In the case of Claremont Library Development Company (Pty) Ltd v The Commissioner for the South African Revenue Service, the Tax Court recently considered the question of whether crediting a loan account constitutes “payment” of full consideration for purposes of the Value-Added Tax Act, No 89 of 1991 (the “VAT Act”).
The appellant, Claremont Library Development Company (“CLDC”), appealed against an assessment issued by the South African Revenue Service (“SARS”) in terms of section 22(3) of the VAT Act. Section 22(3) of the VAT Act provides that where a vendor (who is required to account for tax on an invoice basis) has claimed an input tax deduction in respect of the acquisition of a taxable supply, but has not, within a period of 12 months from the date of such supply, made payment of the full consideration in respect of such supply, that vendor shall be liable to account for deemed output tax equal to the tax fraction of the outstanding amount not paid. Section 22(3) is aimed at preventing the situation where the debt, being outstanding for more than 12 months, is written off by the supplier as irrecoverable and the supplier claims the bad debt relief for the output tax accounted for, and the recipient deducts the VAT charged as input tax even though no payment is ever made for the supply, which would be to the detriment of the fiscus.
On 2 April 2009, Corevest (Pty) Ltd (“Corevest”), the sole shareholder and holding company of CLDC, issued a tax invoice to CLDC in respect of a taxable supply amounting to ZAR82 095 000. CLDC accordingly claimed an input tax deduction in respect of the amount incurred. On receipt of the input tax refund from SARS, CLDC paid the input tax amount over to Corevest, which Corevest then paid over to SARS as output tax. The remaining liability due to Corevest of ZAR73 023 258 was then credited to Corevest’s loan account in CLDC’s books in accordance with a funding arrangement between the parties. Both CLDC and Corevest considered that the liability under the tax invoice had been paid after Corevest’s loan account was credited. The amount in question was accordingly reflected in CLDC’s financial records as a long-term debt, whereas it was reflected as a non-current asset in Corevest’s books.
SARS subsequently conducted an audit in 2013, four years after the tax invoice in question had been raised by Corevest. SARS held that the consideration in respect of the supply by Corevest to CLDC was not paid in a period of 12 months following the expiry of the tax period in which the input tax was claimed, as is required by section 22(3) of the VAT Act. SARS argued that despite the fact that there was no loss to the fiscus, the provisions of section 22(3) of the VAT Act are not discretionary and that no “payment” had been made by CLDC merely by reason of CLDC having credited Corevest’s loan account in this regard. SARS held that the recording of the amount in the loan account of Corevest did not constitute “payment” of the consideration in that it remained a debt on the books. The court had to consider, having regard to the provisions of section 22(3) of the VAT Act, whether the crediting of a loan account constitutes payment of full consideration. The court found that the commercial transaction on the mater arose within the context of an agreed funding arrangement between CLDC and Corevest, as group companies, and that it was this context that should be considered in determining whether “payment” had been made. The court recognised that what was contemplated by the funding arrangement was that the invoice would be settled by crediting the loan account of Corevest in the books of CLDC. Crediting Corevest’s loan account had the effect of changing the current liability to a long-term one in CLDC’s books. The court therefore considered whether in adjusting the liability to a long-term one, CLDC complied with section 22(3)(b) of the VAT Act insofar as it “paid the full consideration in respect of such supply”, which was the subject of the invoice received.
The CLDC relied on the decision of Commissioner SARS v Scribante Construction (Pty) Ltd, in which a dividend declared at interest, which was credited to shareholders’ loan accounts with the company, was found to constitute a payment by the company to the shareholders and as an actual deposit. CLDC also relied on the case of Commissioner for Inland Revenue v Guiseppe Brollo Properties (Pty) Ltd in terms of which the enquiry turns on the overriding purpose of the loan account liability incurred. The court found that the undisputed evidence for CLDC in the matter was that the purpose of the loan liability incurred was to discharge the invoice debt. In considering the definition of “consideration”, the court held that to the extent that payment amounts to the discharge of an obligation to another, there is no reason as to why an obligation under an invoice may not be discharged through the creation of another liability such as one under a loan. The court further considered the purpose of section 22(3), being the prevention of deliberate manipulation so as to create tax benefits, and held that that section 22(3) was accordingly not aimed at barring an invoice from being considered “paid” through the creation of a loan account liability where a funding arrangement exists between group companies.
Lastly, in support of its interpretation of section 22(3) of the VAT Act as one aimed at deliberate manipulation and not one aimed at bona fide transactions between companies within a group in circumstances in which there is no loss to the fiscus, the court acknowledged the introduction of section 22(3A) of the VAT Act, which was introduced with effect from 10 January 2012, to expressly provide that section 22(3) was not applicable in respect of taxable supplies made between group companies. However, since section 22(3A) was only effective from 10 January 2012, it was not applicable to the invoice issued by Corevest to CLDC in the April 2009 tax period.
In view of the above, the court accordingly held that the crediting of Corevest’s loan account by CLDC in the context of the funding arrangement between the two companies amounted to payment of “consideration” in relation to the supply of goods and services invoiced. CLDC was accordingly not required to account for deemed output tax in terms of section 22(3) of the VAT Act. The appeal was upheld with costs (which is unusual for a tax court that does not normally award costs).
Notwithstanding the fact that this judgement deals with a transaction between group companies that is now specifically provided for by section 22(3A) of the VAT Act, it remains that the principles may be applied to transactions between non-group entities that enter into transactions, or make payment of consideration, on loan account.