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TAX3701 - VAT - Lecture Notes
Taxation of business actvities (University of South Africa)
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VAT (PART 1)
LECTURE NOTES
Prepared by Roulon du Toit CA (SA)
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INTRODUCTION
Value-Added Tax is an indirect tax.
This means that not every person that pays VAT has to submit a return to SARS. Instead there are
designated persons, called “VAT vendors” which act as agents on behalf of SARS. These VAT vendors
pay across VAT to SARS and may also be entitled to receive VAT back from SARS.
It was introduced in South Africa in 1991.
As you will see, a person that is required to account for VAT is called a VAT vendor. These VAT
vendors submit returns to SARS (called “VAT returns”) on which they perform the calculation of VAT
that they have to pay to SARS or VAT that SARS must refund them.
TYPES OF SUPPLIES TO CONSIDER FOR VAT
TYPES OF
SUPPLIES
TAXABLE
VAT @
14%
VAT @ 0%
EXEMPT
NO VAT
LECTURE EXAMPLE 1
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REGISTRATION OF VAT VENDOR & ENTERPRISE
VAT VENDOR
A non-executive director that earns more than
R1million must register as a VAT vendor.
Can also choose to register based on rule below.
A person must register as a VAT vendor if
• Carrying on an enterprise
• The taxable supplies for the enterprise (standard rated AND zero-rated) exceed R1million in
a period of 12 months.
• IMPORTANT: exempt supplies are not considered
• The R1million does not include exceptional items (selling of business, replacement of assets,
any abnormal circumstance of temporary nature)
• Any foreign person that supplies electronic services to a SA resident (i.e. iTunes) must
register if value exceeds R50 000.
A person may choose to voluntarily register as a VAT vendor if taxable supplies will exceed R50 000
in a 12 month period.
If the person has more than one business (carried on as a sole proprietor) then the taxable supplies
of both businesses must be considered. If the total taxable supplies exceed R1million, then the
person must still register as a VAT vendor.
ENTERPRISE
The definition of an enterprise is very important and must be kept in mind.
A requirement before being registered as a VAT vendor is that the person must be carrying on an
enterprise.
It is also important to understand that only transactions/supplies which are in the course of carrying
on an enterprise will be subject to VAT.
An ‘enterprise’ is:
• enterprise or activity
• carried on continuously or regularly
• in South Africa (or partly in South Africa)
• by a person
• where the goods or services are supplied for a consideration
• it may or may not be for a profit
The following items are also specifically included as forming part of an ‘enterprise’:
• the activities of starting or termination a business
• supply of electronic services by a person that is NOT a resident if
o services are supplied to a SA resident OR
o payment is made from a SA bank account OR
o the person has a SA address
The following items are NOT the carrying on of an enterprise:
• Salaries/wages earned
LECTURE EXAMPLE 2
• Hobbies carried on by natural persons
• Making of exempt supplies (see later list of items)
• Commercial accommodation where the value of the supply does NOT exceed R120 000 for a
12 month period
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ACCOUNTING BASIS
A VAT vendor needs to submit VAT returns to SARS that shows the calculation of the total output tax
and the total input tax.
These VAT returns needs to be submitted in accordance with the VAT period that has been
prescribed by the Commissioner when the person registered as a VAT vendor.
The different VAT periods are:
CATEGORY
A
B
C
D
VAT PERIOD
2-month VAT periods ending last day of Jan, Mar, May, July, Sep, Nov
2-month VAT periods ending last day of Feb, Apr, Jun, Aug, Oct, Dec
1-month VAT period. Last day of every month
6-month VAT period ending Feb and Aug (only for farmers. Not common)
The most common categories that you need to be aware of are categories A, B and C.
A VAT vendor sells goods for R114 000 (incl
VAT) in January on credit.
The debtor pays for the goods in March.
When must the VAT vendor account for
the output tax of R114 000 x 14/114 =
R14 000?
Is it January or March?
To answer the question you need to understand that there are two different basis of accounting that
a person may be registered under:
• Invoice basis OR
• Payments basis
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ACCOUNTING BASIS
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Most common.
All companies use
this
INVOICE
BASIS
PAYMENT
BASIS
Account for VAT on the earlier of:
- Invoice OR
- Payment
Account for VAT on
payment
The taxpayer must apply to SARS for this.
Only available to:
• The government
• Natural persons with taxable supplies
of less than R2.5 million
LECTURE EXAMPLE 3
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BASIC STRUCTURE OF CALCULATION
OUTPUT TAX
INPUT TAX
ADJUSTMENTS
VAT
PAYABLE/REFUNDABLE
It is important that you make sure that you are aware of whether you are working with output tax or
input tax.
Also, remember, that the VAT vendor that is supplying the goods or services will raise the output tax
and that the VAT vendor that acquires the goods or services will be the one that claims the input tax
BUT ONLY IF in possession of a valid VAT invoice.
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BASICS
OUTPUT TAX
In this next section we will focus our discussion on output tax which is referred to as ‘output tax’.
The person that makes the supply (supply is a sale or rendering of a service) will raise output tax on
the sales invoice and the person that acquires this supply will use the VAT on the invoice received to
calculate the input tax.
It is important that you understand how and when output tax is calculated. The input tax is
determined by the amount of output tax that was raised on the invoice. A vendor must be in
possession of a valid VAT invoice to claim input tax.
There are 3 types of supplies (as noted at the start of these notes). These supplies are:
Standard
Rated (14%)
Taxable
Zero-rated
(0%)
Type
Not taxable
Exempt
It is important that you understand that if a vendor raises output tax that is zero-rated then the
person claiming the input tax will also claim an amount of zero. This is because the VAT invoice will
reflect Rnil as the output tax that was raised.
If the VAT vendor makes an exempt supply then there will be no output tax raised and the person
that acquires the exempt supply will also not be able to claim any input tax as there will be no VAT
on the invoice.
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WHEN IS OUTPUT TAX RAISED?
Most
common
OUTPUT VAT
SUPPLY OF
GOODS/SERVICES
BY VENDOR IN
ENTERPRISE
SUPPLY
IMPORT OF GOODS
IMPORT OF
SERVICES BY NONVENDOR (OR FOR
EXEMPT PURPOSES)
Sale, rendering of services, rental agreement, instalment
credit agreement
We also get something that is called a “deemed supply” of
which the most common are: indemnity award, sale of
going concern, fringe benefits, ceasing to do business
GOODS
Corporeal movable things, including fixed property and a
right to electricity.
Excludes money.
SERVICES
The definition in the Act states “anything done or to be
done” and includes: royalties, sale of intellectual property,
services rendered by any person and professional
VENDOR
Discussed earlier in notes. Revise.
ENTERPRISE
Discussed earlier in notes. Revise.
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ZERO-RATED SUPPLIES
When a supply is zero-rated it means that there is still VAT raised on the supply. However, the VAT is
raised at 0%.
This means that it is NOT an exempt supply. Instead of calculating the VAT using 14%, the VAT is
calculated using 0%. For the purpose of your exams you must clearly state that an amount is zerorated. You will not receive marks if you do not clearly state this.
It is important to understand that as zero-rated supplies are still taxable, it means that the vendor
can still claim input tax on other items that it uses to make these zero-rated supplies. As long as the
vendor is purchasing goods/services and is in possession of valid VAT invoices then the vendor can
claim input tax.
LECTURE EXAMPLE 4
LIST OF MOST COMMON ZERO-RATED SUPPLIES
We will discuss various transactions in more detail but here is a list of the most common zero-rated
supplies.
•
•
•
•
•
•
•
•
•
•
Export of moveable goods
Exported services: transportation (international transport of passengers and goods)
Exported services: services rendered outside of SA
o If services are rendered to a non-resident in SA then it is not zero-rated
Sale of a going concern (see later notes)
Agriculture and farming goods (seed, feed, fertiliser, etc.) (to be changed in future)
Gold coins (such as Kruger Rands)
Basic foodstuffs
o brown bread, maize meal, samp, mealie rice, dried mealies, dried beans, lentils,
pilchards and sardines, milk powder, rice, uncooked vegetables (not dried, canned or
bottled), uncooked fruit (not dried, canned or bottled), vegetable oil, milk, brown
wheaten meal, eggs
Fuel (petrol and diesel)
Illuminating kerosene
Municipal rates
It is important that you are aware of the above items so that you can correctly indicate in your tests
that the items are zero-rated.
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EXEMPT SUPPLIES
Exempt supplies are not subject to VAT.
Refer back to the discussion on an ‘enterprise’. It indicates that the supply of exempt supplies is NOT
an enterprise.
Therefore, this means that there is NO output tax levied on exempt supplies.
This means that the person that acquires the supply also cannot claim input tax as there is no VAT on
the invoice (as it is exempt).
A vendor that acquires goods/services in order to make exempt supplies also cannot claim input tax,
even if there was on the invoice.
LECTURE EXAMPLE 5
LIST OF MOST COMMON EXEMPT SUPPLIES:
We will discuss various transactions in more detail but here is a list of the most common exempt
supplies:
•
•
•
•
•
•
•
•
Financial services
o exchange of currency
o issue of a loan
o issue of shares
o interest (income or expense)
o long-term insurance (this is life insurance, funeral policies, dreaded disease
insurance)
o pension funds, provident funds, RAFs, medical aid
o IMPORTANT NOTE: The fees charged to render the above services (such as bank
charges) are NOT exempt
Residential accommodation (very popular)
o Make sure that you understand that commercial accommodation is thus NOT
exempt
Supply of services by
o body corporate
o share block company
o housing development scheme
o home-owners association
Transport of fare-paying passengers (and personal effects) by road or rail
o does not apply to goods
Supply of educational services by qualifying institution
Membership contributions to trade unions (or other employee organisations)
Supply of childcare services by crèche or after-school care centre
Supplies by political parties to members
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SPECIFIC TRANSACTIONS
For the next section of the work, we are going to look at special types of transactions. Most of these
transactions are already mentioned in the zero-rated and exempt supplies above.
We will just be summarising the most common transactions to make it easier to study.
Our focus is still on output tax. However, remember, the vendor that acquires these goods/services
will claim as input tax the amount that was raised as output tax. So you are basically covering both
output and input tax.
EXPORT OF GOODS
DIRECT
INDIRECT
EXPORTS
(GOODS)
(no export docs)
INDIRECT
(export docs)
Zero-rated
VAT @ 14%
Zero-rated
LECTURE EXAMPLE 6
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ACCOMMODATION
ACCOMMODATION
RESIDENTIAL
ACCOMMODATION
EXEMPT
COMMERICAL
ACCOMMODATION
NORMAL VAT
SPECIAL RULE FOR
STAYING >28 DAYS
If customer stays for more than
28 days, then only 60% of charge
is subject to VAT
LECTURE EXAMPLE 7
ROAD/RAIL
TRANSPORT – ROAD/RAIL
Goods
Standard VAT
Fare-paying
passengers
Exempt
Non-paying
passengers
Standard VAT
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FLIGHTS/BOAT
TRANSPORT – FLIGHTS/BOAT
TRANSPORT
GOODS/PASSENGERS
INTERNATIONALLY
Zero-rated
TRANSPORT
GOODS/PASSENGERS
WITHIN SOUTH AFRICA
Standard VAT
TRANSPORT IN SA PART OF
INTERNATIONAL FLIGHT
Zero-rated
INSURANCE ON
INTERNATIONAL TRIPS
Zero-rated
LECTURE EXAMPLE 8
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INPUT TAX
The following rule is the most important rule pertaining to input tax:
A VENDOR MAY ONLY INPUT TAX EQUAL TO THE AMOUNT ON
THE VAT INVOICE.
A VAT VENDOR MAY NOT CLAIM INPUT TAX IF THE
GOODS/SERVICES WILL BE USED TO MAKE EXEMPT SUPPLIES.
It is thus very important to understand that if a vendor does not have a VAT invoice then the vendor
may not claim any input tax
• The only exception is 2nd hand goods from a non-vendor (discussed below)
2ND HAND GOODS FROM A NON-VENDOR
If a vendor acquires goods from a non-vendor there will not be a VAT invoice from which to claim
VAT (as the non-vendor will not issue a valid VAT invoice).
If you purchase second hand goods
from a non-vendor, the NORMAL rules
This would mean that the vendor could not claim any input tax.
apply. Do NOT apply this section.
However, a special rule exists for 2nd hand goods acquired from a non-vendor.
A vendor may claim a notional input tax amount.
- In other words, the vendor will be allowed to claim an input tax amount even if there wasn’t
any VAT on the invoice.
The notional input tax amount is calculated on the lower of:
- actual cost OR
- market value
SPECIAL RULE:
A second hand car dealer is allowed to claim notional input tax on the actual value of a vehicle
that was traded in by a non-vendor.
Furthermore, the notional input tax may only be claimed to the extent that payment has been made.
2nd hand goods are goods that were:
- previously owned and
- used (if goods are unused then this section does not apply)
2nd hand goods exclude animals and gold coins and goods that contain gold (unless acquired for the
purpose of reselling in substantially the same state).
IMPORTANT: This rule only applies to 2nd hand goods. If new goods are purchased from a nonvendor, there is no input tax as there is no VAT invoice.
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EXPORT OF 2ND HAND GOODS ACQUIRED FROM A NONVENDOR
When goods are exported it is usually zero-rated.
However, if notional input tax had been claimed on the goods (2nd hand goods from a non-vendor)
and these goods are then exported then output tax must be raised equal to the amount of notional
input tax that had been claimed.
LECTURE EXAMPLE 9
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APPORTIONMENT OF INPUT TAX
As noted previously, a vendor may only claim input tax if it will use the VAT to make taxable supplies
(remember taxable supplies are 14% and 0% supplies).
Therefore, if a vendor acquires goods/services to make exempt supplies (or anything that is not
taxable supplies) then the vendor may not claim VAT.
EXAMPLE:
X Ltd is a VAT vendor. It purchases a computer at a cost of R57 000 (which includes R7 000 VAT).
• If X Ltd purchased the computer to use to make taxable supplies (14% or 0% supplies) then X
Ltd may claim R7 000 as input tax
• If X Ltd purchased the computer to make exempt supplies then X Ltd may not claim any
input tax
• If X Ltd purchased the computer and will use it 70% of the time to make taxable supplies and
30% of the time to make exempt supplies, then it X Ltd may only claim 70% of the VAT
(R7 000 x 70% = R4 900)
SPECIAL RULE: If the taxpayer will use the goods/services 95% or more for taxable supplies, then the
vendor may claim 100% of the input tax.
VERY IMPORTANT:
The above section relates to INPUT TAX.
Output tax is always at 100%.
There are only 3 exceptions to when output tax is calculated at less than 100% (covered later in
these notes):
- indemnity award
- fringe benefit
- change in use
LECTURE EXAMPLE 10
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INPUT TAX DENIED
This section is very popular in exams. It also affects some of the areas that are discussed above.
There are some items which are provided in the VAT Act where the vendor is simply not allowed to
claim the input tax.
This is not because it is exempt or zero-rated. The vendor is just not allowed to claim the input tax.
It is very important in your exams that you indicate clearly on which items input tax is denied. If you
state that it is exempt or zero-rated or anything else you will lose your marks.
Input tax is denied on the following items (which are all discussed in detail below):
• Entertainment
• Club membership fees and subscriptions
• Motor cars
ENTERTAINMENT
Input tax is denied on “entertainment”.
The definition of entertainment is provided in s1 of the VAT Act.
The definition of entertainment “means the provision of any food, beverages, accommodation,
entertainment, amusement, recreation or hospitality of any kind by a vendor whether directly or
indirectly to anyone in connection with an enterprise carried on by him”
This is a very broad definition.
It includes items such as furniture and equipment that is used in a staff canteen. Includes anything
given to clients as entertainment (e.g. dinners, thank you gifts, water coolers or coffee provided at
the workplace, etc.)
A vendor may claim input tax on entertainment in the following situations:
• The vendor is in the business of entertainment (e.g. restaurant) and charges persons for the
entertainment
o Includes a person that organises a seminar/event and charges the attendees a fee
that covers all the direct and indirect costs
• The vendor is in the business of entertainment (e.g. restaurant) and any excess food is given
to staff members or welfare organisations
• The vendor is in the business of entertainment and goods are given away for free for bona
fide promotional purposes
• The meals, refreshments and accommodation of the vendor’s staff or self-employed persons
who are obliged (through agreement with vendor) to spend at least one night away from
home
• Meals and refreshments provided to passengers or crew members on a journey if the
transport is taxable (e.g. food on a plane)
LECTURE EXAMPLE 11
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CLUB MEMBERSHIP FEES AND SUBSCRIPTIONS
Input tax is denied on the club fees if the club pertains to recreation or sport (e.g. golf club, bowling
club, cigar club).
Input tax may be claimed if the vendor pays the fees pertaining to professional clubs/bodies (such as
SAICA and legal associations).
MOTOR CARS
This is a very popular section and is very important as it influences the output tax that is calculating
in respect of a company car fringe benefit.
The VAT Act defines a motor car as a vehicle
• with 3 or more wheels
• constructed or converted wholly or mainly for the transport of passengers
• including station-wagons, mini-buses, double cabs
The following vehicles are NOT motor cars (and thus input tax may be claimed):
• vehicles that can only transport 1 passenger
• buses that can transport more than 16 passengers
• special purpose vehicles such as ambulances, fire trucks
• hearses (constructed or converted)
• vehicles weighing more than 3 500kgs when empty
• game-viewing vehicles
o should be able to transport at least 7 passengers AND
o must be used exclusively for game-viewing AND
o must be used in national parks, game reserves, sanctuaries or safari areas
Input tax on motor cars is denied in respect of the supply and importation of a motor car.
Supply means:
• buying
• renting
However, it is important to note that the input tax is NOT denied on the other costs that relate to
motor cars such as:
• insurance
• maintenance/repairs
• tyres
• license fees
Input tax will NOT be denied in the following situations:
- where the vendor buys and sells motor cars as trading stock
- where the vendor buys motor cars and rents it out
- where the vendor acquired the motor car to give away as a prize
LECTURE EXAMPLE 12
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