LEARNING UNIT 1

Learning
unit

INTRODUCTION

LEARNING OUTCOMES

PRESCRIBED STUDY MATERIAL FOR THIS

LEARNING UNIT

CONTENT OF LEARNING UNIT

1.1 Background
1
1.2 The accounting basis
1.3 Tax periods, returns, penalties and refunds
1.4 Output VAT
1.4.1 Supply of goods and services in the course
of an enterprise
1.4.2 Importation of goods and services
1.4.3 Output VAT: zero-rated supplies
1.4.4 Output VAT: exempt supplies
1.4.5 Output VAT: deemed supplies
1.4.6 Output VAT: non-supplies and no
apportionment
1.5 Time of supply
1.6 Value of the supply
1.7 Input tax
1.7.1 Documentation
1.7.2 Determination of input VAT
1.7.3 Input VAT denied
1.7.4 Deemed input
1.8 Special rules
1.9 Adjustments
1.10
1.11
Tax rulings
Tax avoidance and unprofessional conduct
Value-
1.12
1.13
Influence of VAT on income tax calculations
Summary
added Tax
1.14 Questions (VAT)
WRAP-UP QUIZ

LITERATURE CONSULTED
 INTRODUCTION

Tax can be classified into two groups, namely direct taxes, and indirect taxes. Indirect taxes are
included in the price you pay for goods or services. Value-added tax (VAT) is an example of an
indirect tax.

In this learning unit, the calculations relating to VAT will be investigated. The Value-added Tax
Act No. 89 of 1991 (“the VAT Act”) contains the details of how VAT works and how it should be
applied. VAT is a separate tax from income tax, and it has its own rules, based on how and when
goods or services are supplied. The VAT rate changed on 1 April 2018 to from 14% to 15%.

It is important to understand how to calculate the VAT amount (that is, the portion of the
transaction value accounted for by VAT). The VAT amount is calculated by multiplying the value
of the transaction by the tax fraction. The tax fraction is discussed below. When calculating the
VAT on a transaction, it is important to establish which amount was provided: it could be the
amount before VAT is added (the exclusive selling price) or the amount after VAT has been added
(the inclusive selling price). The following basic structure can be used to calculate the different
amounts:

Selling price excluding VAT (100%) R100

Add: VAT at 15% R 15
Selling price including VAT (115%) R115

This framework can be used to calculate any amount, for example, if the selling price (including
VAT) is R230, the VAT and the selling price excluding VAT can be calculated as follows:

Value (selling price excluding VAT) R200 (R230 / 115 x 100)

Add: VAT at 15% R 30 (R230 / 115 x 15) or (R200 / 100 x 15)
Consideration (selling price including VAT) R230 (R200 / 100 x 115)

When an amount includes VAT (i.e., inclusive amount), the fraction will be as
follows: 15/115 (as shown in the example above: R230 x 15/115 = R30).

When an amount excludes VAT (i.e., exclusive amount), the fraction will be as
follows: 15/100 or 15% (as shown in the example above: R200 x 15/100 = R30).

VAT is a tax that is levied at every stage of the production process; therefore, every time a VAT
vendor (an entity that is registered for VAT purposes) sells goods or services, VAT must be levied
(called output tax). The VAT vendor buying the goods or services will be allowed to claim back
the VAT paid (called input tax).

Goods and services sold → Levy OUTPUT TAX

Goods and services purchased → Claim INPUT TAX

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 LEARNING OUTCOMES

After completing this learning unit, you must be able to:

➢ discuss the workings of the Value-added tax system in South Africa.

➢ classify goods and services as standard-rated, zero-rated, or exempt supplies.
➢ discuss the application of different VAT rules in different situations.
➢ calculate the VAT payable by or refundable to a vendor in a practical situation, and
➢ discuss and apply the effect of VAT on business income tax calculations.

PRESCRIBED STUDY MATERIAL FOR THIS LEARNING UNIT

Study Chapter 2 in the prescribed textbook.

Let us look at the practical example of a business entity (a registered VAT vendor) that
manufactures and sells wooden tables. The selling price of a table is R2 000, but the entity must
add the VAT amount (R2 000 x 15% = R300) to the selling price to calculate the consideration
that the customer must pay, therefore R2 300. Although the entity received R2 300, it must pay
the VAT (output tax) of R300 to SARS and account for income of only R2 000 in its income
statement, which will also form part of the entity’s gross income for income tax purposes.

Assume the customer, who purchased the table and paid R2 300 for it, is also a registered VAT
vendor and a furniture dealer. The customer can claim the VAT amount (input tax) of R300 back
from SARS and thus enter an expense of only R2 000 in its income statement, which will be
deductible for income tax purposes.

Did you notice that each transaction has a VAT effect on the seller and the buyer? When you do
your calculations for a question of a business entity, you must consider each transaction to
establish whether that entity needs to account for output tax (selling) or input tax (buying).

Group Activity 1:

Complete this activity in the Group Activities forum.

Information

You are investigating a business supply chain for mince used in a local pie shop. You have
identified the following activities that took place:

• Eric, a farmer, produces cattle that he sells to the Witbank Abattoir for R16 000.
• The abattoir slaughters the cattle and sells the meat for R20 000 to a local butcher.
• The butcher makes mince from the meat and sells it to the local pie shop for R28 000.

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 • The pie shop makes pies from the meat, sells them to the public and receives R40 000 from
the cash sales.

Required

Calculate the input and output tax for each stage of the process. All amounts
exclude VAT, except for the pie shop.

1. Eric
2. Abattoir
3. Butcher
4. Pie shop

CONTENT OF LEARNING UNIT

1.1 BACKGROUND Textbook sections: 2.1, 2.2 and 2.3

An entity must register as a VAT vendor before it can charge and/or claim VAT. VAT vendors
must charge VAT on all goods or services sold unless these are zero-rated or VAT exempt.
Vendors can also claim back the VAT they pay if the goods or services that they acquire meet the
input tax requirements. The net amount of tax due must be paid to SARS at the end of each tax
period.

The VAT Act provides for two types of supplies for VAT purposes, namely:

• taxable supplies, which comprise of

o standard-rated supplies taxed at 15%
o zero-rated supplies taxed at 0%

• exempt supplies, which are not subject to VAT

In terms of the VAT Act, registered VAT vendors must levy (charge) output tax on all their taxable
supplies, that is, on the value of goods and services they sell or provide. Vendors are then
allowed to claim the input tax they have paid on goods and/or services received from other VAT
vendors.

The following is a mind map – for VAT purposes – of the supply of goods and services:

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 Supply of goods and services

Exempt supplies Taxable supplies

Standard- Zero-rated
No VAT rated supplies
implications supplies (0%)
(15%)

VAT is calculated in three phases:

VAT
Output Input
less add/less Adjustments equals payable/
tax tax
refundable
(textbook, 2.17 Complete
(textbook, (textbook,
and 2.20 to VAT201
2.4 to 2.16) 2.26 to 2.32)
2.22) return

When total output tax payable is > total input tax claimable → VAT is payable
to SARS by the vendor.
When total input tax claimable is > total output tax payable → VAT is refundable
to the vendor by SARS.

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 1.2 THE ACCOUNTING BASIS
Textbook section: 2.3.1
(section 15)

The accounting basis, that is, the invoice basis or payments basis, will determine when VAT will
be payable.

According to the invoice basis, vendors must account for the full amount of VAT included in the
price of goods or services supplied in the tax period in which the time of supply has occurred.
This applies to the output tax liability on cash and credit sales as well as to the input tax that may
be claimed on cash and credit purchases.

According to the general time of supply rule on the invoice basis, a supply occurs at the earlier
of the following events:

• at the time that an invoice is issued; or

• at the time that any payment is received by the supplier
All vendors must account for VAT on the invoice (or accrual) basis, unless requirements for
registering on the payments basis are met.

On the payments basis, VAT is accounted for when payments are made or received. The invoice
date is irrelevant.

Did you notice that, in example 2.1 in the prescribed textbook, VAT is accounted
for on the earlier of invoice date or payment of consideration?

Did you also notice that, in example 2.2 in the prescribed textbook, the payments
basis is subject to extremely strict rules as to when it can be used? This is to
prevent abuse of the system.

In example 2.3, a person moves from the payments basis to the invoice basis. A
similar calculation can be done for a person who moves from the invoice basis to
the payments basis. The effect will simply be that the person will now have to pay
the output tax at the date that payment is received from the debtor instead of
having to pay it over to SARS at the invoice date.

1.3 TAX PERIODS, RETURNS, PENAL-

TIES AND REFUNDS (sections 27 and
39 of the VAT Act and sections 25 and Textbook sections: 2.3.2 to 2.3.5
28, and Chapter 13 and 15 of the Tax
Admin Act)

The VAT Act provides for different tax periods to accommodate different types of businesses. For
example, large businesses prepare monthly reports and therefore submits VAT201 returns
monthly. Farmers, on the other hand, do not prepare monthly financial information about their
businesses and they are accommodated by having to submit VAT201 returns only every six
months.

The VAT system is a self-assessment system. This means that the vendor completes the VAT
return (VAT201) and submits it to SARS. SARS accepts the document and assesses the vendor

6
based on the information supplied. SARS does not request supporting documents but will perform
an audit from time to time to confirm that all the requirements have been met. To ensure the
proper working of the system, there are various regulations dealing with how and when to submit
documents.

A VAT201 return must be submitted to SARS 25 days after the end of the tax period (in other
words, by the 25th of the month following the end of the tax period, or the last business day before
the 25th if the 25th falls over a weekend or a public holiday.) An exception applies where the vendor
is registered to submit its VAT returns and payments via SARS’s e-filing system. The submission
of the return and the payment only needs to be concluded by the last business day of the month.

You will note that if the input tax (i.e., VAT claimed on goods or services
purchased) exceeds the output tax (i.e., VAT paid on goods or services sold),
SARS will refund the difference to the vendor.

1.4 OUTPUT VAT (section 7(1)) Textbook sections: 2.4 & 2.5

The first component of the VAT system is the output tax. In this section, we will look at the various
aspects of output tax.

VAT
Output Input
less add/less Adjustments equals payable/
tax tax
refundable

Requirements for levying output tax

For the purposes of our initial discussion, we will assume that the person under discussion is a
registered VAT vendor and must charge VAT on sales. To know the amount of output tax that
must be levied, it is important to know the types of supplies the vendor is providing.

The VAT Act provides for two types of supplies, namely:

• taxable supplies, which include

o supplies at the standard rate (presently 15%), or
o supplies at the zero rate (0%)

• exempt supplies, that is, supplies upon which no output VAT is chargeable.

Always remember that the VAT system works with two persons (or entities): the person selling
and the person buying. If a person sells goods or services that are subject to the zero rate, the
person who is buying the goods or services will also be subject to the zero rate. The person
buying the goods or services therefore cannot claim back input VAT at 15%, as he/she actually
paid 0%.

Before output tax can be levied, all the following requirements must be met:
• the supply of
• goods or services
• by a vendor
• in the course or furtherance of an enterprise carried on by him.

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 Remember:

• The list of goods or services that are zero-rated or exempt from VAT can be
changed by the Minister of Finance.
• The standard rate of VAT (currently 15%) can also be changed by the Minister
in his budget speech.
• Exempt supplies can never be subject to VAT; however, the Minister can also
change these exempt supplies to standard rated supplies.
• If the standard rate is changed (for example, from the current 15% to 16%), the
tax fraction will change from 15/115 to 16/116.

1.4.1 Supply of goods and services in the

Textbook sections: 2.6 and 2.7
course of an enterprise (section 7(1) (a)

The term “supply” is widely defined in the VAT Act to include transactions under any sale, rental
agreement and instalment credit agreement. It also includes all other forms of supply, whether
voluntary, compulsory or by operation of law, irrespective of where the supply is effected and
includes any derivative of the term.

The definition of “goods” includes corporeal movable things, fixed property, any real right and
electricity.

The definition of “services” is very wide, and the supply of services would typically include (with-
out being limited to) the following:
• royalties – granting the right to use intellectual property, that is, patents, trademarks, know-
how and copyrights
• sale of intellectual property
• commercial services – by electricians, plumbers, builders
• professional services – by doctors, accountants, lawyers
• services rendered by advertising agencies
• 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 facilities by clubs, churches, charities and other non-profit organisations

Take note that this does not mean all the above services are taxable supplies – merely that they
will constitute services for the purposes of the VAT Act.

The exclusion of the term “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 for those goods will not.

1.4.2 Importation of goods and services

(sections 7(1)(b), 13 and sections Textbook sections: 2.8 & 2.9
(7(1)(c) and 14)

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When vendor A buys goods from vendor B (and both vendors are registered in the Republic of
South Africa), vendor A will pay the output VAT levied by vendor B on the purchase price. Where
an individual imports a product, the foreign seller will not charge any VAT. However, the
government levies VAT as if it were selling the goods to the person who has imported it.

If, for example, a person buys goods from a South African vendor for R115 and pays the vendor
the full R115, the vendor will have an income of R100 and will be required to pay the R15 VAT
portion to SARS as output tax at the end of the VAT period. The rule regarding the importation
of goods aims to achieve the same result. An individual might buy goods from a foreign seller for
R100 and in such a case, the buyer would pay the seller R100. The foreign seller would then
have to declare the income of R100 to SARS, and the buyer would be required to pay the VAT of
R15 directly to SARS upon importation of the goods.

Provided the goods are taxable supplies used in the course and furtherance of the buyer's enter-
prise, the buyer would in both cases be able to claim the VAT paid (R15) back from SARS and
the seller would retain a R100 income.

The VAT Act contains specific rules for calculating the VAT that must be paid when goods are
imported. Section 7(1)(b) and (c) sets out the method for dealing with services that are being
imported.

Remember, the 10% customs duty value that is included in the calculation of the
VAT on imported goods will never be paid to SARS, as it simply forms part of the
method used to calculate the value of the supply for VAT purposes. Therefore, in
example 2.9 of the prescribed textbook, the R120 000 will be paid to the seller, the
R5 600 to the customs and excise section at SARS and the 15% VAT levied to the
VAT section at SARS.

Self-assessment Activity 1:

Complete this activity in the Self-assessment Activities forum.

Information

Tax Hub (Pty) Ltd imported motor vehicle parts that has a cost price of R250 000, from
Switzerland. Import surcharges of R15 000 were levied.

Required

1. Calculate the amount of VAT levied on importation?

2. Calculate the amount of VAT levied if the parts were imported from Lesotho?

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 1.4.3 Output VAT: Zero-rated supplies
Textbook sections: 2.10
(section 11)

As discussed earlier, a supply will either be taxable (at a standard rate of 15% or at a zero-rate
of 0%) or will be VAT exempt. By default, a supply will attract VAT at 15%, unless it is zero-rated
or exempt. The VAT Act specifically lists supplies that are zero-rated and those that are exempt
from VAT. It is therefore very important to know exactly which supplies are zero-rated or exempt,
as all other supplies will be taxable at a standard rate of 15%.

VAT is charged on zero-rated supplies, even though the Minister has set the rate at 0%. This is
done for two main reasons:
• Firstly, it determines whether VAT can be claimed back on goods or services purchased.
• Secondly, it determines what percentage should be used when doing apportionments
regarding input tax.

If a business sells goods or services that are classified as zero-rated supplies, that business will
still be able to claim back all the input tax (at 15%) related to the goods or activities. This is
because zero-rated items are classed as taxable supplies.

This section contains a couple of important aspects that you must ensure you understand:

• In the case of a direct export, VAT is charged at 0%. In the case of an indirect export, VAT is
charged at 15% and is then reclaimed when the goods leave the country. Whether an export
is direct or indirect is determined by the location at which the risk of ownership of the goods
being exported is transferred. If ownership changes once the goods are outside of South
Africa, the export is a direct export. If ownership changes in South Africa, the export is an
indirect export.

• Remember the zero-rating principle, when a business is sold as a going concern, is applicable
only if all the requirements laid down in the VAT Act are met. You must know what these
requirements are. For example, if an examination question, in referring to a going-concern
sale, says 'some of the assets necessary for carrying on the enterprise are sold separately
from the business', you should know immediately that the sale will not qualify for the zero rate
because of the requirement that all the assets must be sold. In other words, the word 'some'
in the question is the clue telling you that the sale will not qualify for the zero-rating. (Note that
this example is different to the one referred to in the prescribed textbook (section 2.10.3)).

• One of the criteria for the sale of a business as a going concern is that both parties should be
registered VAT vendors (section 11(1)(e)). If a person who is not a registered VAT vendor
wishes to purchase an enterprise as a going concern, it is catered for by the possibility of
voluntary registration. Such a person may apply for registration, provided certain conditions
are fulfilled: he or she must intend to purchase the enterprise as a going concern and to
continue the trading activities of that enterprise with effect from a specified date. In addition,
the total value of taxable supplies made by the supplier of the going concern must have
exceeded (or must reasonably be expected to exceed) R50 000 over a period of 12 months.
Provided these conditions are fulfilled, it is possible for both parties to be registered and for
the enterprise to be supplied as a going concern (section 23(3)(c)).

• It is important to note that if a going concern is supplied to a vendor at the zero rate, but the
recipient will use it only partially (less than 50%) for purposes of making taxable supplies, an

10
 adjustment to the recipient’s output tax must be made in terms of section 18A of the VAT Act.
(This is discussed in detail in chapter 2 (section 2.29) of the prescribed textbook. See also
section 1.9 of this learning unit.)

• When an enterprise is sold as a going concern, assets that are not related to going concern
activities can sometimes be sold together with the assets that do relate to going concern
activities. If the value of the taxable supplies concerned with the going concern activities totals
more than 50% of the total supplies, the total selling price will be taxed at the zero rate (section
2.10.3.3 of the prescribed textbook).

Note that certain basic foodstuffs are zero-rated, provided they

• are not supplied for immediate consumption (for example, sandwiches and
other take-away foods) OR
• are not added to a standard-rated supply (for example, a gift hamper con-
taining a basket of fruit)

1.4.4 Output VAT: exempt supplies

Textbook section: 2.11
(section 12)

If a business sells only goods or services that are classified as exempt supplies, no VAT is levied
and thus no input tax is claimed in respect of expenditure incurred.

This section contains several important aspects that you must ensure you understand:

• Not all services provided by a financial institution are exempt from VAT. You must be able to
identify which are exempt and which are not. If you refer to example 2.18 in the prescribed
textbook, you will see that in some questions, we will supply you with the expenses that were
incurred, and you must determine if they were exempt or not (2.11.1).

• When studying section 2.11.3 (dealing with accommodation), ensure that you know what the
differences in respect of VAT are for the following:

o residential accommodation
o commercial accommodation 28 days or less
o commercial accommodation more than 28 days

Remember that in situations of a business having a taxable supply (commercial

accommodation) and an exempt supply (residential accommodation), the input tax that
relates to both types of supplies must be apportioned (see section 2.17 of the prescribed
textbook). Note that the output tax is not apportioned – either the full VAT amount is charged
(for taxable supplies) or no VAT is charged (exempt supply) unless an exception applies.

11
 Group Activity 2:

Complete this activity in the Group Activities forum.

Information:

Tax Hub (Pty) Ltd sent Mr Tebogo Molokoane, financial manager of the company, to a seminar
in Cape Town, South Africa. The company paid a rate of R4 250 (excluding VAT) per day at
the Royal Hotel for Mr Molokoane to stay in. The company also paid for cleaning services at
an extra cost of R150 per day.

Required:

1. Calculate the VAT on the accommodation and the cleaning services if Mr Molokoane
stays in the hotel for 15 days.
2.Calculate the VAT on the accommodation and the cleaning services if Mr Molokoane
stays in the hotel for 45 days.

• Note that the supply of public transport by road or rail is exempt from VAT if the transportation

o takes place between two places within the Republic of South Africa (RSA)
o is for fare-paying passengers and their personal effects
o is supplied in the course operations of a transport business, in a vehicle operated by the
supplier of the transportation service, or by a person acting as the supplier's agent

Take note of some of the above used terms’ descriptions:

Fare-paying passengers
When the operator of the vehicle (in which passengers are transported) charges a consideration
for the service, the passengers will be regarded as fare paying.

Operation of a transport business

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 does not necessarily have to be
the owner of the vehicle or even the employer of the driver but must be commercially responsible
for the transporting of the passengers.

When the supplier of the vehicle does not operate the vehicle himself but rents or hires it to a third
party who uses it for the transport of passengers, the exemption does not apply.

Examples of exempt transport services

• passenger transport in South Africa by taxi, bus, or train for a consideration

• ambulance services – transporting of patients in an ambulance for a consideration

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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

When answering a question, remember to provide a reason, for example, exempt

supply when an amount is nil. If you only answer Rnil, you may lose marks.

1.4.5 Output VAT: deemed supplies

Textbook sections: 2.12
(sections 8, 8A and 18(3))

When a vendor sells goods to a person and that person takes ownership of the goods, a supply
has taken place; the vendor has supplied the goods (or services) to its customer. However, in
several situations it is not always clear whether a supply has taken place or not. To prevent any
dispute arising as to whether a supply has taken place, the VAT Act includes specific transactions,
which will always qualify as a supply.

You will note that for each of the situations in which the deemed supply takes place, the value
that should be used and the time when the VAT must be recorded, are given in the prescribed
textbook.

Group Activity 3:

Complete this activity in the Group Activities forum.

Deemed supply When it will Value of Time of supply

apply supply
Ceasing to be a vendor
Indemnity payments
Supplies to independent branches
Fringe benefits
Payments exceeding con-
sideration

The four items listed below will make sense only if read in conjunction with the examples in the
prescribed textbook.

Ceasing to be a vendor

• The value of the deemed supply when a person ceases to be a vendor is the lesser of cost
price or open-market value of the supply. (section 2.12.1.2).

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• There is relief available to vendors who deregister because their turnover is less than
R1 million (vendors who deregister because they intend to register as micro businesses) or
less than R50 000 (vendors who deregister solely because their turnover is less than the
prescribed threshold or voluntarily threshold) (section 2.12.1.2).
• If a person who ceases to be a vendor disposes of any goods or rights after the cancellation
of his registration (and thus after the deemed supply has been accounted for), that person will
not be seen as carrying on an enterprise for VAT purposes and, therefore, no VAT will be due
on the supply of the goods or rights.
• 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 executor or trustee.

Indemnity payments

• Not all insurance payments received are deemed supplies. Did you notice that long-term
insurance (life insurance, for example) is not subject to VAT? To know whether VAT is pay-
able on short-term insurance compensation, you must know how the compensation was
received and by whom. Ensure you know the VAT consequences of each option.
• Where an indemnity payment relates to the total reinstatement of goods stolen or damaged
beyond economic repair AND/OR the vendor was denied an input tax credit on its acquisition
(for example, a motor car), no deemed supply will arise in the hands of the insured. A pay out
in respect of the repair of an asset will thus give rise to a deemed supply (an output tax), since
an input tax could be claimed on the repair expenses.
• Where the insurer replaces the damaged goods, the insured is not deemed to have made a
supply, as the replacement of goods does not constitute an indemnity payment. However, the
insurer will have made a taxable supply of the replacement goods to the insured, but for a Rnil
consideration. The insurer will be entitled to an input tax deduction on the acquisition of the
replacement goods.

Indemnity payment

Pay out
Replacement of asset

No VAT All other assets – Asset on which input VAT was

deemed supply denied (such as motor cars and
entertainment assets) – no
deemed supply

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 Self-assessment Activity 2:

Complete this activity in the Self-assessment Activities forum.

Information

Tax Hub (Pty) Ltd makes 100% taxable supplies. The company recently suffered a robbery at its
premises. Their insurance company reimbursed them in cash, as follows (All amounts include
VAT):
• For delivery vehicle stolen R420 000
• For television in canteen stolen R6 500

Required:

Calculate the output tax in respect of the insurance payment.

Supplies to independent branches

• Three types of costs can be included when making supplies to independent branches. Do
you know what they are (section 2.12.3.2 of the prescribed textbook)?

Fringe benefits

• The consideration for the supply of a fringe benefit, other than motor vehicles, is deemed the
cash equivalent of the benefit (as used for income tax purposes) multiplied by the tax fraction.
• The value of the supply for right of use of motor vehicles is calculated differently. You should
be able to identify in which situations you must use the 0,3% and when to use the 0,6%
(section 2.12.4.2 of the prescribed textbook). Take note that this is a monthly percentage.
Remember, when calculating the value of the motor vehicle benefit, the first step is to remove
the VAT from the vehicle value to determine the value that should be used for the next steps
– but note that this is not the actual VAT calculation. The actual VAT calculation is done only
in the fourth step. You might think you are calculating VAT twice but remember that step 1
obtains the value of the motor vehicle, and that step 4 is the VAT calculation (section 2.12.4.2
of the prescribed textbook). You can deduct the R85 for maintenance costs only and not for
fuel costs as well. The percentage usage refers to the percentage of the input tax that the
vendor will be able to claim (section 2.12.4.2 of the prescribed textbook).

In an examination question you must be able to identify which fringe benefits are
subject to VAT and which are not.

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 Self-assessment Activity 3:

Complete this activity in the Self-assessment Activities forum.

Information

Tax Hub (Pty) Ltd grants an employee the right of use of a motor vehicle for the two-month
VAT period in the current year of assessment. The employer was unable to claim the input
tax when the vehicle was purchased for R276 000 (including VAT). The employee bears the
full cost of maintaining the vehicle and used the vehicle for the full VAT period.

Required:

Calculate output tax for the two-month VAT period falling in the current year of assessment
in respect of the fringe benefit.

1.4.6 Output VAT: non-supplies and no

apportionment (sections 8(14) and Textbook sections: 2.13 & 2.14
8(16)

If, at the time of the initial purchase of goods or provision of services, the input tax was denied in
terms of the VAT Act, no output tax must be levied on the subsequent supply of such goods. The
rules as to when input tax cannot be claimed are discussed in section 1.7.3.

If a vendor acquires goods or services partly for the purposes of making taxable supplies and,
subsequently, to sell these goods, the vendor will be deemed to be making a taxable supply of
goods or services in the course of his enterprise and the total consideration received for such a
supply will be subject to VAT.

1.5 TIME OF SUPPLY (section 9(1)) Textbook section: 2.15

The time of supply is important for VAT purposes, as it determines when you must pay the output
tax and when you can claim the input tax. The general rule is that the time of supply is the earlier
of

• the date of the invoice; or

• the date at which the payment of the consideration is received by the supplier

After studying this section, you should be able to answer the following questions:

1. What is the time-of-supply rule for a connected person?

2. What is the time-of-supply for a rental agreement?

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 1.6 VALUE OF THE SUPPLY (section 10) Textbook section: 2.16

As mentioned earlier, to calculate the VAT on the value of a supply (which is the selling price
excluding VAT), multiply the value by the applicable rate (in this case, 15/100).

To calculate the VAT portion of the consideration (which is the selling price including VAT),
multiply the consideration by the tax fraction (in this case, 15/115).

The value of the supply of goods or services is either

• the amount of money if the consideration is in money
OR
• the open-market value of the consideration if the consideration is not in money
LESS
• the amount of VAT included in the consideration

After studying this section, you should be able to answer the following questions:

1. What is the value-of-supply rule for a connected person?

2. What is the value-of-supply rule for entertainment?

1.7 INPUT TAX Textbook section: 2.17

The second component of the VAT system is the input tax; in this section, we will look at the
different aspects relating to input tax.

VAT
Output Input
less add/less Adjustments equals payable/
tax tax
refundable

1.7.1 Documentation (sections 16(2), 20

Textbook sections: 2.18 & 2.19
and 21)

Have you noticed that to be able to claim input tax, you must have documentation relating to the
transaction? We will now look at the documentation that is required.

Three main types of documents are used in the VAT system, namely tax invoices, tax debit notes
and tax credit notes. Remember, certain other documents can also be used in specific situations,
for example, a rental agreement.

For an example of a full tax invoice on which the consideration exceeds R5 000,
refer to page 117 (latest version June 2022, issue 14) of the VAT404 Guide for
Vendors. (The guide can be found at www.sars.gov.za under Types of Tax, select
Value-Added Tax and click on VAT404-Guide for Vendors.)

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1.7.2 Determination of input VAT (section
Textbook section: 2.20
17)

If a vendor uses goods or services wholly (100%) in the course of making taxable supplies
(standard rated or zero-rated), that vendor will be entitled to claim the full input tax that was
incurred when acquiring those goods or services. If a vendor uses the goods or services wholly
in the course of making exempt supplies, that vendor will not be entitled to claim any input tax.

If a vendor uses the goods or services only partially in the course of making taxable supplies,
either one of the following input tax deductions can be made:

• the full input tax (so-called de minimis rule) – if the taxable use is 95% or more of the total
intended use; or

• the portion of the input tax that relates to the taxable supplies – if the taxable use is less
than 95% (the input tax must be apportioned by the vendor)

A vendor must use the turnover-based method of apportionment unless it does not yield a fair
approximation. In such a case, an alternative apportionment method can be used if it has been
pre-approved by SARS. You will be provided with the apportionment percentage in any question
that you need to answer for this module’s purpose.

Remember that if there is a question in which input tax must be apportioned, you
must first decide if the cost relates to a taxable supply or an exempt supply.
• If the cost is incurred only to make taxable supplies, the full input tax can be
claimed, for example, in respect of maintenance on commercial accommoda-
tion. The input tax must therefore not be apportioned.
• The converse applies when costs are incurred solely for the making of exempt
supplies. In such a case, no input tax can be claimed, for example, in respect
of maintenance on residential accommodation.
• If the cost relates to both a taxable supply (i.e., commercial accommodation)
and an exempt supply (i.e., residential accommodation), then it must be
apportioned. For example, the input tax paid in respect of a computer used to
prepare accounts for both commercial and residential accommodation must be
apportioned between taxable and exempt usage.

Note that only input tax is apportioned. The output tax of a vendor is not
apportioned (except for indemnity payments and fringe benefits) – it is charged at
either 15% or 0%, or not charged at all (Rnil for exempt supplies).

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 Example of input tax apportionment

XYZ Company owns a three-storey building. The ground floor and the first
floor accommodate various businesses, while the second floor comprises flats rented out as
residential units. The SARS Commissioner has agreed to an apportionment set at 80%. The
following information has been provided to you for the two-month tax period ended 31 March
2025 (all amounts exclude VAT):

DESCRIPTION
Receipts R
Commercial rental received 240 000
Residential rental received 60 000
Payments made R
Insurance (building) 6 500
Repairs and maintenance (residential units) 15 250
Advertising (commercial business units) 7 850
Electricity and water (building) 22 875
Bank charges 725

Required:
Calculate the VAT payable by XYZ Company for the two-month tax period ended
31 March 2025.

Solution
Output tax R
Commercial rental received (R240 000 x 15%) 36 000
Residential rental received (exempt supply) -
36 000
Input tax
Insurance (R6 500 x 80% x 15%) 780
Repairs and maintenance (input denied – exempt supply) -
Advertising (R7 850 x 100% x 15%) 1 178
Electricity and water (R22 875 x 80% x 15%) 2 745
Bank charges (R725 x 80% x 15%) 87
4 790
VAT due to SARS 31 210

1.7.3 Input tax denied (section 17(2)) Textbook section: 2.21

The VAT Act provides that, in certain situations, a vendor may not claim input tax. In such cases,
input tax is denied, even if the vendor has paid input tax and he will use the goods or services
wholly for the making of a taxable supply.

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Input tax is denied for the following supplies:

• entertainment (section 2.21.1 of the prescribed textbook)

• club membership fees and subscriptions (section 2.21.2 of the prescribed textbook)
• motor cars (section 2.21.3 of the prescribed textbook)

The following is a list of goods or services that will be classified as being acquired for the purposes
of entertainment (and for which any input tax deduction will therefore be denied):

• food and other ingredients purchased to provide free meals to staff, clients and business
associates; and
• business lunches, golf days, or other entertainment for customers and clients in restaurants,
theatres and night clubs or at sporting events; and
• goods and services acquired for providing employees with subsidised (or free) meals if the
direct and indirect costs of providing those benefits and facilities are not covered by the price
charged, for example, catering services, furniture, equipment and utensils used in kitchens,
canteens and dining rooms; and
• beverages, meals, entertainment shows, amusements or other hospitality supplied to custo-
mers and clients at product launches and promotional events; and
• capital goods such as hospitality boxes, holiday houses, yachts and private aircraft that are
used for entertainment.

Group Activity 4:

Complete this activity in the Group Activities forum.

Required:

Can VAT be claimed on the following vehicles? Supply a reason for each answer

Yes/No Reason
• Motorcycles
• Station wagons
• Caravans
• Minibuses
• Single cab bakkie/delivery vehicle
• Ordinary sedan-type passenger vehicle
• Double cab bakkie
• Club-cab bakkie

1.7.4 Deemed input (sections 1, 18(8) and Textbook section: 2.22

20(8)

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When goods are acquired from a non-vendor, a vendor can usually not claim any input tax be-
cause the non-vendor did not charge any output tax. When second-hand goods are acquired
from a non-vendor who is a resident of South Africa, and the goods are situated in South Africa,
the VAT Act provides that a deemed input tax may be claimed, provided the goods will be used
in making a taxable supply.

The tax fraction must be calculated on the lower of the purchase price and the
open-market value. For the purposes of this module, when the open-market value
is not supplied in a question, then use the purchase price.

1.8 SPECIAL RULES Textbook sections: 2.23, 2.24 & 2.25

The VAT Act has several special rules that must be applied to certain types of assets. These
rules can influence the time or the value of supply.

The special rules included in this section will override the rules that you have
studied up until now. Please ensure you know when to apply these rules.

Take special note of the distinctions between finance lease agreements and operating lease
agreements. In the case of a finance lease agreement, the stated or determinable sum of money
payable at stated dates over a period in the future (i.e., instalments) also includes finance
charges. Should any input tax be claimable, it will be claimed at the earlier of the time of delivery
of the goods or the time that any payment is received. In the case of a rental (operating lease)
agreement, there will normally be no finance charges applicable, and input tax can be claimed as
and when the rental payment is made.

1.9 ADJUSTMENTS (sections 18(1), 9(6),

16(3)(h), 10(7), 18D, 9(13), 10(29) and Textbook sections: 2.26 to 2.32
16(3)(o))

The third component of the VAT system is adjustments. In this section, we will look at the different
adjustments that can be made to input and output tax.

VAT
Output Input
less add/less Adjustments equals payable/
tax tax
refundable

The adjustment rules apply when goods or services are acquired for a specific purpose (for
example, wholly for making taxable supplies), and when there is a subsequent change in the use
of the goods or services, for example, to being used wholly or partially for private purposes.

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 When studying these rules, it is important to understand when the adjustment
relates to input tax and when the adjustment relates to output tax. If you refer to
the VAT201 return, discussed at the beginning of this learning unit, you will note
that the adjustments are not done separately. Rather, they form part of the input
and output tax sections of your calculation.

Self-assessment Activity 4:

Complete this activity in the Self-assessment Activities forum.

Information

Tax Hub (Pty) Ltd purchased a delivery vehicle for business purposes for R448 000 (including
VAT) at the beginning of year one. 80% of the business relates to taxable supplies. At the
end of year one Tax Hub (Pty) Ltd determined that 55% of the business would now relate to
taxable supplies. The market value of the delivery vehicle on that date was R420 000. At the
end of year two, Tax Hub (Pty) Ltd determined that 70% of the business would now relate to
taxable supplies and the market value of the delivery vehicle on that date was R380 000.

Required:

Calculate the VAT consequences of the above.

1.10 TAX RULINGS Textbook section: 2.33

All written VAT rulings issued prior to 1 January 2007 have been withdrawn and they may no
longer be relied upon (except for rulings specifically confirmed by SARS). The advance ruling
system previously regulated in the Income Tax Act and the VAT Act is now incorporated in the
Tax Administration Act No. 28 of 2011, which came into effect on 1 October 2012.

A binding ruling will provide a taxpayer with clarity and certainty on how SARS will interpret and
apply the various tax laws as they pertain to a proposed transaction.

1.11 TAX AVOIDANCE AND UNPROFES-

SIONAL CONDUCT (section 73 of the
Textbook sections: 2.34 & 2.35
VAT Act and section 102 of the Tax
Admin Act)

If a person enters into a scheme to avoid or reduce tax, SARS can apply the tax avoidance rules
to levy the VAT on the transaction in a manner that would have applied had it been carried out
for bona fide business purposes. If any person involved in such a scheme is a member of a
professional organisation, SARS can lodge a complaint with that organisation.

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 1.12 INFLUENCE OF VAT ON INCOME TAX
Textbook section: 2.36
CALCULATIONS

VAT has a direct influence on the calculation of income tax. The cost price to be used for capital
allowances (in the taxable income calculation) will depend on whether the enterprise has claimed
back the VAT on the asset.

The taxable income calculation of an enterprise that is also registered as a VAT vendor must,
where applicable, exclude VAT. However, this calculation must include VAT where the input tax
has been denied, for example in respect of motor vehicles, as defined.

If XYZ Company purchases a motor vehicle as defined for R322 000 (including VAT), the input
tax of R42 000 (R322 000 x 15/115) will be denied and the cost price of the motor vehicle for
income tax purposes will be R322 000. However, if the same amount was spent to purchase a
delivery vehicle to be used in the making of taxable supplies by XYZ Company, it will qualify for
an input tax deduction of R42 000. The cost price of the delivery vehicle would thus be R280 000
(R322 000 less input tax of R42 000) for income tax purposes.

1.13 SUMMARY Textbook section: 2.37

Vendors levy VAT on all taxable supplies. Vendors who pay input tax on goods and services
supplied to them may claim such input tax against the output tax levied on taxable supplies.
However, the scope of the rules in the VAT Act is much more complicated. The VAT Act is indeed
a complicated, rule-based document with many exceptions. Regarding supplies made, great care
should be taken to distinguish between standard-rated supplies, zero-rated supplies and exempt
supplies.

Regarding input tax, VAT may be claimed only if it was levied on the supply of goods or services,
except in the case of second-hand goods acquired from non-vendors. In addition to these basic
principles, cognisance must be taken of the special rules concerning a change of use, exports,
accommodation, financial services, sale of going concerns, fringe benefits, indemnity payments,
instalment credit agreements, and so forth.

1.14 QUESTIONS Textbook section: 2.38

Work through the practical exam type questions in Learning unit 1. The solutions
to these practical exam type questions will only be made available later during
the course. This reiterates the importance of attempting these questions on your
own, as this will help you to ascertain whether you understand all the topics that
were discussed.

The questions in the tests and the exam will also be based on application of this theory.

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 WRAP-UP QUIZ

Once you have worked through all the questions in the textbook and Study guide and completed
all the learning activities under Learning unit 1, you must complete the Wrap-up Quiz and receive
a pass mark of 50%, before you can continue with Learning unit 2.

LITERATURE CONSULTED

1. Value-Added Tax Act No. 89 of 1991

2. www.sars.gov.za

3. A Student's Approach to Taxation in South Africa (2024)

4. SILKE - South African Income Tax (2024)

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