When a car dealership acquires a vehicle purely for demonstration use, the question arises of whether this constitutes a taxable supply for value-added tax (VAT) purposes.
Section 17(2)(c)(ii) of the Value-Added Tax Act (89/1991) provides that: "A motor car acquired by such vendor for demonstration purposes or for temporary use prior to a taxable supply by such vendor shall be deemed to be acquired exclusively for the purpose of making a taxable supply."
This section allows for two interpretations:
- A vehicle acquired by a dealer for demonstration purposes is always deemed to have been acquired exclusively for the purpose of making a taxable supply; or
- Input tax credit can be claimed only to the extent that the vehicle has been acquired by the vendor for demonstration purposes before a taxable supply.
Under the second interpretation, the assumption is that the dealer would have to sell the vehicle to make a taxable supply. However, if the first interpretation has merit, then the only requirement is that the dealer have acquired the vehicle for demonstration purposes.
Even in the context of the first interpretation, reference is made to a vehicle that is acquired by a vendor. The question is thus whether the word 'acquired' also includes the renting of a vehicle, as opposed to ownership. CIR v Freddies Consolidated Mines Ltd(1) considered that the word 'acquired' should be construed as meaning "the acquisition of a right to acquire the ownership of property". Similarly, SIR v Wispeco Housing (Pty) Ltd(2) indicated that the word 'acquired' does not mean the acquisition of actual ownership of the property, but rather the acquisition of the right to acquire ownership of the property at such a time as may be designated in the relevant contract. A narrower approach was adopted in Transvaal Investment Co Ltd v Springs Municipality,(3) where it was held that the word 'acquire' connotes ownership – that is, the acquisition of dominium.
Given that the courts have adopted a wider meaning of the word 'acquire', it seems that even if the first interpretation is preferred (ie, that the sole requirement is that the vendor have acquired the vehicle for demonstration purposes, whether or not before a taxable supply), the requirement seems to suggest that the vehicle should have been acquired by the dealer.
An interesting scenario that could arise when entering into a lease agreement is whether it can be argued that the vehicle was not acquired, even though use of the vehicle was transferred to the dealer. In other words, on either interpretation, it would seem that the dealer should have 'acquired' the vehicle; an option to acquire the vehicle is insufficient. It may be possible to argue that a vehicle acquired for demonstration purposes could qualify, whether it is before a taxable supply, but such argument is not without risk. It would seem that the devil is in the detail.
For further information on this topic please contact Carmen Moss-Holdstock at Cliffe Dekker Hofmeyr Inc's Johannesburg office by telephone (+27 11 562 1000), fax (+27 11 562 1111) or email (firstname.lastname@example.org).
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