexum (Pty) Ltd did not acquire the delivery vehicle in terms of an instalment credit agreement but obtained the use of the same delivery vehicle for 36 months in terms of a rental agreement with monthly rentals of R5 000 (excluding VAT) for 36 months, payable from 1 July 2021. Indicate the amount of input tax that Lexum (Pty) Ltd can claim in respect of the rental of the delivery vehicle and the specific date or dates when the input tax is claimable.

2 2

Total 20

91 TAX4861/103/2021

QUESTION 16 - SUGGESTED SOLUTION (a) Office building:

R

Purchase of offices

The offices were purchased from a non-vendor; therefore, a notional input tax can be claimed to the extent that the building is used to make taxable supplies. The notional input tax is calculated as 15/115 x with the lower of cost or open market value (section 1(1), par (b) of the definition of input tax).

Claim input tax of: R1 000 000 x 15/115 x 80% = R104 348. (104 348) (2) The time of supply is the earlier of date of any payment (10 March 2021) or

date of registration (15 March 2021) (section 9(3)(d)). In terms of section 16(3)(a)(ii)(aa) the input tax can only be claimed to the extent of payment and in term of section 16(3)(a)(ii)(bb)(A) only once registration in the name of Lexum (Pty) Ltd has taken place. Therefore, the full input tax can be claimed on 15 March 2021 (March tax period)

(1) Conversion of offices

No input tax can be claimed in respect of the conversion of the offices to residential accommodation as the supply of residential accommodation in terms of an agreement is an exempt supply (section 12(1)(c)).

-

(1)

Rent received

R10 000 x 8 offices x 8 months x 15/115 = R78 596 output tax Time of supply: earlier of rent becomes due or is paid; thus 1st of each month, from 1 May 2021 to 1 December 2021.

83 478 (2)

(1) Rent received from letting of 2 bachelor flats

There will be no output tax on the supply of residential accommodation in respect of the bachelor flats as the supply of residential accommodation is an exempt supply in terms of section 12(1)(c).

(1) (b) Motorboat

Purchase – input tax denied in terms of section 17(2)(a) or 17(2) as the motor-boat was acquired for the purpose of supplying entertainment.

(-)

(1)

(c)(i) Motor car – journal entry

Salary (Employees expense) Output tax Output tax in terms of section 18(3) in respect of the free use of the motor car by the employee – R120 000 x 0.3% x 15/115 x 8 months = R376

R 376

R

376

(1) (1)

(2)

92 TAX4861/103/2021

QUESTION 16 - SUGGESTED SOLUTION (continued) (c)(ii) Section 17(2)(c) denies a vendor the input tax in respect of the supply of a motor car,

as defined in section 1 of the VAT Act. In the case of the purchase or rental of a motor car the client is supplied with a motor car, BUT In the case of the insurance, maintenance or repair of a motor car the client is not supplied with a motor car but with a service that constitutes either the insurance, maintenance or repair of the motor car.

(2)

(1)

(1) Max 3 Delivery vehicle (d)(i) Suspensive sales agreement:

Time of supply: the earliest of:

The time of delivery of the delivery van; or

The time of any payment received

THUS: On the date of delivery (30 June 2021) of the delivery vehicle claim input tax of R19 500. (section 9(3)(c))

(3)

Max 2 (d)(ii) Rental agreement:

Time of supply: the earliest of when:

Payment becomes due; or

Payment is received THUS: on the date that each payment becomes due, being on the first of each month from 1 July 2021 for 36 months unless payment is made in advance, then on such date of payment claim input tax of R750 (R5 000 x 15%).

(2)

Total marks 22 Max 20

93 TAX4861/103/2021

QUESTION 17 20 marks Northern Enterprises (Pty) Ltd (Northern) is a South African resident company and a category B Value-Added Tax (VAT) vendor. The company owns a property situated on the banks of a river and utilises this property for various different divisions of its business. All divisions operate under one VAT registration.

Accommodation division: This division rents out holiday accommodation. Furnished, self-catering units are let at R520 per person per night (excluding VAT). The income from this division exceeds R250 000 (excluding VAT) per year.

Manufacturing division: This division manufactures and sells craft beer. The product is sold locally.

Transport division: This division provides transport services for tourists to and from airports, various tourist attractions as well as between lodges in the vicinity. All services are rendered in the Republic. The fares charged for these services vary according to the distance travelled and are charged per person.

All providers of goods and services to Northern are VAT vendors. All amounts include VAT, except where stated or implied otherwise. SARS approved turnover percentages as follows: accommodation 10%, manufacturing 70% and transport 20%.

Northern’s accountant needs your assistance with the following transactions:

1. During January 2021, a new minibus, which can transport 14 passengers at once, was purchased for a consideration of R433 200 from a vendor. The full amount was financed by way of a finance lease agreement over a period of 60 months. Monthly payments amounted to R9 636 payable from 1 February 2021. The total finance charges amounted to R144 960. The bus was delivered and brought into use in the transport division on 25 January 2021.

2. A delivery vehicle, not a “motor car” as defined, used by the manufacturing division to deliver goods, was written-off in an accident in January 2021. The vehicle was originally purchased for a consideration of R741 000 in 2017. The insurance company indemnified Northern on 5 February 2021 for this loss when Northern received R350 000 in its bank account.

3. During January and February 2021, 14 guests (South African residents) stayed in the accommodation (excluding note 4) for a total of 22 nights. These guests also made use of the transport services to a total value of R7 600.

4. One of the chalets was let to a person (South African guest) working at a nearby mine. This person stayed for an unbroken period of 44 nights at a special tariff of R450 (excluding VAT) per night.

5. The annual accounting and auditing fee, invoiced by the external auditors to Northern, amounted to R41 040. The invoice was issued on 31 January 2021, but still owing (not paid) on 28 February 2021.

6. On 5 February 2021 an ingredient for the manufacturing of craft beer was imported (and cleared for home consumption) from Zimbabwe. The transaction was denominated in South African Rand. The customs duty value was R58 000 and customs and import duties paid at the border amounted to R17 000.

7. At a social function held for the staff of the manufacturing division during February 2021, soft drinks

were made available for sale to the staff at the function at a total consideration of R10 per can of soft drink, which covers all direct and indirect costs. The soft drinks were purchased by Northern during January 2021 at a cost of R7.41 per can and the total invoice amount was R7 410 for 1 000 cans of soft drinks. Northern sold 820 cans on the day and received R8 200 cash in total. The staff did not have to pay anything else for the function. The caterers invoiced Northern for this function on 28 February 2021 for R31 920 and expected payment early in March 2021.

94 TAX4861/103/2021


REQUIRED Marks

Calculate the VAT effect of all the transactions for Northern Enterprises (Pty) Ltd (Northern) for its two-month tax period ended 28 February 2021. Indicate clearly in each instance whether you are dealing with output tax or input tax. Provide a valid reason for items where the input tax is either denied or relates to exempt supplies, or not claimable or where the output tax is Rnil. You may assume that all documentary requirements have been met.

20

Total 20


95 TAX4861/103/2021

QUESTION 17 - SUGGESTED SOLUTION

1 New bus purchased Input

R Output

R

VAT was paid on the purchase of the asset, but it can only be claimed as input tax if it relates to the making of taxable supplies (def of input tax read with s 17(1)). Therefore, as the transport of fare paying passengers by road or rail is an exempt supply (s 12(g)) no input tax will be claimable on this asset. - (1)

It is irrelevant that it qualifies as a motor car as defined and therefore a denied input tax. To be denied the input tax must first be input tax, which it is not in this instance.

2 Insurance indemnity payment received

The indemnity payment was received for a loss incurred in the course of carrying on an enterprise and is therefore deemed to be consideration received for a supply of services (deemed supply ito s 8(8)).

Value: R350 000 x 15/115 Output 45 652 (1½) 3 Guest accommodation (14 guests)

This qualifies as commercial accommodation (as defined in section 1 of the VAT Act) supplied with domestic goods and services (definition in section1 of the VAT Act) which is the carrying on of an enterprise (Proviso (ix) to the definition of enterprise in the VAT Act) and therefore a taxable supply (s 7(1)(a)).

Value: 14 guests x 22 nights x R520 = R160 160 x 15% Output 24 024 (2½)

Transport of fare paying passengers by road (R7 600) Exempt supply (s 12(g)) No output tax - (1)

4 Guest accommodation (1 guest)

This also qualifies as commercial accommodation (as defined in section 1 of the VAT Act) supplied with domestic goods and services (definition in section1 of the VAT Act) which is the carrying on of an enterprise (Proviso (ix) to the definition of an enterprise in the VAT Act) and therefore a taxable supply (s 7(1)(a)), but

the value of the supply is determined ito s 10(10) due to the fact that the period of stay is >28 days. Therefore, the consideration is deemed to be 60% of the all-inclusive charge.

Value: 1 x 44 x R450 x 60% x 15% Output 1 782 (2½) 5 Accounting and auditing fee

The VAT incurred will qualify as input tax, but only to the extent that it relates to taxable supplies (definition of input tax in section 1 of the VAT Act read with s 17(1)).

Time of supply: general rule - earlier of invoice or any payment (s 9(1))

Value: R41 040 x 15/115 x (10% + 70%) Input (4 282) (2½) QUESTION 17 – SUGGESTED SOLUTION (continued)

96 TAX4861/103/2021

6 Importation of goods from Zimbabwe Input

R Output

R

Import VAT (s 7(1)(b)) will be paid on importation at the border which will qualify as input tax as it relates wholly to the making of taxable supplies (Par (a)(ii) of the definition of input tax in section 1 of the VAT Act read with s 17(1)).

Value of the supply ito s 13(2)(a):

Customs duty value R58 000 + customs duty R17 000 + 10% upliftment (not BLNS country) R5 800 = R80 800 x 15% Input tax (12 120) (4)

7 Soft drinks purchased

The VAT paid on the purchase of the cans of soft drinks will qualify as input tax as it relates to the making of taxable supplies (manufacturing division) (definition of input tax in section 1 of the VAT Act read with s 17(1)), but it must be considered if the VAT is perhaps denied due to the fact that the supply of the soft drinks constitutes entertainment. Due to the fact that the cans of soft drinks are supplied at a charge which covers all direct and indirect costs of such entertainment (s 17(2)(a)(i)(bb)), it is not denied. (2)

R7 410 x 15/115 input tax (967) (1½)

The supply of the soft drinks at the social function is, however, a taxable supply.

Value: R820 x R10 = R8 200 x 15/115 Output 1 070 (1½) Entertainment cost

The VAT incurred on the catering will qualify as input tax as it relates to the making of taxable supplies (manufacturing division) (definition of input tax in section1 of the VAT Act read with s 17(1)), but as the expense relates to entertainment (as defined in section 1 of the VAT Act) it is denied ito s 17(2)(a)). - 2

Total 22

Max 20

97 TAX4861/103/2021

QUESTION 18 20 marks This question consists of four (4) unrelated parts, namely, Part A to D PART A 7 marks Traders (Pty) Ltd (“Traders”) is a registered VAT vendor with two-month tax periods ending on the last day of January, March, May, July, September and November, respectively. Traders makes 100% taxable supplies. All amounts include VAT where relevant as all transactions were entered into with registered VAT vendors, unless specifically stated or implied otherwise. Assume that all requisite supporting documentation (as required by the VAT Act) is in place. The following transactions occurred for Traders’ two-month tax period ending 31 May 2021: 1. Trading stock was ordered on 28 March 2021 from the USA for $1 500. The trading stock had a

customs duty value of R21 000 and import duties of R900 were paid on 1 May 2021 when the stock

was cleared for home consumption.

2. Sam Stacks, an employee and the sole shareholder of Traders, flew to London, United Kingdom, for a

business meeting on 10 April 2021. The international flight cost R12 000 and was paid on 2 April 2021.

Sam did not require accommodation while in London as he stayed with his brother.

3. Sam Stacks has the free use of an Audi Q5 that cost Traders R661 200 on 1 March 2018. Sam

obtained the right of use at acquisition date. Sam bears the full cost of fuel and maintenance on the

vehicle.

4. Traders wrote off R6 600 of bad debts, R4 600 relates to trade debtors arising in the month of

November 2020 and the remaining R2 000 relates to a loan made in September 2020 to a former

employee that is irrecoverable.

PART B 9 marks

InvestCo Ltd (“InvestCo”), a registered VAT vendor making 100% taxable supplies, is interested in the acquisition of a commercial building for investment purposes from PropCo Ltd (“PropCo”), also a registered VAT vendor making 100% taxable supplies. InvestCo and PropCo are not connected persons. The purchase consideration is equal to the open market value of R8 000 000 and the sale will be concluded on 1 June 2021. The commercial building currently generates R120 000 (including VAT) per month as it is let to a tenant, Odorcrew (Pty) Ltd, and the rental contract will continue after the sale as it will be transferred to InvestCo. The rental of this commercial building operates independently from the other operations of PropCo.

Assume that both parties will agree in writing to any condition necessary, in order to have the transaction qualify as a sale of going concern. PART C 4 marks Joshua Nguni bought his wife, Patricia, a brand-new BMW i8 for her 50th birthday on 30 April 2020. The vehicle cost Joshua R2 250 000 (equal to its fair market value). On 1 July 2020 he gave his daughter (22 years old), Thato, a house in Waterkloof, Pretoria as a wedding present. The house had a fair market value of R4 350 000 on the date it was given to Thato. On 15 September 2020, Joshua went sky diving with his brother, Monwa. Just before they jumped out of the plane, James promised to give Monwa his Bugatti Vayron that had a fair market value of R6 600 000 if he should die while sky diving. Joshua provided the family trust, the Nguni Trust, with an interest free loan of R900 000 on 1 January 2021 to fund the trust’s acquisition of listed shares. A market related interest rate is 10% and the official interest rate is 8.75%.

98 TAX4861/103/2021

QUESTION 18 (continued) REQUIRED

PART A

Marks

Total

Calculate the VAT implications in respect of Traders (Pty) Ltd’s two-month tax period ended 31 May 2021. Indicate whether an item is input or output tax. Should no input or output tax be deductible or levied, provide a brief reason or reference to relevant legislation.

7

Total for PART A 7

PART B

Marks

Sub- total

Total

(1) Write a memo to the CEO of InvestCo Ltd, discussing whether the acquisition of

the commercial building would qualify as a sale of a going concern in terms of the

VAT Act.

Presentation - layout

4 1

5

(2) Assuming the sale of the commercial building qualifies as the sale of a going concern in terms of the VAT Act and that InvestCo Ltd will use the building 80% for taxable supplies and 20% for exempt supplies.

Calculate any VAT implications for InvestCo Ltd from the acquisition of the commercial building. Clearly indicate whether the implications relate to input or output tax and if no input or output tax arises, provide a brief reason and or reference to legislation.

4

Total for PART B 9

PART C

Marks

Total

Calculate the donations tax consequences for Joshua Nguni for the 2021 year of assessment. Assume that the value of Joshua Nguni’s prior donations amounted to R5 500 000 and that no other donations arose other than those mentioned in the question. Provide reasons or relevant references to legislation where any amount is NOT subject to donations tax.

4

Total for PART C 4


99 TAX4861/103/2021

QUESTION 18 – SUGGESTED SOLUTION PART A – Calculation of the VAT implications for Traders Ltd for the period 1 April 2021 until 31 May 2021: 1. Import of stock from USA R R

Customs duty value 21 000 Plus: 10% of customs duty value (R21 000 x 10%) 2 100 (1) Plus: non-rebated customs duty and import surcharges (given) 900 (½)

Value of supply(s 13(2)(a)) 24 000 Output tax on import (R24 000 x 15%) (3 600) (1)

2. International flight – zero rated [½] (no input tax deductible) - (1)

3. Use of a motor vehicle Determined value: R661 200 x 100/114 (purchased prior to 1 April 2018) = R580 000

Deemed supply – output tax (s 10(13)): R580 000 x 0.3% = R1 740 – R85 = R1 655 x 15/115 = R216 x 2m

(432)

(3)

4. Bad debts written-off Trade debtors – input tax: R4 600 x 15/115 600 (1) Loan to employee – exempt supply (s 12(a)): financial services - (1)

Total 8½

Max 7

PART B (1) Memo of sale of commercial building – going concern s 11(1)(e)

To: InvestCo CEO From: Student Date: 13 March 2021 Re: Whether the sale/purchase of commercial building constitutes the sale of a going concern

(1)

For the sale of a going concern to be zero-rated, section 11(1)(e) requires the following to be met:

The supply must be to a registered vendor (by implication) by a registered vendor. o InvestCo and PropCo are both registered VAT vendors

(½)

The enterprise or part of it must be capable of separate operation. o The commercial building operates independently from the other operations of PropCo.

(½)

The supplier and recipient must agree in writing that the enterprise will be disposed of as a going concern. o PropCo and InvestCo agree in writing that the sale will be a sale of a going concern.

(½)

The supplier and recipient must agree in writing that the enterprise is an income-earning activity on the date of the transaction. o PropCo and InvestCo agree in writing that the commercial building is an income earning

activity as it is currently let and will continue to earn rental income after the acquisition.

(½)

The parties must agree in writing that the consideration agreed upon for the supply is inclusive of tax at the rate of zero percent. o PropCo and InvestCo agree in writing that the consideration is inclusive of VAT (tax) at zero-

percent.

(½)

The assets which are necessary for carrying on such enterprise are disposed of by the supplier to the recipient. o The commercial building including the rental contract (asset necessary to carry on of the

enterprise) is disposed of (sold) by PropCo to InvestCo.

(½)

Conclusion: The sale of the commercial property to InvestCo meets all the requirements of a sale of a going concern and will be zero-rated.

(1)

Total 5

100 TAX4861/103/2021

QUESTION 18 – SUGGESTED SOLUTION (continued) (2) Calculate the VAT implications for the sale of a going concern. Purchaser

makes 20% exempt supplies.

R

Input tax – sale of a going concern at zero percent, therefore no input tax deductible - (1) Section 18A adjustment: (1) Full cost of going concern purchase 8 000 000 Less: % intended for taxable supplies (80% x R8 000 000) (6 400 000) (1)

[Or R8 400 000 x 20%] 1 600 000

Section 18A adjustment – Output tax (R1 600 000 x 15%) 240 000 (1½)

Total 4½

Max 4

PART C – Calculate the donations tax for Joshua Nguni

Description Donation amount

Exemption Taxable amount

Donations tax @ 20%

30 April 2020 Donation to wife

R2 250 000

Exempt in terms of s 56(1)(b) “donation made to or for benefit of spouse" or bona-

fide subsistence s56(2)(c)

-

-

(1)

1 July 2020 Donation to daughter – Waterkloof house

R4 350 000 (R100 000) s 56(2)(b) exemption – basic annual exemption

(R4 350 000 – R100 000)

= R4 250 000 x 20%

R850 000

(1½)

15 September 2020 Donation to brother

R6 600 000 Exempt ito (s 56(1)(c)) donatio mortis causa

(OR the donation is contingent upon death

of donor) (s 56(1)(d))

- - (1)

28 February 2021 Interest free loan (on (1 January 2021) to trust – deemed ongoing donation (s 7C)

R900 000 Basic exemption already utilised

R900 000 x 8.75% x

60/365 (or 2/12)

= R12 945 x 20%

2 589 (2)

Total 5½

Max 4

___________________________

END OF SECTION B

101 TAX4861/103/2021

SECTION C – PRIOR YEAR TEST

PURPOSE STATEMENT:

SECTION C contains the Test from the prior year. The objectives of this section are:

to assist you in familiarising yourself with the format in which the tests (formative assessments) are set out; and

to provide an opportunity to apply your knowledge under exam conditions and practice your exam technique.

The scope of Test 1 includes both TL103 and TL104 topics, therefore please refer to Section C in TL104 for the prior year test.

© UNISA 2021

Date post:	30-Aug-2021
Category:	Documents
Upload:	others
View:	7 times
Download:	0 times

Tutorial Letter 103/0/2021 - Unisa · 2021. 2. 5. · TAX4861/103/0/2021 NTA4861/103/0/2021...

Documents