Postgraduate Diploma in Accounting

Worked Examples

Worked example 1 – VAT Registration

Question:

The company, Smith Sports (Pty) Ltd, is a registered VAT vendor with a
manufacturing subsidiary company based in Mauritius. Smith Sports
manufactures sports equipment for the local retail market.

Before Smith Sports (Pty) Ltd was registered as a VAT Vendor and opened
their company on 1 March Y1, their turnover for the 12-month period ended
28 February Y2 was R520 000. Jack Smith (Jack is a 33% shareholder in the
company) asked your advice on whether they need to register as a VAT
vendor, given the information below.

1. With effect from 1 March Y2 their turnover has increased to R90 000 a
month for the period ending 28 February Y3. This trend is expected to
continue for the next 12 months.
2. Jack Smith queried, on the assumption Smith Sports is required to
register as VAT vendor, whether they can break down the company
into divisions/branches in order to avoid VAT registration
requirements.

 Advise Smith Sports whether they must register as a VAT vendor as at

28 February Y3.
 Inform Jack Smit on his request in point 2.
Solution:

 Smith Sports is obliged to register as a VAT vendor because the total

value of taxable supplies for preceding 12 months exceeds R1000 Commented [A1]: Take note that the amount of
000. R1million refers to the ‘value’ of taxable supplies i.e.
 In terms of s50 of the VAT act all the taxable supplies of all the excludes exempt supplies. ‘Value’ refers to amounts
excluding VAT.
branches together should be added to determine whether the
R1million threshold has been met. If this is the case, the company
need to register for VAT. Branches of the same company may be Commented [A2]: If SARS believes a that the
registered separately, but all branches must then be registered. threshold is being avoided, they may issue a decision
that you are required to register as VAT Vendor (section
50A)
Worked example 2 – Importation of goods
Question:

Smiths Sports imported certain sport equipment parts into the country that
has cost price and value for customs duty purposes of R120 000 from

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 Mauritius. Import surcharges of R5 600 were levied. Determine the VAT
implications.

Solution:

Smiths Sports imported from non-BLSN country. VAT is calculated as follow: Commented [A3]: BSLN is the term used to
describe Botswana, Lesotho, Namibia and Swaziland c
Customs duty value(CDV): R120 000 ollectively. These countries have a favourable trading
status with South Africa which allows for free flow of
Add 10% of CDV : R12 000 trade from a customs duty point of view.
Add import surcharges: R5 600

Total: R137 600 x 15% = R20 640 VAT output paid on importation.

Smith Sports is a VAT vendor making 100% taxable supplies, therefore R20
640 VAT input can be claimed.

Worked example 3 – Importation of services

Question:

Peter Smith, (Jack’s son) is working for a local financial services business. He
received professional advice relating to their total business from a foreign
company. The local financial services business entails the making of both
taxable and exempt supplies in ratio of 20% taxable supplies and 80% exempt
supplies. The foreign company charges the local business R60 000 for services.

Determine the amount of VAT that should be levied.

Solution:

The local financial service business acquired the importation of services partly
for purposes of making exempt supplies i.e. 80% (Vendor who uses service
for purpose other than making taxable supplies).

They will be required to pay VAT output on 80% of the value of services: Commented [A4]: Remember the reason why we levy
R60 000 x 80% x 15% = R 7200 VAT output on the “non-taxable” supply portion for
importation of services? Private individuals or
businesses making exempt supplies (“non-taxable”)
might be tempted to import services, if the imported
services are not subject to VAT, to acquire them from
Worked Example 4 – Export of goods non-resident/foreign suppliers rather than locally and
Question pay irrecoverable VAT (i.e. they can’t claim VAT back)
on purchase price. The levying of VAT on imported
Smith Sports wishes to know what the Output VAT consequences are, in any services would thus partly prevent such persons from
of the following export transactions: paying a lower price to non-residents.
1. Sell goods worth R100 000 to a UK importer through their website.
Commented [A5]: Where these Vendors have paid
Smith Sports will courier the goods to the purchaser and have VAT on imported services, such vendors are NOT
obtained documentary proof for the export within 90days. permitted to claim VAT input, as it relates to only non-
2. Sell goods worth R100 000 to a UK importer through their website. taxable supplies i.e. exempt supplies.
Smith Sports will courier the goods to the purchaser however no
documentary proof was obtained within 90 days.

Solution:

1. These goods have been directly exported and documentary proof was
obtained, therefore the sale is zero-rated. VAT is calculated at 0%.

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 2. If the required documentary proof is not obtained within 90 days, the
supply may be deemed to be at the standard rate and not zero rated,
therefore VAT output of R100 000 x 15%.

Worked Example 5 – Sale of a going concern

Question

Smith Sports is considering selling their business as a going concern in the

future.
Discuss and calculate the VAT implications for Smith Sports and the other party
if:
Smith Sports sells their business to Macro Sports as a going concern for
R10mill. Assume all criteria for the sale of an enterprise as a going concern
has been met.

Smith Sports used the business with assets for 100% taxable supplies and the
buyer estimates the same.

Solution:

Seller:
Output VAT at 0% due to 100% taxable supplies: R10mill x 0% = R0 VAT
output.

Purchaser:
Going concern is zero rated, thus B paid no VAT on acquisition, thus no input
VAT.
Commented [A6]: From a VAT point of view, supplies
Question can be taxable, or exempt. If a business is making
exempt supplies, there won't be any output VAT levied
on the sale because of the exempt supplies.
On the assumption if Smith Sports used the business with assets for 90%
taxable supplies and the buyer estimates the same. Where mixed supplies are made there are potential
adjustments on either or both sides of the transaction.
Discuss and calculate the VAT implications for Smith Sports and the other party To understand this, you need to bear in mind that at the
if: point that ownership is transferred, the BUYER is
getting assets on which 100% of VAT was claimed
Smith Sports sells their business to Macro Sports as a going concern for (because the sale was fully taxable at 0%).
R10mill. Assume all criteria for the sale of an enterprise as a going concern
has been met. s16(3)(h) and s18A are VAT adjustments on either side
of a going concern sale. s16(3)(h) is an input that the
seller can potentially claim and s18A is an output which
Cost price of Smith Sports was R8,4mill when he originally bought it from a the buyer must potentially pay.
vendor.
The SELLER in a going concern sale is applying all
Solution: assets for 100% taxable use, therefore s/he can claim a
s16(3)(h) INPUT where a full input could not be claimed
Seller: in the past.
Output VAT at 0% due to mainly taxable supplies: R10mill x 0% = R0 VAT
output The BUYER in a going concern sale is effectively
S16(3)(h) adjustment: R8,4mill (lower of cost/OMV) x 15/115 x 10%(non- getting a full input on all assets as the sale is zero rated.
Therefore, s/he must pay a s18A output where supplies
taxable portion) are mixed.
Commented [A7]: Purchaser was not allowed to claim
a full input when purchased, thus s16(3)(h) adjustment
applies

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 Purchaser:
Going concern is zero rated, thus B paid no VAT on acquisition, thus no input
VAT
s18A adjustment: 10mill x 10% x 15% = R150k output VAT Commented [A8]: The BUYER in a going concern sale
is effectively getting a full input on all assets as the sale
is zero rated. Therefore, s/he must pay the s18A output
where supplies are mixed i.e. the effect now is that a full
Worked Example 6 – International Travel vs Local Travel input has only been claimed on 90% of the goods.
Section 18A is a unique adjustment for the buyer in a
Question going concern transaction. S18A does not make any
mention of multiplying with the tax fraction and therefore
Explain the VAT implications for the following business travelling transactions for a section 18A adjustment you will always multiply
with 15%. The reason for this is due to the buyer that
occurred by Smith Sports with regards to their Financial Director: must levy output VAT on the intended non-taxable use
1. R550 for taxi service across Gauteng on which the seller levied VAT output at 0%.
2. R10 300 for a flight to Mauritius
3. R1 800 for flight to Cape Town

Solution:

1. Travel by road or rail of fair-paying passengers within SA is an exempt

supply
2. Travel by air when any leg of the ticket is outside SA, is a zero-rated
supply
3. Travel by air in SA is a standard rated supply, and therefore Smith
Sports can claim VAT input on the cost.

Worked Example 7 – Property rental

Question

Rohan Smith, Jack Smith’s brother, is the owner of a few residential and
commercial establishments. He is a property magnate and a VAT vendor.
Calculate the VAT effects of the following transactions for the month:
1. He owns a residential apartment building. This apartment building is
fully let to tenants at a gross monthly rental of R250 000.
2. He purchased an IPad for exclusive use by the building manager for
residential purposes only. The cost of this IPad was R6 000.
3. He owns a hotel (Short term stay (less than 28 days) & bed &
breakfast) and earned R15 000(incl VAT) for the month.

Solution: Commented [A9]: Note that this does not mean that
VAT is raised at 0%. Exempt supplies are not charged
with VAT at all, thus no input tax in connection with
1. Residential accommodation VAT exempt, therefore there are no VAT such supply may be claimed.
implications.
2. The iPad was purchased for use by the building manager for
Commented [A10]: No input tax in connection with
residential purposes only. As the supply of the residential exempt supply may be claimed.
accommodation is exempt, he will not be allowed to claim the input
Commented [A11]: If this was board and lodging in
VAT on the iPad as it is linked to an exempt supply.
boarding houses for period longer than 28days, what
will the VAT implication be?
3. Bed & breakfast hotels are seen as commercial accommodation. R15
000 x 15/115 = R 1 956 VAT output Board and lodging in boarding houses are seen as
commercial accommodation. Since period is longer than
28 days, the consideration is deemed to be 60% of the
value: R15 000 x 15/115 x 60% = R 1 174

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Worked example 8 – Non Supplies
Question:

Smith Sports purchased a coffee machine for the canteen. They paid R1200
(Incl. VAT) for the coffee machine.
Smith Sports then sells the coffee machine after 1 year.

Explain the VAT consequences relating to the purchase and sale of the coffee
machine

Solution:

No input tax will be claimable on the acquisition of the coffee machine, as input
tax deductions are specifically denied for entertainment.
Smith Sports will not be required to account for any output tax on the sale of Commented [A12]: S8(14) provides that if the input
the coffee machine, since Smith Sports was denied input tax deduction on the tax has been denied in terms of the VAT act, then no
acquisition of the item. output tax is levied on supply.

Worked example 9 – Connected Person Rule

Question:
Smiths Sports sells a treadmill valued at R10 000 (incl VAT) to Jack Smith,
who only paid an amount of R4000 (incl VAT) for this treadmill.

Explain VAT consequences.

Solution: Commented [A13]: Why is this rule in place?
Connected persons can manipulate the prices in order
• Jack Smith is a connected person to Smith Sports as he holds more than to ensure they limit the VAT costs for the seller if the
10% shareholding in Smith Sports. Therefore they are connected persons buyer cannot claim a full input. Example the seller can
be in a net positive position always because the VAT
and levied is always less than the VAT claimed so SARS
• Consideration is < OMV and receives the net amount. The CP rule ensures that this
• Buyer can’t claim 100% input tax. Jack Smith is not a VAT vendor. net amount is fair so that the 2 parties cannot collude to
reduce this net amount owing to them.
Therefore:
If both parties are 100% VAT vendors, then the
payment and claim will always offset each other. (E.g. if
Smith Sports has to account for VAT on the OMV of the supply: I charge R115, output VAT is R15 and the buyer can
VAT output: R10k x 15/115 = R1 304 claim R15, therefore from SARS point of view, they
receive R15 and pay R15, therefore a net position of
Rnil). This offset to zero will happen regardless of the
Jack Smith is not a VAT Vendor and therefore can’t claim input tax. price charged as the buyer will always claim what the
seller charged
Commented [A14]: If Jack Smith was a sole trader and
registered as a VAT Vendor making 60% taxable
supplies, what will the value of the input tax claimed by
Worked Example 10 – Insurance Jack be?
Question: Jack will not be able to claim 100% input tax but only to
extent of his taxable supplies of 60%:
Smith Sports incurred losses when a fire broke out at their warehouse. Luckily, VAT input claimed by Jack: R4000 x 15/115 x 60% =
it was insured against these losses. Calculate the output VAT payable on the R313
transactions below:
Note: If Jack was VAT Vendor making 60% supplies,
1. Sports equipment worth R50 000 was replaced by the insurance Jack (the buyer) will claim input tax on the actual
company. amount as per tax invoice, which is the R4000.
Remember the connected person rule is an output tax
rule for the seller and not an input tax rule.

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 2. A VW Polo, driven by one of the marketing staff, as well as stock in
the boot was irreparably damaged. The insurance company paid out
R120 000 for the car and R15 000 for the trading stock.
3. A senior employee passed away and R750 000 was received on the
proceeds of his life insurance policy that the company had taken out.

Solution:

1. No output VAT is payable where assets are replaced.

2. No output VAT is payable on the VW Polo as this is a motor car as Commented [A15]: Note: Had the vehicle been
defined and therefore input was originally denied. Deemed output VAT repaired, output VAT would have applied to the vehicle
on the trading stock is calculated as follows: as this is a separate cost for repairs.
R15 000 x 15/115 = R1 956. Commented [A16]: Output Tax is usually not
3. Amounts received in terms of a life insurance are exempt from VAT as apportioned. There are 2 exemptions to this rule:
 Fringe benefits and
these constitute financial services.
 Indemnity payments

Thus for both these types of supplies, amount of output

tax is payable to extent that it relates to taxable
supplies.
Worked Example 11.1 – Fringe Benefits
Question:

Apart from a cash salary, Smith Sports offers its employees the following
additional benefits:
1. A monthly travel allowance of R4 000;
2. A favourable interest rate on a loan to buy a house;
3. Lunch in a canteen at work;
4. Share options in the company; and
5. 7 days’ accommodation at a holiday apartment owned by the
company.
Does VAT need to be accounted for on any parts of the salary package above
in terms of section 18(3) deemed supplies on fringe benefits?

Solution:

1. No output VAT is payable on the allowances as it constitute a supply of

money (a financial service) and an allowance is not Fringe Benefit in
terms of 7th Schedule, therefore no output tax payable on an
allowances(s8).
2. The low interest loan is an exempt supply (financial service).
3. The meal provided is entertainment as defined. No VAT is claimed on
buying food for staff and as such there is no output VAT on the fringe
benefit.
4. Share options are a financial service.
5. Holiday accommodation is entertainment as defined. Commented [A17]: Remember if a fringe benefit
relates to an exempt supply, zero rated supply or supply
of entertainment it is not a deemed supply and thus no
output tax payable.

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Worked Example 11.2 – Fringe Benefits: Right of use of a motor car
Question:

One of the directors at Smiths Sports is granted the use of company owned
motor car (motor car as defined in terms of the VAT act) with determined value
of R450 000, that is fully used for taxable purposes. The director pays R1000
per month that is allocated as follows:
 Fuel R200
 Insurance R220
 Maintenance R100
 Interest R190
 Fixed cost of car R290

Calculate the VAT consequences of the above

Solution:

• Step 1: R450 000 (DV already excludes VAT)

• Step 2: R450 000 x 0,3% = R1350 Commented [A18]: Motor car as defined = 0.3%
• Step 3: R1350 – R220(insurance)- R100(maintenance) = Other cases = 0.6%
R1030 Commented [A19]: Remember if vendor pays
The fuel (zero rated), interest (exempt), and fixed cost (input insurance premiums under a short term policy, s/he
tax denied) are not deductible. may claim input tax on the premium if premium was
• Step 4: R1030 x 15/115 = R134.35 paid in furtherance of the enterprise. This includes
insurance premiums paid in respect of a motor car.
• Step 5: R134.35 x 1 month x 100% = R134,35 output tax per
month payable by Smiths Sports on the FB.
Commented [A20]: Smith Sports will get a s11(a)
deduction for the deemed output amount on the fringe
benefit as it forms part of the payroll cost. Refer to the
accounting journal:
Dr. Payroll expense (P/L) R134,35
Cr. VAT output (SoFP) R134,35

Worked Example 12 – VAT apportionment

Question

Assuming Smith Sports makes both taxable supplies (60%) and exempt
supplies (40%)

Calculate the input VAT that can be claimed on a computer purchased for R3
420 (Including VAT) under the following 3 scenarios:

a) The computer is used to process invoices for the taxable supplies only
b) The computer is used to process invoices for the exempt supplies only
c) The computer is used to process invoices for all supplies

Solution:

a) No VAT apportionment as the computer will be used to make taxable

supplies only.
3 420 x 15/115 = 446
b) The computer is used to process invoices for the exempt supplies only Commented [A21]: No VAT can be claimed because
c) The computer is used to process invoices for all supplies this computer is being used wholly to make exempt
supplies.

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 Apportion VAT input for the portion used to make taxable supplies: 3
420 x 15/115 x 60% = 267

Worked Example 13 – s16(3)(h)

Question

Assume Smith Sports made 60% taxable supplies. They purchase a machine
for R57 000(Incl VAT) and claim an input on purchase date of 57 000 x 15/115
x 60% = 4 460.

Calculate the VAT effects for Smith Sports if:

1. There is a change in their product mix so they start making 80%
taxable supplies
2. They sell the machine for R34 200(Incl VAT)

Solution: Commented [A22]: Section 16(3)(h) applies where

goods are sold, or taxable usage changes.
1. Input: 57 000 x 15/115 x (80% - 60%) = R1 487
2. Output: 34 200 x 15/115 = 4 461
S16(3)(h) Input: 34 200 x 15/115 x (100% - 60%) = R1 784
Worked Example 14 – Second hand goods
Question

Company ABC is a non-vendor who is in the process of being liquidated.

Company ABC sells an old delivery vehicle for R40 000 and A VW Polo for R30
000 to a Smith Sports. Smith Sports pays cash for the goods immediately.
1. What would the tax implications be for Smith Sports that bought the
goods?
2. Would the situation change if the open market value of the delivery
vehicle was R30 000?

Solution:

1. Delivery vehicle: The tax fraction is applied to the delivery vehicle as

this is a purchase of a second hand good from non-vendor. Deemed
input tax of R5 217 (R40 000 x 15/115) may be claimed by Smith
Sports even though no VAT was charged to them.
Citi Golf: No vat can be claimed on the second hand Citi Golf as even
though it is a second hand good. This does not change the fact that
you cannot claim Vat on a passenger vehicle, motor car as defined.
2. The lower of cost and open market value is used. Thus input vat of R3 Commented [A23]: Value of notional input tax: lower of
913 (R30 000 x 15/115) may be claimed. purchase price or OMV

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Worked Example 15 – Entertainment
Question

Smith Sports incurred the following costs inclusive of VAT in December Y1:

1. Staff refreshments such as tea, coffee, other beverages and snacks for
the kitchen…R850
2. Christmas lunch for the employees…R2450

Discuss the VAT implications for each.

Solution:

All of the above will be seen as goods or services acquired by Company B for
purposes of entertainment. Therefore VAT input will be denied on all items.

Worked Example 16 – Change in use adjustments

Question

Prop (Pty) ltd (registered VAT vendor), one of Smith Sports subsidiaries, is a
leasing company with a year end of 31 December.
The company owns one building which is used for residential leasing and
commercial leasing. When the building was purchased at R5,7 million (incl
VAT), they had used 30% for residential and 70% for commercial leasing.

When they purchased the building they only claimed input tax of R520 435
(R5,7mill x 15/115 x 70%). The OMV of the building was R6,8 million on 1 July
2018.

What will the VAT consequences be if the change in use changed on 1 July
2018 as follows:
1. They decided to change it to 40% residential leasing
2. They decided to change it to 15% residential leasing
3. They decided to change it to 100% residential leasing

Solution:

1. Increase in residential usage is equal to 10%. Therefore, no

adjustment necessary.
2. Commercial taxable supply increased with 15%. From 70% to 85%
taxable supplies. Therefore, s18(5) will apply: Input VAT: R5,7mill x Commented [A24]: This adjustment is made at year-
15/115 x 15% end.
3. Commercial taxable supply decreased. From 70% to 0%. Therefore,
s18(1) will apply. Commented [A25]: You were granted an input tax
Output VAT: R6,8mill x 15/115 credit when you purchased the asset, which would not
s16(3)(h): Input Vat R5,7mill x 15/115 x 30% have been available had you used the asset for non-
taxable supplies, therefore SARS requires you to pay
this back via an output tax
Commented [A26]: Input was previously 70%
apportioned. Thus on 30% input was not originally
claimed. But now 100% output VAT on amount, thus
now you can claim input VAT on portion originally not
allowed due to s16(3)(h).

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Worked Example 17 – s18C leasehold improvements
Question

Company A and B are both VAT vendors. Company A leases land to company
B for R50 000(Incl. VAT) per month from 1 January Y1. Company B is
required to erect leasehold improvements (a factory building) on the land for
an amount of R1 500 000 (Incl. VAT). The building was completed on 28
February Y1. The lessee uses the building for 70% taxable supply purposes
only.

Explain the VAT consequences supported with calculations for both A and B.

Solution:

Company B (Lessee):

VAT input on monthly rentals:

 R50 000 x 15/115 x 2 months x 70% = R9 130

A deemed supply is triggered for the leasehold improvements as lessee is

deemed to supply goods to the lessor.
Value of supply: Rnil
Time of supply: When improvements were completed, 28 Feb Y1.

Company B can claim input VAT on value of improvements:

 R1 500 000 x 15/115 = R195 652 input VAT Commented [A27]: No apportionment is necessary to
make for the non-taxable usage for the lessee as the
The input VAT can be claimed if in possession of the necessary supporting deemed supply rule applies in terms of s8(29), s8(29)
documentation. explains that the taxpayer is deemed making "100%
taxable supplies" AND Section 18C is to place the
lessor in the position that the lessor would have been
Company A (Lessor): had the lessor undertaken the leasehold improvements
and used the improvements for non-taxable supplies.
Output VAT on monthly rentals: R50 000 x 15/115 x 2 months = R13 043 (i.e. making the net effect fair).

In this example the VAT net effect would be: R136 956
Section 18C determined that the lessor has to account for output VAT, but only (195 652 - 58 695) input which ultimately would have
to extent that the leasehold improvements undertaken is applied for non- been
taxable purposes: R1 500 000 x 15/115 x 70% = R136 956 input.
Commented [A28]: Section 18C is to place the lessor
Section 18C output VAT adjustment: R1500 000 x 15/115 x 30% = R58 695 in the position that the lessor would have been had the
lessor undertaken the leasehold improvements and
used the improvements for non-taxable supplies.

The input VAT is permitted as a deduction in the hands

Worked Example 18 – Fixed Property of the lessee and the output tax adjustment is triggered
Question in the hands of the lessor, on the basis that the
improvements become property of the lessor. Section
18C has the effect that the lessor ultimately bears the
1. Smith Sports is not a property dealer and ABC is not registered for potential output VAT, where leasehold improvements
VAT. Smith Sports sells a factory property to ABC for R750 000. are undertaken by the lessee for no consideration.
What are the VAT implications for both Smith Sports and ABC?

2. Smith Sports buys a second hand commercial property from a SA non-

vendor for R1 000 000. Smith Sports paid R80 000 transfer duty when
they took ownership of the property. What are the VAT implications
for Smith Sports?

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 Solution:

1. Smith Sports (Seller) VAT implications:

Smith Sports is a registered VAT vendor. VAT will be levied on the sale
of the factory as it is the sale of a commercial property by a VAT vendor.
Thus VAT of R97 826 (R750 000 x 15/115) will be recorded as an output
tax on sale.
Company ABC (Buyer) VAT implications
The factory is commercial property and there is, therefore, VAT levied
on it. As there was output VAT charged when selling the property there
will not be any transfer duty. Company ABC cannot claim the input VAT
as it is not a VAT vendor

2. Smith Sports may claim a notional input VAT amount of R130 435 Commented [A29]: The limitation rule to transfer duty
(R1 000 000 x 15/115). does not apply anymore. The vendor is left in a positive
The deduction may only be claimed by the vendor to the extent that the tax position having been entitled to notional input tax
deductions which are greater than the transfer duty
purchase consideration has been paid to the seller. actually paid.

Worked Example 19 - ICA

Question

Calculate the VAT and income tax treatment for the following ICA via a lease:

Smith Sports enters into a lease agreement with the following terms:

Lease term 48 months

Cash Cost (Including VAT) 114 000

Finance Charges 92 340
Total Lease liability 206 340

Lease term 48 months

Lease instalment per R4 299
month
206 340/48

Solution:

 VAT can be claimed upfront of R 14 870 (R114 000 x 15/115)

 Instalments deductible for tax purposes are calculated as follows
(Income Tax Act) i.e s11(a):
o R4 299 – R14 870/48 = R3 989 per month Commented [A30]: In terms of section 23C of the Act it
is necessary to reduce the lease payments made to the
extent that they relate to VAT claimed under the VAT
Act.

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Worked example 20 – Irrecoverable debts
Question

Smith Sports writes off the following bad debts. Determine which debts an
input VAT deduction may be claimed:
1. Local trade receivables of R50 000, inclusive of interest on overdue
accounts of R5000.
2. Overseas trade receivables of R75 000
3. Staff loan written off R20 000

Solution:
1. The R5 000 interest written off has no VAT implication as it is a
financial service. Smith Sports may claim an input VAT deduction of
the balance of R5 869 (R45 000 x 15/115).
2. No VAT was charged on the export, thus there is no VAT input on the Commented [A31]: Zero rated supply
write off of the bad debt.
3. Loans are financial services and as such there is no VAT input on the
write-off of a staff loan.

Worked example 21 – s18D

Question

Mr D is a registered VAT vendor who is a residential property developer. He

recently completed a residential development in Stellenbosch (Western Cape)
in Year 1. Mr D incurred a cost of R1 500 000(incl. VAT) when he developed
the unit. Due to current market conditions, he is unable to sell the residential
property and therefore decided to temporarily rent out the property. On 1 May
Y1 he entered into temporarily rental agreement to rent out the residential
accommodation for 12 months only. The open market value of the property
was R2 300 000 on the date the rental agreement was signed. On 1 November
Y1 Mr D received an offer from a purchaser (non VAT vendor) and sold the
property for R2 200 000(Incl. VAT) and the full amount was paid in cash on
date of registration on 15 February Y2.

Discuss the VAT implications

Solution:

MR D is a developer as defined and temporarily applied the residential property

as a supply of dwelling under a letting agreement not exceeding 12 months.

Therefore section 18D will apply:

 Output tax must be levied as change in use occurred.
 Output tax is on the adjusted cost : Since Mr D would have claimed
input of R1500 000 x 15/115 = 195 652 input tax claimed when costs
incurred for development, the output VAT levied on the adjusted cost
is R1500 000 x 15/115 = 195 652 output tax
 Time of supply: on date rental agreement comes into effect which is 1
May Y1

No VAT will be levied on rental income received as this is an exempt supply.

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Subsequent disposal of property:
 MR D sold the property within the ‘temporarily applied’ 12 month
period, therefore:
 Output tax to be levied on R2 200 000 x 15/115 = 286 956 output tax
 Time of supply is the earlier of date of registration or payment
received, 15 February Y2.
 Input tax will be claimed again on the adjusted cost: R1500 000 Commented [A32]: The purpose of the additional input
x15/115 = 195 652 tax is to effectively reverse the output tax adjustment of
s18D that was made when MR D 'temporarily applied'
the fixed property in supplying accommodation in
dwelling.

© Milpark Education PGDA

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