The Draft Taxation Laws Amendment Bill, 2011 (“the TLAB”) released on 2 June 2011, proposes a number of amendments to the Value-Added Tax Act, No 89 of 1991 (“the VAT Act”), which we summarise below. All of the proposed amendments are scheduled to become effective from the date of promulgation of the TLAB.
Temporary letting of residential property developed for resale
Property developers who develop residential properties for resale, and who are unable to find buyers for the properties concerned, currently find themselves in the position where they need to let the properties to prevent them from being vandalised and to enable them to service their debt obligations whilst they seek buyers. However, as a result of the letting of the properties the developer becomes liable for the payment of VAT on the open market value of the property, which places an additional financial strain on the developer.
It is proposed that, as a temporary relief measure, property developers be granted a grace period of 36 months to find a buyer for the developed properties. If a buyer is not found within the 36 month period then the developer is required to account for output tax on the open market value of the property. This grace period will apply until 1 January 2015 to allow National Treasury and SARS to consider various alternative options for dealing with VAT on the temporary letting of residential properties developed for resale.
No provision is made for the VAT treatment of properties which were temporarily let by the developer and where the developer already accounted for the output tax.
Notional input tax on fixed property acquisitions
Currently, the notional input tax deduction on the purchase of fixed property by a vendor from a non-vendor is limited to the transfer duty paid by the vendor. This limitation, which was introduced as an anti-avoidance measure, resulted in a cascading effect of VAT, particularly with regard to properties where the exemption from transfer duty apply (currently properties with a value less than R600 000) and no deduction is possible.
It is proposed that the limitation of the input tax deduction to the transfer duty paid be eliminated, with the result that a vendor acquiring a fixed property from a non-vendor will be entitled to claim an input tax deduction equal to the tax fraction (14/114) of the purchase consideration. However, the input tax deduction may only be claimed to the extent that the vendor has made payment to the non-vendor as consideration for the property.
Inter-company loan accounts
Where a vendor acquired goods or services on credit and has not made payment for such goods or services within a period of 12 months, the vendor is obliged to account for output tax in respect of the unpaid consideration for the supplies. This also applies to group companies where there is often a group services company that acquires and on-supplies goods or services to group companies on loan account.
It is proposed that the 12 month claw back period be repealed for intra-group debt, until the debt is either cancelled or the debtor no longer forms part of the same group of companies as the creditor. The creditor will further only be entitled to claim bad debt relief if the creditor can substantiate that the debtor paid the VAT to the SARS.
No provision is made for the situation where the group company debtor has already made an adjustment in respect of past transactions older than 12 months.
The VAT exemption that applies to temporary imports, in particular, duty free goods that are imported on a temporary basis for beneficiation in South Africa, is subject to SARS Customs procedures and policies because it is SARS Customs that controls the VAT exemption. These procedures and policies are not aligned with the VAT Act. One problem is that the applicable Schedule Item in the Customs Act is only applied to clear dutiable goods.
It is proposed that the relevant Schedule Item in the Customs Act be amended to apply to duty free goods as well, and that a corresponding amendment be made in Schedule 1 to the VAT Act.
Unfortunately this proposed amendment only addresses part of the operational problems which are being experienced. The problem is that the customs officials insist on carrying out a physical inspection of the goods imported and exported to determine that the same goods imported are exported, but where the goods imported and exported are substantially different in nature, has not been addressed.
The proposed amendment further provides that where the importer is contractually entitled to retain a portion of the goods imported as a fee for processing the goods, then the importer must process a bill of entry and pay VAT on the value of the goods so retained, unless the goods retained is exported within 12 months. No details are provided as to how the importer should prove that the goods retained were exported.
Since VAT becomes payable on the goods retained by the importer, presumably SARS would no longer require the foreign owner of the goods to register for VAT on the basis that it supplies goods in South Africa for a consideration. However, this is not clear from the proposed amendments.
Where the VAT exemption does not apply for any reason and the importer paid import VAT, the question as to whether the importer, not being the owner of the goods, is entitled to claim the import VAT as a deduction, has not been addressed.
Goods supplied in a bonded warehouse
Where goods are cleared for home consumption and the goods are supplied after importation but whilst in a bonded storage warehouse, VAT is generally paid on the original import value of the goods and not on the sales consideration whilst the goods were in bond.
It is proposed that the import value will be ignored when goods were supplied after importation in a bonded storage warehouse, and VAT will instead be payable on the purchase consideration paid by the purchaser when the goods are cleared for home consumption.
Minimum exemption value for imported services
VAT is payable on all imported services no matter how insignificant the consideration. This creates a mismatch between certain goods such a newspapers and periodicals which enjoy a minimum exemption value of R100, whereas no exemption applies to services. It is now proposed that a minimum exemption value for imported services of R500 per supply be introduced, and that the minimum value for books, newspapers, journals and periodicals imported by post also be increased to R500 per parcel.
Section 16(3)(i) of the VAT Act allows for an input tax deduction equal to the tax fraction in respect of a payment made by a vendor upon the redemption of a discount voucher to a supplier who has granted a discount on the surrender of such voucher for the supply of goods or services.
It is proposed that the deduction only be allowed for discounts granted in respect of standard rated goods or services. No input tax deduction will be allowed for discount vouchers redeemed for zero rated goods or services.
Zero rating of mineral rights conversions
Section 11(1)(n) of the VAT Act that provides for the zero rating for conversions of old order mineral rights or OP26 rights where no ownership of the rights changes hands will be amended to reflect that only the extent of continuation or conversion of the old order right as required by the Mineral and Petroleum Resources Development Act will be zero rated.
The zero rating for mineral right renewals is further deleted as superfluous.