Learning unit

1
LEARNING UNIT 1

INTRODUCTION

LEARNING OUTCOMES

PRESCRIBED STUDY MATERIAL FOR THIS

LEARNING UNIT

SECTIONS OF THE PRESCRIBED TEXTBOOK

THAT CAN BE IGNORED

CONTENT OF LEARNING UNIT 1

1.1 Background
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 or furtherance 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-Added
1.12
1.13
Influence of VAT on income tax calculations
Summary Tax (VAT)
WRAP-UP QUIZ

KNOWLEDGE TEST

LITERATURE CONSULTED
 INTRODUCTION

Generally, tax can be classified into two groups, namely direct taxes, and indirect taxes. Indirect
taxes are included in the price you pay for the consumption of 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 details of how the VAT system works and how the
VAT Act should be applied. VAT is a separate tax from income tax, and it has its own rules,
based mainly on how and when goods or services are supplied. The VAT rate changed on
1 April 2018 from 14% to 15%.

VAT RATE CHANGE

Please take note:
It is important to understand how to calculate the VAT amount (that is, the portion of the tran-
saction
From 1value/amount
April 2018 the thatVAT
constitutes VAT). from
rate changed The 14%
VAT toamount
15%. is calculated by multiplying the
transaction
This means amount by the
that from tax fraction.
1 April 2018 VATThe tax fraction
is levied at 15%.is discussed
For most ofbelow. When calculating
your calculations you
the VAT on a transaction, it is important to establish which amount
will use 15%, however there will be questions where assets were purchased was provided: It could be the
before
amount 2018. VAT
1 April before If an is added
asset was(the VAT exclusive
purchased before selling
1 April price)
2018, or thethe
and amount VATincludes
afterprice
purchase has been
added
VAT, (the VATwill
the VAT inclusive selling price).
be calculated at 14%.The following basic structure can be used to calculate
VAT from the above different amounts:
Example 1:
Selling
Sahara price excluding
(Pty) VAT a second-hand manufacturing
Ltd purchased R100 machine on 1 January 2021 for
Add: VAT at 15% R 15
R287 500 (including VAT). Calculate the capital allowance for the 2025 year of assessment.
Selling price including
The company VAT
has a February year-end. R115

This framework can be used to calculate any amount, for example if the selling price (including
Calculation:
VAT)
Costisprice:
R230,R287
the VAT
500 xand the selling
100/115 = R250price excluding VAT can be calculated as follows:
000
Value (selling- price
*Allowance 2025:excluding
R250 000VAT) R100 R200 (R230 x 100 / 115)
x 20% = R50 000*
Add: VAT at 15% R 15 R 30 (R230 x 15 / 115) or (200 x 15 / 100)
Consideration
Example 2: (selling price including VAT) R115 R230
Sahara (Pty) Ltd purchased a second-hand manufacturing machine on 1 January 2019 for
R287 500 (including VAT). Calculate the capital allowance for the 2025 year of assessment.
The companyWhen
has aanFebruary includes VAT (i.e., VAT inclusive amount), the tax fraction will
amount year-end.
be as follows: 15/115 (as shown in the example above: R230 x 15/115 = R30).
Calculation:
When500
Cost price: R287 an xamount excludes
100/114 VAT (i.e., VAT exclusive amount), the rate will be as
= R252 193
follows: 15/100 or 15% (as shown in the example above: R200 x 15/100 = R30).
*Allowance -2025: Nil as the machine was fully written-off in 2023*

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 of South Africa,

• classify goods and services as standard-rated, zero-rated, or exempt supplies,
• discuss the application of different VAT rules in different scenarios,
• calculate the VAT payable by or refundable to a vendor in a practical scenario,
• 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 ("Value-Added Tax (VAT)").

SECTIONS OF THE PRESCRIBED TEXTBOOK THAT CAN BE IGNORED

The following sections in the textbook can be ignored:

2.10.1.2 Indirect exports (par (d))

2.10.1.3 Goods delivered by a vendor to a foreign-going ship or aircraft
2.10.1.4 Goods supplied under a rental agreement
2.25 Foreign suppliers of electronic service

CONTENT OF LEARNING UNIT 1

Textbook sections: 2.1, 2.2, 2.3, 2.6.3,

1.1 BACKGROUND
2.6.3.1 and 2.6.3.2

Study sections 2.6.3, 2.6.3.1 and 2.6.3.2 in the prescribed textbook

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 supplied unless they are 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 within 25 days following the end
of each tax period (last day of the month following the end of the VAT period if payments and
returns are submitted/ made via e-filing).

Study sections 2.1, 2.2 and 2.3 in the prescribed textbook

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The Value-Added Tax Act No. 89 of 1991 (“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 that they sell or provide. Vendors are then
allowed to claim the input tax they have paid on goods and/or services bought or received from
other VAT vendors.

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

Supply of goods and services

Exempt supplies Taxable supplies

No output tax charged Standard- rated Zero-rated

supplies (15%) supplies (0%)

VAT is calculated in three phases:

VAT
Output Input
less add/less Adjustments equals payable/
tax tax
refundable
(Textbook: 2.4 (Textbook: (Textbook: Complete VAT201
to 2.16) 2.17 to 2.25) 2.26 to 2.32) 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.

Example 1

Work through this example on how the VAT system works.

Inkuni Ltd is 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 when determining the consideration that the customer must pay,
which makes the selling price equal to R2 300. Although the entity received R2 300, it must pay
the VAT (output tax) portion of R300 to SARS and account for income of only R2 000 in its income

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statement. This amount (i.e., R2 000) 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 (input tax) portion of R300 back
from SARS and thus enter an expense of only R2 000 in its income statement. This is the amount
(i.e., R2 000) that will be deductible for income tax purposes.

Did you notice that in the above example, the transaction has a VAT effect on the seller
and the buyer? When you attempt a VAT calculations question on a business entity,
you must carefully evaluate each transaction to establish whether that business entity
needs to account for output tax (selling) or input tax (buying).

Forum Activity 1:

Complete this activity in the Learning unit 1 discussion 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.
• 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

Work through examples 2.7 and 2.8 in the prescribed textbook.

1.2 THE ACCOUNTING BASIS

Textbook section: 2.3.1, 2.3.1.1, 2.3.1.2
(section 15)

Study sections 2.3.1 and 2.3.1.1 and 2.3.1.2 in the prescribed textbook

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

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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:

• the time that an invoice is issued; or

• 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 regis-
tering on the payment’s basis are met.

On the payment’s basis, VAT is accounted for when payments are made (i.e., for purchases) or
received (i.e., for sales). The invoice date is irrelevant.

Work through examples 2.1 to 2.4 in the prescribed textbook.

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

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

In example 2.4, a person moves from the payment’s basis to the invoice basis. A
similar calculation can be done for a person who moves from the invoice basis to
the payment’s 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 at the invoice date.

1.3 TAX PERIODS, RETURNS, PENAL-

Textbook sections: 2.3.2 to 2.3.5
TIES AND REFUNDS

Study sections 2.3.2, 2.3.3, 2.3.4 and 2.3.5 in the prescribed textbook

The VAT Act provides for different tax periods to accommodate different types of businesses. For
example, large businesses prepare monthly reports and can therefore submit VAT201 returns
monthly. Farmers, on the other hand, do not generally 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
based on the information supplied. SARS does not request supporting documents but will per-
form an audit from time to time to confirm that all the requirements have been met. To ensure

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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.) 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.

Study the table under section 2.3.3 in the prescribed textbook.

Work through example 2.5 in the prescribed textbook.

Take note: 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 Textbook sections: 2.4 and 2.5

Work through section 2.4 and 2.5 in the prescribed textbook

The first component of the VAT system is the output tax. In this section, we will investigate 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 VAT at the zero
rate, the person who is buying the goods or services will also be subject to VAT at the zero rate.

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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 in South Africa
• by a vendor
• in the course or furtherance of an enterprise carried on by him.

Work through example 2.6 in the prescribed textbook.

Remember:
• The list of goods or services that are zero-rated or exempt from VAT can be
changed by the Minister of Finance at any stage.
• 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
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: 2.6.1, 2.6.2 and 2.7
course of an enterprise

Work through sections 2.6.1, 2.6.2 and 2.7 in the prescribed textbook.

The term “supply” is widely defined in the 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 in such
thing or property and electricity.

The definition of “services” is very wide, and the supply of services would typically include
(without 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

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• 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 – it
merely means 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.

Work through the remember block under section 2.7.1 in the prescribed
textbook.

1.4.2 Importation of goods and services Textbook sections: 2.8 and 2.9

Work through section 2.8 and 2.9 in the prescribed textbook

When vendor A buys goods from vendor B (and both vendors are South Africa residents and
registered for VAT), 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 them.

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 within 25 days following the end of the VAT period (last day of the
month following the end of the VAT period if payments and returns are submitted/ made via e-
filing). The rule regarding the importation of goods aims to achieve the same thing. 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 buyers 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 Act contains specific rules for calculating the VAT that must be paid when goods are impor-
ted. There is also a section setting out the method for dealing with services that are being im-
ported.

Work through examples 2.9 and 2.10 in the prescribed textbook.

9
 Remember
The 10% customs duty value that is added to the calculation of the VAT on
imported goods will never be paid over, as it simply forms part of the method
used to do the calculation. Therefore, in example 2.9, 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.

Textbook sections: 2.10, 2.10.1, 2.10.1.1,

1.4.3 Output VAT: zero-rated supplies
2.10.2, 2.10.3 and 2.10.4

Work through section 2.10, 2.10.1, 2.10.1.1, 2.10.2, 2.10.3 and 2.10.4 in
the prescribed textbook.

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 making 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 under-
stand:

• 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 (2.10.1.2). NB! Indirect exports are not part of your TAX3701 syllabus.

• When a business is sold as a going concern, the zero-rating principle 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 (2.10.3)).

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• 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 as 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 only use it partially (less than 50%) for purposes of making taxable supplies, an
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 section 2.30 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
(2.10.3.3).

Forum Activity 2

Complete this activity in the Learning unit 1 discussion forum.

Make a list of all the zero-rated supplies. It is important to know these items, as examination
questions may contain some of them and you will have to identify them from a scenario.

Make use of the below format:

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 contain-
ing a basket of fruit)

Work through examples 2.11 and 2.13 to 2.17 in the prescribed textbook.

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 1.4.4 Output VAT: exempt supplies Textbook section: 2.11

Work through section 2.11 in the prescribed textbook

If a business sells only goods or services that are classified as exempt supplies, it is not permitted
to charge any output tax on goods or services supplied and it will not be able to claim back any
of the input tax that was paid on purchases.

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 the expenses that were
incurred and you must decide 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 are in respect of VAT for the following:

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

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

dation) and an exempt supply (residential accommodation), the input tax that relates to both
types of supplies must be apportioned (see section 2.20). Note that the output tax is not
apportioned – either the full VAT amount is charged (for taxable supplies) or no VAT is charged
(for exempt supplies) unless an exception applies.

• 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 RSA

o is of fare-paying passengers and their personal effects
o is supplied in the course of 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 or 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.

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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

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

Work through examples 2.18 to 2.22 in the prescribed textbook.

Forum Activity 3

Complete this activity in the Learning unit 1 discussion forum.

Make a list of all the exempt supplies. It is important to know these items, as examination
questions may contain some of them and you will have to identify them from a scenario.

Make use of the below format:

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

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

Textbook sections: 2.12, 2.12.1, 2.12.2,

1.4.5 Output VAT: deemed supplies
2.12.3, 2.12.4 and 2.12.5

Work through sections 2.12, 2.12.1, 2.12.2, 2.12.3, 2.12.4 and 2.12.5 in the
prescribed textbook

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 or not, the Act includes specific things,
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.

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 Forum Activity 4

Complete this activity in the Learning unit 1 discussion forum.

Complete the following table:

Work through examples 2.23 to 2.34 in the prescribed textbook.

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

Ceasing to be a vendor – example 2.23

• The value of the supply when a person ceases to be a vendor is effectively the open-market
value of transactions with connected persons (2.12.1.2).
• 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 pre-
scribed threshold or voluntarily threshold) (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 – examples 2.24 to 2.26

• Not all insurance payments received are deemed supplies. Did you notice that long-term insu-
rance (life insurance, for example) is not subject to VAT? To know whether VAT is payable
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

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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

Replacement of asset Pay-out

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

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

Supplies to independent branches – example 2.27

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

Fringe benefits – examples 2.28 to 2.32

• The normal rule is that the calculation of the value of the fringe benefit is the same as the
calculation used for income tax purposes. (For the purposes of this course, the amount will
be provided/supplied.) The exception to this rule is a right to the use of a motor vehicle.

• The consideration in money 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%
(2.12.4.2). 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 only done in the fourth step. You might
think you are calculating VAT twice but remember that step 1 obtains the value of use, and
that step 4 is the VAT calculation (2.12.4.2). You can claim 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 (2.12.4.2).

In an examination question, you must be able to identify which fringe benefits

are subject to VAT and which are not.

Payments exceeding consideration – example 2.33

• When a vendor receives a payment that exceeds the consideration charged for a standard
rated (15%) taxable supply of goods or services (i.e., double payment), output tax is
payable by the vendor if the excess payment is not refunded within four months.

15
 • In the excess payment is refunded on a date after the output tax is accounted for (i.e., after
the 4 months period lapses), the vendor becomes entitled to claim an additional input tax
credit (1.12.1.1).

• Since payments exceeding consideration qualify as deemed supplies, the related time of
supply and value of supply should be noted (2.12.5.2) and (2.12.5.3).

Read textbook section 2.12.6 in the prescribed textbook.

1.4.6 Output VAT: non-supplies and no

Textbook sections: 2.13 and 2.14
apportionment

Work through section 2.13 and 2.14 in the prescribed textbook

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 sells 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.

Work through examples 2.35 and 2.36 in the prescribed textbook.

1.5 TIME OF SUPPLY Textbook section: 2.15

Work through section 2.15 in the prescribed textbook

The time of supply is important for VAT purposes, as it determines when you must pay the output
VAT and when you can claim the input VAT. 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 Textbook section: 2.16

Work through section 2.16 in the prescribed textbook

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 tax fraction (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.

Work through examples 2.37 to 2.41 in the prescribed textbook.

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

Work through section 2.17 in the prescribed textbook

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

Work through example 2.42 in the prescribed textbook.

17
 1.7.1 Documentation Textbook sections: 2.18 and 2.19

Work through section 2.18 and 2.19 in the prescribed textbook

Have you noticed that to be able to claim input VAT, 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, debit notes
and 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 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 on the list of documents
appearing at the bottom of the page.)

Work through examples 2.43 and 2.44 in the prescribed textbook.

1.7.2 Determination of input VAT Textbook section: 2.20

Work through section 2.20 in the prescribed textbook

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 incur-
red 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 being 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.

Work through example 2.45 in the prescribed textbook.

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Remember that if there is a question in which input tax must be apportioned, you
must first decide if the cost only relates to a taxable supply, exempt supply, or
both.

• 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 appor-
tioned. For example, the input tax paid in respect of a computer used to pre-
pare accounts for both commercial and residential accommodation (example
2.45) must be apportioned between taxable and exempt usage.

Note that only input tax is apportioned. The output tax of a vendor is not appor-
tioned – it is charged at either 15% or 0%, or not charged at all (Rnil for exempt
supplies).

Practical activity 1

Complete this activity in the practical activity section of learning unit 1.

Zethu Pty (Ltd) owns a three-storey building. The ground floor and the first floor accommodate
various businesses, while the second floor is comprised of flats rented out as residential units.
The SARS Commissioner has agreed to an input tax apportionment of 80%. The following
information has been provided to you for the two-month tax period ended 31 March 2024 (all
amounts exclude VAT):

DESCRIPTION

Receipts R

Commercial rental received 240 000

Residential rental received 60 000

Payments made

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 Zethu (Pty) Ltd for the two-month tax period ended 31 March 2025.

19
 1.7.3 Input VAT denied Textbook section: 2.21

Work through section 2.21 in the prescribed textbook

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.

Input tax is denied for the following supplies:

• entertainment (2.21.1)
• club membership fees and subscriptions (2.21.2)
• motor cars (2.21.3)

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
• business lunches, golf days, or other entertainment for customers and clients in restaurants,
theatres, and night clubs or at sporting events
• 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.
• beverages, meals, entertainment shows, amusements or other hospitality supplied to custo-
mers and clients at product launches and promotional events.
• capital goods such as hospitality boxes, holiday houses, yachts and private aircraft that are
used for entertainment.

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

1. When will a person be able to claim input tax on entertainment expenses?

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

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

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Work through example 2.46 in the prescribed textbook.

1.7.4 Deemed input Textbook section: 2.22

Work through section 2.22 in the prescribed textbook

When goods are acquired from a non-vendor, a vendor can usually not claim any input tax
because the non-vendor did not charge any output VAT. 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.

Work through examples 2.47 to 2.49 in the prescribed textbook.

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 and 2.24

Work through section 2.23 and 2.24 in the prescribed textbook

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.

Work through examples 2.50 to 2.52 in the prescribed textbook.

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 rental 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 agreement, there will normally be
no finance charges applicable, and input tax can be claimed as and when the rental payment is
made.

21
 1.9 ADJUSTMENTS Textbook sections: 2.26 to 2.32

Work through sections 2.26 to 2.32 in the prescribed textbook

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 a subsequent change in the use of the goods
or services arises, for example to being used wholly or partially for private purposes.

Work through examples 2.53 to 2.63 in the prescribed textbook.

When studying these rules, it is important to understand when will the adjustment
relate to input tax and when it will relate 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.

1.10 TAX RULINGS Textbook section: 2.33

Work through section 2.33 in the prescribed textbook

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 the SARS Commissioner). 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-

Textbook sections: 2.34 and 2.35
SIONAL CONDUCT

Work through section 2.34 and 2.35 in the prescribed textbook

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 TAX3701/102

If a person enters 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.

1.12 INFLUENCE OF VAT ON

Textbook section: 2.36
INCOME TAX CALCULATIONS

Work through section 2.36 in the prescribed textbook

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 or not.

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 (i.e., not a motor car as defined) 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

Work through section 2.37 in the prescribed textbook

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 ser-vices,
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.

Work through question 2.1 in section 2.38 of the prescribed textbook.

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 Taxation and accounting are integrated subjects. You may therefore expect to
apply some accounting knowledge when answering a taxation question. For this
learning unit you are expected to be able to do journal entries. In the learning
units that follow, you will be expected to know the principles of preparing financial
statements to the extent that it relates to taxation.

The total amount included in a cashbook will generally be the amount including
VAT, as this represents the total amount received. If the information provided is
from a general ledger, it will exclude VAT, as VAT will have been recorded in a
separate general ledger account (such as the VAT control account). Remember,
these are the general rules: Always read the information provided carefully as
certain amounts may include VAT. For example, a question may state that the
amounts reflected are the totals of the relevant columns in the cashbook, which
would mean the VAT component has already been removed if there is a separate
VAT column in the cashbook.

1.14 QUESTIONS Uploaded on MyUnisa

Work through the self-assessment exam type questions uploaded under Learning
unit 1 on myUnisa. The solutions to these self-assessment exam type
questions are available under learning unit 1 on myUnisa, you are however
encouraged to only look at the solutions once you have attempted the
questions. later during the course. This reiterates the importance of attempting
these questions on your own and will help you to ascertain whether you understand
all the topics that were discussed.

The questions in your assessments including the final exam will also be based on the application
of the learnt theory.

WRAP-UP QUIZ

Once you have worked through all the examples in the prescribed textbook, the
activities in this tutorial letter and completed all the self-assessment questions on
myUnisa, you must complete the Wrap-up Quiz and receive a pass mark of 50%,
before you can continue with Learning unit 2.

KNOWLEDGE TEST

In this learning unit, we investigated the different sections of the VAT Act. We also examined
each of the three components of the VAT system, namely output tax, input tax and adjustments.

Are you now able to answer the following questions? If not revisit the sections relating to
questions you are still not able to answer.

• When does a person need to register as a vendor for VAT?

• How does the VAT system work?
• When and at what rate is VAT levied?
• How long is a VAT period?

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• What are the requirements for the documents that are the driving force of the VAT system?
• When is a supply standard rated, zero-rated or exempt?
• When should output tax be accounted for?
• What constitutes a deemed supply?
• When should input tax be accounted for?
• Under which other special circumstances must output tax be raised?
• When will input tax be denied?
• What are the timing rules for supplies?
• How is the value of a supply determined?
• Which accounting basis may be applied in the VAT system?
• What do I need to know about returns, penalties, and refunds for VAT purposes?
• Can there be avoidance schemes in respect of VAT?
• How does the VAT system influence income tax calculations?

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: Business Activities (2024)

4. SILKE - South African Income Tax (2024)

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