Binding General Ruling 43
Subject to certain exceptions, the Value Added Tax (VAT) Act (89/1991) entitles vendors to claim a notional input tax deduction for second-hand goods acquired under a non-taxable supply if they are acquired from a South African resident for consumption, use or supply in the course of making taxable supplies.
However, as of April 1 2015, vendors were prohibited from claiming notional input tax deductions for the acquisition of second-hand goods comprising gold or goods containing gold. This exclusion was introduced to curb fraudulent notional input tax deductions regarding the acquisition of gold and gold jewellery. However, the amendment had a negative impact on legitimate transactions in the second-hand gold industry. The definition of second-hand goods was accordingly amended with effect from April 1 2017 in order to limit the extent of the exclusion, thus allowing notional input tax deductions for the acquisition of second-hand goods in certain circumstances.
Section 1 of the VAT Act now defines 'second-hand goods' as comprising, among other things, goods which were previously owned and used, excluding:
- goods consisting solely of gold, unless they were acquired for the sole purpose of supplying such goods in the same state without any further processing;
- gold coins provided for in Section 11(1)(k) of the VAT Act; and
- any other goods containing gold, unless they were acquired for the sole purpose of supplying such goods in the same or substantially the same state to another person.
Vendors acquiring second-hand gold or goods containing gold under a non-taxable supply are thus unentitled to claim a notional input tax deduction in respect thereof unless one of the above exceptions applies.
On September 12 2017 the South African Revenue Service (SARS) issued Binding General Ruling (VAT) 43, which sets out and clarifies the circumstances under which the supply of gold is regarded as falling within the exceptions provided in the VAT Act's definition of 'second-hand goods'.
Goods consisting solely of gold
Binding General Ruling 43 provides that goods consisting 'solely of gold' are goods which comprise at least 99.5% pure gold. Under the ruling, certified 24-carat gold items, gold bars, gold ingots and foreign 24-carat gold coins will be deemed to consist solely of gold for purposes of the definition of second-hand goods.
In order for a vendor to be able to claim a notional input tax deduction in respect of goods consisting solely of gold, it must acquire the goods for the sole purpose of supplying them in the course or furtherance of its business in "the same state without any further processing". Under Binding General Ruling 43, this means that the vendor cannot melt the gold or subject it to any transformational process which could change its purity, quality or form in any way. Where these requirements are met, the vendor may claim a notional input tax deduction for the goods consisting solely of gold acquired from a non-vendor that is a South African resident.
A vendor will not be entitled to claim a notional input tax deduction for second-hand goods comprising gold coins issued by the South African Reserve Bank, including Kruger rands, protea and the R1 series. There are no exceptions to this exclusion.
Other goods containing gold
The term 'other goods containing gold' includes all goods containing gold which do not fall under the first two categories discussed above. Under Binding General Rule 43, this includes:
- gold jewellery, including nine and 18-carat gold items;
- foreign gold coins that comprise less than 99% gold, such as the American Eagle series;
- certain computer components;
- medical equipment; and
- electronic appliances.
In order to claim a notional input tax deduction in respect of second-hand goods that constitute goods containing gold, the vendor must acquire such goods for the sole purpose of supplying them in the same or substantially the same state to another party in the course or furtherance of the vendor's enterprise. Under Binding General Ruling 43, this means that the principal essentials of the gold contained in the goods cannot be altered or transformed. A vendor may therefore change a small or nominal detail of the goods containing gold and will not be precluded from deducting notional input tax. However, where a vendor changes the nature of the goods containing gold – for example, by melting a gold ring to make gold earrings – no notional input tax deduction will be allowed for the acquisition of the gold ring.
Binding General Ruling 43 accordingly provides that where a vendor smelts (or intends to smelt) gold acquired under a non-taxable supply, the gold will not qualify as second-hand goods due to the transformational nature of the process. Binding General Ruling 43 also provides specific examples of goods containing gold which are supplied in substantially the same state, including:
- gold rings that:
- are resized; or
- have a precious stone replaced before resale; and
- medical equipment whose faulty parts are upgraded before resale.
Effect of Binding General Ruling 43
Where a vendor claims an input tax deduction for which it does not qualify, SARS may impose penalties and interest on the prohibited input tax claimed.
Binding General Ruling 43 is effective from April 1 2017. It clearly sets out the considerations and circumstances under which a vendor will be entitled to claim a notional input tax deduction for the acquisition of second-hand gold for consumption, use or supply in the course of making taxable supplies. Vendors that conduct business in the second-hand gold industry should carefully consider their intention and purpose at the time of acquiring the second-hand gold, as well as the processes that they intend to undertake in respect of such gold, before claiming any notional input tax deduction in respect of the acquisition.
For further information on this topic please contact Varusha Moodaley at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email ([email protected]