Preferential Treatment: Value-added Tax

PREFERENTIAL TREATMENT: VALUE-ADDED TAX


Alicea van der Ryst

What is VAT:

VAT consists mainly out of two concepts which are known as output VAT and input VAT.[1]  Output VAT gets levied once it has been established that there is a supply made by a vendor for goods or services in the course or furtherance of any “enterprise” carried on by it.[2]  On the other hand input VAT is the output VAT borne by a vendor on supplies of goods and/or services made to the vendor by other vendors, and in respect of which the vendor is entitled to claim a refund from SARS.[3]

The possible effect of VAT on a PBO:

A Public Benefits Organisation (PBO) is an organisation which complies with the relevant provisions of the Income Tax Act 58 of 1962[4] (hereafter “Income Tax Act”).

A PBO is a term defined and used in the Income Tax Act, however when one looks at the VAT Act, a PBO can either be regarded as an association not for gain, or a welfare organisation, which is a further sub-division of an association not for gain.[5]  There are specific legislation governing each of the above categories.

Associations not for gain:

An “association not for gain”, as defined in the VAT Act, means any religious institution of a public character; any other organisation (except an educational institution) which does not carry on its activities for the purposes of profit or gain to any owner, member or shareholder; and educational institutions of a public character.[6]

Usually businesses further their financial objectives through commercial activities, however associations not for gain have a variety of income sources including, but not limited to donations, bequests, collections, and fundraising activities combined with commercial activity to generate additional income.[7] Consequently, there may be a mixture of standard-rated and zero-rated taxable supplies, exempt supplies and supplies which are outside the scope of VAT.[8] If an association not for gain supplies goods or services which it received as a donation, the supply is exempt in terms of Section 12(b) of the VAT Act. The exemption applies whether the supply is made for a consideration or not.

To qualify as a welfare organisation it must firstly be an approved PBO and it must also carry on “welfare activities” as listed in Regulation Number 112 in the Government Gazette Number 27235 issued on 11 February 2005 (hereafter “Regulation 112”).[9]

Welfare organisation:

A welfare organisation is a special type of association not for gain, or a sub-division thereof, which means that the VAT Act should have the exact application to welfare organisations as with associations not for gain.[10]

Welfare organisations are however entitled to benefits which are not available to an association not for gain. This includes paragraph (b)(ii) of the definition of “enterprise” in Section 1(1) of the VAT Act, which regards supplies made for no consideration to be taxable supplies to the extent that the taxable supplies are in connection with carrying on certain “welfare activities” listed in Regulation 112.[11] Welfare organisations are therefore provided with an option to register voluntarily as vendors without having to meet the minimum threshold or the requirement that supplies must be made for a consideration.[12]

This allows a welfare organisation the ability to claim a refund of input VAT in respect of supplies made for no consideration in respect of “welfare activities” conducted.

An additional benefit available to welfare organisations is that it is entitled to deduct input VAT in respect of soliciting donations with advertising, as this activity is regarded as an integral part of conducting “welfare activities”.[13]

It is clear from the aforementioned explanations that organisations which fall within in the definitions of “association not for gain” or “welfare organisations” are identified for preferential treatment under the VAT Act.[14]  This means that the standard definitions used to determine the application of the VAT Act, as explained above, will not be formally applied to these type of entities, but in conjunction with their specific regulations.

[1] Haupt P. Notes on South African Income Tax (2016), 35th Edition. (Publications: Roggebaai 2016), page 905.

[2] Section 7(1) of the Value-Added Tax Act 89 of 1991

[3] Haupt P. Notes on South African Income Tax (2016), 35th Edition. (Publications: Roggebaai 2016), page 906.

[4] Section 30(3) of the Income Tax Act 58 of 1962.

[5] Interpretation Note 70 issued by the South African Revenue Service dated 14 March 2013, page 26.

[6] Interpretation Note 70 issued by the South African Revenue Service dated 14 March 2013, page 26 read with Section 1(1) of the Value-Added Tax Act 89 of 1991.

[7] Interpretation Note 70 issued by the South African Revenue Service dated 14 March 2013, page 26.

[8] Ibid page 26.

[9] Ibid page 26.

[10] Interpretation Note 70 issued by the South African Revenue Service dated 14 March 2013, page 28.

[11] Section 1(1) of the Value-Added Tax Act 89 of 1991.

[12] Interpretation Note 70 issued by the South African Revenue Service dated 14 March 2013, page 28.

[13] Ibid page 28.

[14] VAT414, Guide for Association not for Gain and Welfare Organisations, (10 March 2016), (Publication:SARS), page 14.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

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