By Jean-Louis Nel, Senior Associate – Tax
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As general rule, a Vendor [a taxpayer registered for VAT] may only claim input-VAT on goods purchased from another Vendor under the provisions of the Value-Added Tax Act (the “Act”). As always with tax, there are exceptions to the general rule, one of which is when a Vendor purchases fixed property from a seller that is not registered for Value-Added Taxes (“VAT”).
Section 16(3)(a)(ii)(bb) of the Act entitles a Vendor to claim an amount of notional input VAT against amounts incurred to acquire ‘Second-hand goods’ from non-VAT Vendors if it consists of fixed property. If the provision applies, the Vendor is entitled to a notional input tax deduction equal to the tax fraction (15/115) of the lesser of the consideration in money paid by the Vendor for the fixed property, or its open market value.
There is some discord as to whether the ‘consideration’ paid by the Vendor includes the concomitant transfer duty. SARS’ position is that transfer duty is excluded from the ‘consideration’. The Cape Town Tax Court overturned the position in Case No. 1857. However, when SARS appealed the judgment, the taxpayer withdrew from the matter and abandoned the judgment in terms of section 141 of the Tax Administration Act No. 28 of 2011 (“TAA”). Subsequently, SARS issued Binding General Ruling 57, which reaffirms SARS’ position that ‘consideration’ excludes transfer duty. Although the ruling is not binding on taxpayers, it expresses SARS’ general view on the application of the provision and SARS will disallow part of the deduction to the extent that it factors in the transfer duty paid. It is worthy to note, the amount of transfer duty and transfer cost paid by the Vendor may be included in the base cost of the fixed property in terms of paragraph 20(1)(c) of the Eight Schedule to the Income Tax Act.
Beyond calculating the notional input tax deduction correctly, it is important to be certain that all of the underlying requirements of section 16(3) and 20(8) of the Act are satisfied, which can be summarised as follows:
- The fixed property must be acquired by the Vendor for the purpose of making taxable supplies [VAT levied supplies]. Stated differently, the Vendor will utilise the fixed property for the purpose of generating taxable VAT supplies;
- The fixed property constitutes ‘Second-hand goods’, which means the fixed property should have been previously owned and used by the seller [i.e. the non-VAT Vendor];
- The time when the input VAT may be claimed depends on if the Vendor is registered on the payment or invoice basis. In case of the former, the notional input VAT may be claimed to the extent that payment of the purchase price has been made. If the Vendor is registered on the invoice basis, which is most often the case, the Vendor may claim the notional input VAT to the extent that the full purchase price for the fixed property has been paid and the fixed property is registered in the name of the Vendor at the deeds office;
- The input VAT is claimed within 5 (five) years from the date that the fixed property was purchased from the seller; and
- The Vendor has maintained sufficient documentary records of the transaction as provided for in Section 20(8) of the Act.
On a practical level, the purchaser [the Vendor] of the fixed property must ensure that the underlying agreements are available to support the tax position taken in terms of Section 16(3) of the Act. In this regard, it is imperative that the agreements are drafted meticulously to fall within the ambit of the taxing provision relied on to discharge the Vendor’s burden of proof in terms of Section 102 of the TAA.