Legal Counsel Leveraged Legal: Products Indirect Taxes
Office Cape Town Enquiries Janean Bennett Telephone (021) 413 6760 Facsimile (021) 413 6504 Room 11th floor, 22 Hans Strijdom Avenue Reference 2021/120 (28/17/2) Date 24 February 2022	Mr Rodney Govender PricewaterhouseCoopers Tax Services (Pty) Ltd PO Box 2799 CAPE TOWN 8000   By E-mail: rodney.govender@pwc.com	Khanyisa Building 281 Middel Street, Nieuw Muckleneuk, 0181 Private Bag X923, Pretoria, 0001 SARS online: www.sars.gov.za Switchboard: (012) 422-4000

Dear Mr Govender

VALUE-ADDED TAX: APPORTIONMENT METHODOLOGY TO BE APPLIED BY UNIVERSITIES

I write with reference to your letter dated 20 October 2021, the meeting of 28 January 2022 and set out my response below.

Background

Based on the information you provided, it is understood that the position as you see it, is as follows:

A principle of the value-added tax (VAT) system is that VAT incurred on the acquisition of goods or services by a vendor in the course or furtherance of making taxable supplies should not be a cost to a vendor unless specifically provided for in legislation. The exceptions provided for in section 12 of the Value-Added Tax Act, 89 of 1991 (the VAT Act) therefore envisage that VAT incurred to make exempt supplies will not qualify as input tax.

In the instance that a vendor makes both taxable and exempt supplies, it is required to determine the extent to which the goods or services are used, consumed, or supplied in the course of making taxable supplies, as only this portion constitutes “input tax” as defined in section 1(1) of the VAT Act. In this regard, the determination of the extent to which input tax may be deducted is regulated by the provisions of section 17(1) of the VAT Act.

Most universities primarily provide exempt educational services and are registered as VAT vendors as they make taxable supplies (that is, standard and zero-rated supplies) in addition to exempt and other non-taxable supplies. As a result, universities are required to apportion input tax in respect of those expenses that are not acquired wholly to make either taxable or exempt supplies.

The Commissioner for the South African Revenue Service (SARS) (the Commissioner) issued a VAT class ruling (VCR) to the members of Universities South Africa (USAf) (previously known as Higher Education South Africa) in a letter dated 25 May 2020 (the prior VCR) prescribing the apportionment method that universities must use to calculate the amount of

VAT to be deducted as input tax in respect of the acquisition of goods or services for a mixed purpose1. The prior VCR expired on 31 December 2021.

The complexities in the research space and the correct classification and application of the research definitions in the VCR remains a major area of risk for the sector. As a result, the Tax Task Team (TTT) acting on behalf of USAf entered into discussions with research bodies at some member institutions in order to gain a better understanding of the approach followed by researchers when classifying research projects pursuant to the VCR.

Based on these discussions it became very clear, that due to the subjective nature, the interpretation and application of the research guidelines is very different across the sector and even in the same institution across the different faculties.

This is a major risk area for the sector and the complexities makes it very difficult for institutions to ensure consistent compliance under the VCR.

Class

This VCR is applicable to all public universities and universities of technology in South Africa which are members of USAf. Refer to Annexure B for a complete list of the members.

Request

The Commissioner is requested to re-confirm the prior VCR and approve the that the:

VCR applies to assets of a capital nature (with a value of less than R5 million) which the university purchases for research purposes. Where an asset of a capital nature is acquired for mixed purposes and exceeds either R5 million or if the percentage reflected in paragraph 7.4 is not appropriate, this asset will be subject to a special apportionment method which must be approved by the Commissioner;

annual adjustment time period to account for any shortfall or excess in respect of input tax deducted in the previous financial year within 6 months be extended to 12 months after the financial-year end; and

VCR is valid for 5 years until 2026.

The law

For ease of reference, the relevant sections of the VAT Act and the Income Tax Act, 58 of 1962 (the IT Act) are quoted in the attached Annexure A. All references to sections hereinafter are to sections of the VAT Act unless otherwise stated.

1 For purposes of this document, the acquisition of goods or services partly for the purpose of consumption, use or supply in the course of making taxable supplies and partly for another intended use will be referred to as being acquired for a “mixed purpose”.

Application of the law

Input tax

VAT on goods or services acquired2 by universities may be deducted by universities to the extent that it constitutes “input tax” as defined in section 1(1). This definition determines that, amongst others, the goods or services must be acquired by universities for consumption, use or supply in the course of making its taxable supplies. In this regard, VAT on mixed expenses incurred must be apportioned in accordance with section 17(1) (that is, in terms of a method granted in accordance with a binding general ruling in terms of Chapter 7 of the Tax Administration Act 28 of 2011 (the TA Act) or a VAT ruling in terms of section 41B).

The abovementioned deduction is subject to sections 16, 17 and 20.

The universities are, therefore, required to directly attribute the VAT on goods or services acquired according to the intended purpose for which the goods or services will be consumed, used or supplied, prior to applying the apportionment method to mixed expenses.

Supplies made by Universities

Universities primarily supply educational services which are exempt from VAT in terms of section 12(h)(i)(bb) and section 12(h)(ii). Universities have however expanded their services and applied their resources to obtain funding from other sources including services supplied to corporate entities and government.

Research activities in universities are one such component used to increase universities’ funding and global standing. It is however important to ascertain the objective of this research activity to assess whether the VAT incurred would be deductible.

Adjustments

In the event that capital goods or services are acquired, a vendor is required to estimate the percentage of taxable use in order to deduct input tax as soon as possible after acquisition or importation, despite the fact that the goods or services will be used, consumed or supplied during the subsequent tax periods. Where input tax has been deducted based on an estimate which does not reflect the actual taxable use, an adjustment must be effected. In the event that the input tax deducted exceeds the input tax that should have been deducted3, as the taxable use of the goods or services has decreased, an output tax adjustment must be made. Alternatively, where the input tax deducted is less than the input tax which should have been deducted, as the taxable use of the goods has increased an input tax adjustment must be effected.

A vendor who acquires capital goods or services wholly or partly for the purpose of consumption, use or supply in the course of making taxable supplies, and subsequently reduces the taxable application or use of such goods or services, shall be deemed, in terms of section 18(2), to make a

2 Including the tax fraction of amounts contemplated in paragraphs (b) and (c) of the definition of “input tax” under section 1(1).

3 The input tax which should have been deducted is determined as a result of calculating the actual apportionment ratio.

taxable supply to the extent that there is a decrease in the application or use of such goods or services in relation to its total application. The value of the aforementioned supply is determined by applying the formula as set out in section 10(9), subject to the provisions of that section.

Capital goods or services acquired or applied partly for the purpose of use, consumption or supply in the course of making taxable supplies shall be deemed to be supplied to the vendor in terms of section 18(5) to the extent that there is a subsequent increase in the taxable use of the goods or services. In this regard, the vendor shall be entitled to an input tax deduction in terms of section 16(3)(f).

The provisions of section 18(2) read with section 10(9), and section 18(5) read with section 16(3)(f) are only applicable to capital goods or services where the change in use of such capital goods or services exceeds ten per cent. The proviso to section 18(2) and (5) further provides, inter alia, that an adjustment does not have to be made in the following instances:

The capital goods or services have an adjusted cost of less than R40 000 (excluding VAT);

The capital goods or services costs less than R40 000 (excluding VAT); or

The capital goods or services were deemed to be supplied in terms of section 18(4) and the amount, being the lesser of the adjusted cost to the vendor of acquisition, manufacture, assembly, construction or production of those goods, was less than R40 000 when the goods or services were deemed to be supplied to such vendor.

In terms of section 18(6), any adjustment made by the vendor for purposes of sections 18(2) and (5) is deemed to take place at the end of the vendor’s financial year.

Imported services

In terms of section 7(1)(c), VAT is levied on the supply of “imported services” by a person. The VAT must be paid, in terms of section 7(2), by the recipient of the imported services.

The term “imported services” is defined in section 1(1) as a supply of services made by a supplier who is not a resident, or carries on business outside of the Republic, to a recipient who is a resident of the Republic to the extent that the aforementioned services are not used or consumed in the Republic for the purpose of making taxable supplies.

Therefore, the person who acquires imported services from a foreign supplier for final consumption must account for VAT at the standard rate in terms of section 7(1)(c) to the extent that the services are used or consumed for purposes other than the making of taxable supplies (for example, exempt supplies).

Electronic services

Every person who carries on any enterprise as contemplated in paragraph (b)(vi) of the definition of “enterprise” in section 1(1) is, in terms of section 23(1A), required to register as a vendor at the end of the month where

the total value of taxable supplies made by that person has exceeded R50 0004.

The term “electronic services” is defined in section 1(1) to mean those electronic services prescribed by the Minister by Regulation5.

Definitions and classification of supplies and activities

For purposes of clarity and understanding, the following definitions apply when referred to in this VCR.

“applied research”, means a project which is primarily directed towards a specific practical aim or objective and should result in the application of new knowledge into a process or product, or the transfer of existing knowledge into a new process or product, for the benefit of the donor or for the immediate purposes of commercialising the product.

“basic research” means experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any particular application or use in view.

“research grant” means any appropriation of funds by an organ of state within the Republic to a university for the purposes of research where the involvement or development of students is a requirement or condition.

Research projects entered into by a university partly meet the requirements contained in the definition of “enterprise” at the point when the research activity can be defined as “applied research”.

Contract research projects where there is student involvement, whether such involvement is of an administrative nature or where student participation in such projects is not a requirement for his/her specific degree, the expenditure incurred in such projects will be regarded as mixed expenses. The Commissioner is therefore of the view that any student involvement in projects of such nature contribute to the educational activity of the respective student. As a result, any educational activity, whether such activity is incidental or limited, must be recognised, in which case, the expenditure incurred in such projects will be incurred for mixed purposes.

Class ruling

Research

Universities must apply a fixed percentage to calculate the input tax deductible in respect of goods or services acquired for a mixed purpose in relation to research activities.

For the purposes of direct attribution, where expenses are incurred for contract research projects and there is no student involvement, such expenses are regarded as being incurred wholly for the purposes of making taxable supplies and the input tax may be deducted in full. Similarly, expenses incurred for basic research projects are incurred wholly for non-enterprise activities.

4 Paragraph (b)(vi) of the definition of “enterprise” has been amended in the Taxation Laws Amendment Act, No. 43 of 2014 and will come into operation on 1 April 2015.

5 The Regulations prescribing electronic services for the purpose of the definition of “electronic services” in section 1 of the VAT Act published as Government Notice R221 in Government Gazette No. 37489 dated 28 March 2014.

All expenses incurred in respect of contract research projects in which there is any student involvement (whether limited or incidental), as well as projects which meet the definition of “applied research”, whether funded by a donor, a “research grant”, local or foreign grant funding or internal resources, are regarded to have been incurred for a mixed purpose.

The following percentages shall be applied to calculate input tax in relation to research activities:

This VCR also applies to assets of a capital nature, other than fixed property and buildings, (with a value of less than R1 million) which the university purchases for research purposes. To the extent that the asset is applied for a mixed purpose the apportionment percentage in the above table is to be applied.

Where an asset of a capital nature, as set out in paragraph 7.4.1, is acquired for a mixed purpose and the purchase price exceeds either R1 million and/or if the percentage reflected in paragraph 7.4 is not appropriate6, this asset will be subject to a special apportionment method which must be approved by the Commissioner.

General overheads

In calculating the apportionment ratio on expenses incurred for activities other than research activities, universities may continue to apply the varied input-based method of apportionment. This ratio is calculated as follows:

a

y =         

100

x          

(a + b) 1

100 per cent of all input tax incurred in relation to contract research funding where there is no student involvement.

50 per cent of all input tax incurred in relation to “applied research” funded by sources other than contracted research.

Input tax incurred wholly in the course of making taxable supplies other than research.

The VAT incurred on “applied research” activities which is not deductible as input tax as a result of this ruling in respect of research activities.

In the instance where the ratio calculated exceeds 12.5 per cent the ratio is limited to 12.5 per cent. However, if the ratio calculated is less than 12.5 per cent the lesser percentage must be applied.

A vendor who is subject to apportionment may calculate the apportionment ratio using the figures from the previous year’s source documentation, and apply that ratio for purposes of deducting input tax during the current year. An adjustment must be made annually to account for any shortfall or excess in respect of input tax deducted in the previous financial year using the figures from the source documentation for the current financial year.

Universities are required to effect the annual adjustment referred to in paragraph 7.5.2 within a period of nine months after the financial year end.

Change in use adjustments

Universities are required to make adjustments, at year-end, in terms of sections 18(2) and (5) in respect of all capital goods applied for mixed purposes. In calculating the adjustment, universities must determine the difference between the apportionment ratios for the current7 and previous financial years (the adjustment percentage) and, insofar as the difference exceeds ten per cent, apply the adjustment percentage to the VAT paid on acquisition of capital goods.

Imported services

Universities are required, in terms of section 7(1)(c), to account for output tax at the standard rate on the supply of services acquired by the universities from a supplier who is not a resident or carries on business outside of the Republic

7 The ratio ascertained in “y” in paragraph 7.5 without applying the limitation of 12.5 per cent.

(foreign services) to the extent that the services are applied for an exempt or non-taxable purpose.

In order to determine what portion of the foreign services are acquired for an exempt or non-taxable purpose (therefore constituting imported services) the taxable portion of the foreign services expense must be extracted. The taxable portion is calculated by applying the apportionment ratio percentage (paragraph 7.5) to the actual cost incurred when acquiring these services.

The value of the supply of the imported service is therefore the difference between the actual costs incurred in acquiring these foreign services and the value of the taxable portion.

From 1 April 2014 all foreign suppliers of electronic services (as defined in section 1(1) and prescribed by the Minister by Regulation) supplying electronic services to South African customers, are required to register as VAT vendors and levy VAT at the standard rate on all supplies made to South African customers. Universities will not be required to account for VAT on imported services in relation to these supplies from such foreign suppliers who have registered for and levied VAT in relation to these supplies.

Period for which this ruling is valid

This VCR, which extends the previous VCR issued in accordance with section 41B read with section 17(1) is–

effective from 1 January 2022;

valid until the earlier of any change in legislation or 31 December 2024; and

subject to the standard conditions and assumptions set out in Annexure C.

Continued on next page…

Income Tax implications

Section 18A(1)(a)(ii) of the IT Act provides that bona fide donations made in cash or of property made in kind to an institution contemplated in section 10(1)(cA)(i) of the IT Act and which carries on a public benefit activity (PBA) as contemplated in Part II of the Ninth Schedule, may be deducted from the taxable income of the donor in the year of assessment that the donation was actually paid or transferred. This deduction is limited to ten per cent of the donor’s taxable income before the deduction of donations under section 18A and medical expenses under section 18 of the IT Act8.

A university that has been approved by the Commissioner under section 10(1)(cA)(i) of the IT Act is therefore allowed to issue the receipt prescribed in section 18A(2)(a) of the IT Act to organisations or persons in respect of bona fide donations of cash or of property made in kind, provided the donation is used solely or exclusively for PBAs contemplated in Part II of the Ninth Schedule9.

Should you have any enquiries regarding this letter, please contact

Ms Janean Bennett at the contact details above. Sincerely

Ryan Boise

MANAGER

for COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE

8 If the donor is a collective investment scheme the amount of the deduction will be calculated on a different basis.

9 Universities should refer to section 18A of the IT Act for further details on income tax requirements with regard to the issue of donation receipts.

ANNEXURE A

For ease of reference, the relevant sections are quoted below.

The VAT Act

Section 1(1) – Definitions

“enterprise” means—

…

the supply of electronic services by a person from a place in an export country— (aa) to a recipient that is a resident of the Republic; or

(bb) where any payment to that person in respect of such electronic services originates from a bank registered or authorised in terms of the Banks Act, 1990 (Act No. 94 of 1990).

…

“imported services” means a supply of services that is made by a supplier who is resident or carries on business outside the Republic to a recipient who is a resident of the Republic to the extent that such services are utilized or consumed in the Republic otherwise than for the purpose of making taxable supplies;

…

“input tax” in relation to a vendor, means―

tax charged under section 7 and payable in terms of that section by―

a supplier on the supply of goods or services made by that supplier to the vendor; or

the vendor on the importation of goods by him; or

the vendor under the provisions of section 7(3);

an amount equal to the tax fraction (being the tax fraction applicable at the time the supply is deemed to have taken place) of the lesser of any consideration in money given by the vendor for or the open market value of the supply (not being a taxable supply) to him by way of a sale on or after the commencement date by a resident of the Republic (other than a person or diplomatic or consular mission of a foreign country established in the Republic that was granted relief, by way of a refund of tax as contemplated in section 68) of any second-hand goods situated in the Republic; and

an amount equal to the tax fraction of the consideration in money deemed by section 10(16) to be for the supply (not being a taxable supply) by a debtor to the vendor of goods repossessed under an instalment credit agreement: Provided that the tax fraction applicable under this paragraph shall be the tax fraction applicable at the time of supply of the goods to the debtor under such agreement as contemplated in section 9(3)(c),

where the goods or services concerned are acquired by the vendor wholly for the purpose of consumption, use or supply in the course of making taxable supplies or, where the goods or services are acquired by the vendor partly for such purpose, to the extent (as determined in accordance with the provisions of section 17) that the goods or services concerned are acquired by the vendor for such purpose;

Section 7 – Imposition of value-added tax

Subject to the exemptions, exceptions, deductions and adjustments provided for in this Act, there shall be levied and paid for the benefit of the National Revenue Fund a tax, to be known as the value-added tax—

on the supply by any vendor of goods or services supplied by him on or after the commencement date in the course or furtherance of any enterprise carried on by him;

on the importation of any goods into the Republic by any person on or after the commencement date; and

on the supply of any imported services by any person on or after the commencement date,

calculated at the rate of 15 per cent on the value of the supply concerned or the importation, as the case may be.

Except as otherwise provided in this Act, the tax payable in terms of paragraph (a) of subsection (1) shall be paid by the vendor referred to in that paragraph, the tax payable in terms of paragraph (b) of that subsection shall be paid by the person referred to in that paragraph and the tax payable in terms of paragraph (c) of that subsection shall be paid by the recipient of the imported services.

Section 10 – Value of supply of goods or services

…

Where goods or services are deemed by section 18(2) to be supplied by a vendor, the supply shall be deemed to be made for a consideration in money determined in accordance with the formula

A x (B – C)

In which formula-

“A” represents the lesser of-

(aa) the adjusted cost (including any tax forming part of such adjusted cost) to the vendor of the acquisition, manufacture, assembly, construction or production of those goods or services: Provided that where the goods or services were acquired under a supply in respect of which the consideration in money was in terms of section 10(4) deemed to be the open market value of the supply or would in terms of that section have been deemed to be the open market value of the supply were it not for the fact that the recipient would have been entitled under section 16(3) to make deduction of the full amount of tax in respect of that supply, the adjusted cost of those goods or services shall be deemed to include such open market value to the extent that it exceeds the consideration of money for supply; or

(bb) where the vendor was at some time after the acquisition of such goods or services deemed by section 18(4) to have been supplied with such goods or services, the amount which was which was represented by “B” in the formula contemplated in section 18(4) when such goods or services were deemed to be supplied to the vendor; or

(cc) where the vendor was at some time after the acquisition of the goods or Services required to make an adjustment contemplated in section 18(2) or (5), the amounts then represented by “A” in the said formula or by “B” in the formula contemplated in section 18(5) respectively, in the most recent adjustment made under section 18(2) or (5) by the vendor prior to such deemed supply of goods or services; and

the open market value of the supply of those goods or services at the time any reduction in the extent of the of the consumption or use of the goods is deemed by section 18(6) to take place;

“B” represents the percentage that the use or application of the goods or services for the purposes of making taxable supplies was of the total use or application of such goods or services determined under section 17(1), section 18(4) or (5) or this subsection, whichever was applicable in the period immediately preceding the 12 month period ”B” contemplated in “C”; and

“C” represents the percentage that, during the 12 month period which the decrease in use or application of the goods or services is deemed to take place, the use of application of the goods or services for the purposes of making taxable supplies (in respect of which, if such goods or services had been acquired at the time of such use or application, a deduction of input tax would not have been denied in terms of section 17(2)(a)), was of the total use or application of the goods: Provided that where the percentage contemplated in “B” does not exceed the said percentage by more than 10 per cent of the total use or application, the said percentage shall be deemed to be the “C” percentage determined in “B”.

Section 12 – Exempt supplies

The supply of any of the following goods or services shall be exempt from the tax imposed under section 7(1)(a):

…

(i) the supply of educational services—

(aa) provided by the State or a school registered under the South African Schools Act, 1996 (Act No. 84 of 1996), or a public college or private college established, declared or registered as such under the Further Education and Training Colleges Act, 2006 (Act No. 16 of 2006);

(bb) by an institution that provides higher education on a full time, part-time or distance basis and which is established or deemed to be established as a public higher education institution under the Higher Education Act, 1997 (Act No. 101 of 1997), or is declared as a public higher education institution under that Act, or is registered or conditionally registered as a private higher education institution under that Act, or

…

the supply by a school, university, technikon or college solely or mainly for the benefit of its learners or students of goods or services (including domestic goods and services) necessary for and subordinate and incidental to the supply of services referred to in subparagraph (i) of this paragraph, if such goods or services are supplied for a consideration in the form of school fees, tuition fees or payment for board and lodging; or

the supply of services to learners or students or intended learners or students by the Joint Matriculation Board referred to in section 15 of the Universities Act, 1955 (Act No. 61 of 1955);

Provided that vocational or technical training provided by an employer to his employees and employees of an employer who is a connected person in relation to that employer does not constitute the supply of an educational service for the purposes of this paragraph;

Section 16 – Calculation of tax payable

The tax payable by a vendor shall be calculated by him in accordance with the provisions of this section in respect of each tax period during which he has carried on an enterprise in respect of which he is registered or is required to be registered in terms

of section 23: Provided that the Commissioner may authorise a vendor to calculate the tax payable in accordance with a method which the Minister may prescribe by regulation.

No deduction of input tax in respect of a supply of goods or services, the importation of any goods into the Republic or any other deduction shall be made in terms of this Act, unless-

a tax invoice or debit note or credit note in relation to that supply has been provided in accordance with section 20 or 21 and is held by the vendor making that deduction at the time that any return in respect of that supply is furnished; or

(i) a document as is acceptable to the Commissioner has been issued in terms of section 20(6); or

(ii) a document issued by the supplier in compliance with section 20(7) or 21(5);or

sufficient records are maintained as required by section 20(8) where the supply is a supply of second-hand goods or a supply of goods as contemplated in section 8(10) and in either case is a supply to which that section relates;

a bill of entry or other document prescribed in terms of the Customs and Excise Act together with the receipt for the payment of the tax in relation to the said importation have been delivered in accordance with that Act and are held by the vendor making that deduction, or by his agent as contemplated in section 54(3)(b), at the time that any return in respect of that importation is furnished; or

(dA) a bill of entry or other document prescribed in terms of the Customs and Excise Act as contemplated in section 54 (2A) is held by the agent, and a statement as contemplated in section 54 (3) (b) is held by the vendor at the time that any return in respect of that importation is furnished; or

a tax invoice or debit or credit note has been provided as contemplated in section 54(2), and a statement as contemplated in section 54(3)(a) is held by the vendor at the time a return in respect of the supply to the vendor is furnished; or

the vendor, in the case where an amount is deducted from the sum of the amounts of output tax which are attributable to that period in terms of subsection (3)(c), (d), (dA), (e), (f), (g), (h), (i), (j), (k), (l), (m), or (n), is in possession of documentary proof, as is prescribed by the Commissioner, substantiating the vendor’s entitlement to the deduction at the time a return in respect of the deduction is furnished; or

…

Provided that where a tax invoice or debit note or credit note in relation to that supply has been provided in accordance with this Act, or a bill of entry or other document has been delivered (including by means of an electronic delivery mechanism) in accordance with the Customs and Excise Act, as the case may be, the Commissioner may determine that no deduction for input tax in relation to that supply or importation shall be made unless that tax invoice or debit note or credit note or that bill of entry or other document is retained in accordance with the provisions of section 55 and Part A of Chapter 4 of the Tax Administration Act.

Subject to the provisions of subsection (2) of this section and the provisions of sections 15 and 17, the amount of tax payable in respect of a tax period shall be calculated by deducting from the sum of the amounts of output tax of the vendor which are attributable to that period, as determined under subsection (4), and the amounts (if any) received by the vendor during that period by way of refunds of tax charged under section 7(1)(b) and (c) and 7(3)(a), the following amounts, namely-

…

(f) the amounts calculated in accordance with section 18(4) or (5) in relation to any goods or services applied during the tax period as contemplated in that section;

Section 17 – Permissible deductions in respect of input tax

Where goods or services are acquired or imported by a vendor partly for consumption, use or supply (hereinafter referred to as the intended use) in the course of making taxable supplies and partly for another intended use, the extent to which any tax which has become payable in respect of the supply to the vendor or the importation by the vendor, as the case may be, of such goods or services or in respect of such goods under section 7(3) or any amount determined in accordance with paragraph (b) or (c) of the definition of 'input tax' in section 1, is input tax, shall be an amount which bears to the full amount of such tax or amount, as the case may be, the same ratio (as determined by the Commissioner in accordance with a ruling as contemplated in Chapter 7 of the Tax Administration Act or section 41B) as the intended use of such goods or services in the course of making taxable supplies bears to the total intended use of such goods or services: Provided that—

where the intended use of goods or services in the course of making taxable supplies is equal to not less than 95 per cent of the total intended use of such goods or services, the goods or services concerned may for the purposes of this Act be regarded as having been acquired wholly for the purpose of making taxable supplies;

…

where a method for determining the ratio referred to in this subsection has been approved by the Commissioner, that method may only be changed with effect from a future tax period, or from such other date as the Commissioner may consider equitable and such other date must fall-

(aa) in the case of a vendor who is a taxpayer as defined in section 1 of the Income Tax Act, within the year of assessment as defined in that Act; or

(bb) in the case of a vendor who is not a taxpayer as defined in section 1 of the Income Tax Act, within the period of twelve months ending on the last day of February, or if such vendor draws up annual financial statements in respect of a year ending other than on the last day of February, within that year,

during which the application for the aforementioned method was made by the vendor

Section 18 – Change in use adjustments

…

Where-

capital goods or services have been supplied to or imported by a vendor; or

capital goods have been manufactured, assembled, constructed or produced by him; or

capital goods or services were deemed by subsection (4) to have been supplied to him,

(excluding goods or services to the extent that, in respect of the acquisition of which by the vendor a deduction of input tax was denied by section 17(2) or would have been denied if that section had been applicable prior to the commencement date) and such goods or services were acquired. manufactured, assembled, constructed or produced by such vendor wholly or partly for the purpose of consumption, use or supply in the course of making taxable supplies or such goods were held or applied for that purpose, such goods or services shall, if the extent of the application or use of such goods or

services in the course of making taxable supplies (in respect of which, if such goods or services had been acquired at the time of such application or use, a deduction of input tax would not have been denied in terms of section 17(2)(a)) is subsequently reduced in relation to their total application or use, be deemed to have been supplied by him by way of a taxable supply by him in the course of his enterprise at the time at which such reduction is deemed by subsection (6) to take place: Provided that this subsection does not apply to-

capital goods or services which have an adjusted cost of less than R40 000 (excluding tax) or where such goods or services were deemed to be supplied to the vendor by subsection (4) if the amount which was represented by "B" in the formula contemplated in that subsection was less than R40 000 when such goods or services were deemed to be supplied to such vendor;

capital goods or services acquired by a public authority or public entity listed in Part A or C of Schedule 3 to the Public Finance Management Act, 1999 (Act No. 1 of 1999), if the goods or services were acquired prior to 1 April 2005 or if an input tax deduction in respect thereof was denied under proviso (iv) to section 18(4); or

capital goods or services acquired by a municipality, if the goods or services were acquired prior to 1 July 2006 or if an input tax deduction in respect thereof was denied in terms of paragraph (v) of the proviso to section 18(4).

…

Where-

capital goods or services have been supplied to or imported by a vendor; or

capital goods have been manufactured, assembled, constructed or produced by him; or

capital goods or services are deemed by subsection (4) to have been supplied to him,

and such goods or services were acquired, manufactured, assembled, constructed or produced or applied by such vendor partly for the purpose of consumption, use or supply in the course of making taxable supplies (other than taxable supplies in respect of which, if such goods or services had been acquired at the time of such application, a deduction of input tax would have been denied in terms of section 17(2)) or of making supplies in the course of an activity which was an enterprise or would have been an enterprise if section 1 had been applicable prior to the date of promulgation of this Act (other than supplies in respect of which, if such goods or services had been acquired at the time of such application, a deduction of input tax would have been denied in terms of section 17(2) if that section had been applicable prior to the commencement date) such goods or services shall, if the extent of the application or use of such goods or services in the course of making taxable supplies (other than taxable supplies in respect of which, if such goods or services had been acquired at the time of such application, a deduction of input tax would have been denied in terms of section 17(2)) is subsequent to the commencement date increased in relation to their total application or use, be deemed to be supplied to him, and the Commissioner shall allow the vendor to make a deduction in terms of section 16(3), in the tax period during which such increase is deemed by subsection (6) to take place, of an amount determined in accordance with the formula

A x B x (C – D)

in which formula-

"A" represents the tax fraction;

"B" represents the lesser of-

(aa) the adjusted cost (including any tax forming part of such adjusted cost) to the vendor of the acquisition, manufacture, assembly, construction or

production of those goods or services: Provided that where the goods or services were acquired under a supply in respect of which the consideration in money was in terms of section 10(4) deemed to be the open market value of the supply, the adjusted cost of those goods or services shall be deemed to include such open market value to the extent that it exceeds the consideration in money for that supply;

(bb) where goods or services were deemed by subsection (4) to have been supplied to the vendor, the amount which was represented by "B" in the formula contemplated in that subsection when such goods or services were deemed to be supplied to the vendor; or

(cc) where the vendor was at some time after the acquisition of the goods or services required to make an adjustment contemplated in subsection (2) or this subsection the amounts represented by "A" In the formula contemplated in section 10(9) or by "B" in the formula contemplated in this subsection respectively, in the most recent adjustment made under subsection (2) or this subsection by the vendor prior to such supply of goods or services so deemed to be made; and

…

the open market value of the supply of those goods or services at the time any increase in the extent of the use or application of the goods or services is deemed by subsection (6) to take place;

"C" represents the percentage that, during the 12 month period during which the increase in use or application of the goods or services is deemed to take place, the use or application of the goods or services for the purposes of making taxable supplies (other than taxable supplies in respect of which, if such goods or services had been acquired at the time of such application, a deduction of input tax would have been denied in terms of section 17(2)) was of the total use or application of the goods: Provided that where the said percentage does not exceed the percentage contemplated in "D" by more than 10 per cent of the total use or application, the said percentage shall be deemed to be the percentage determined in "D";

"D" represents the percentage that the use or application of the goods or services for the purposes of making taxable supplies (other than taxable supplies in respect of which, if such goods or services had been acquired at the time of such application, a deduction of input tax would have been denied in terms of section 17(2)) was of the total use or application of such goods or services determined in terms of section 17(1), section 10(9) or subsection (4) of this section or this subsection, whichever was applicable in the period immediately preceding the 12 month period contemplated in "C":

Provided that-

this subsection does not apply to-

For the purposes of subsections (2) and (5), any reduction or increase in the extent of the application or use of goods or services shall be deemed to take place on the last day of the vendor's year of assessment as defined in section 1 of the Income Tax Act or, if the vendor is not a taxpayer as defined in that section, on the last day of February: Provided that where a vendor who is not a taxpayer as so defined draws up annual financial statements in respect of a year or other period ending on a date other than the last day of February the reduction or increase in the extent of the application or use of goods or services shall be deemed to take place on such first-mentioned date: Provided further that where a vendor ceases to be a vendor prior to any day contemplated in this subsection, any reduction or increase in the extent of the application or use of goods or services shall be deemed to take place immediately before that vendor ceased to be a vendor.

Section 41B – VAT class ruling and VAT ruling

The Commissioner may issue a VAT class ruling or a VAT ruling and in applying the provisions of Chapter 7 of the Tax Administration Act, a VAT class ruling or a VAT ruling must be dealt with as if it were a binding class ruling or a binding private ruling, respectively: Provided that—

the provisions of section 79(4)(f) and (k) and (6) of the Tax Administration Act shall not apply to any VAT class ruling or VAT ruling;

an application for a VAT class ruling or a VAT ruling in terms of this section shall not be accepted by the Commissioner if the application—

(aa) is for an advance tax ruling that qualifies for acceptance in terms of Chapter 7 of the Tax Administration Act; and

(bb) falls within a category of rulings prescribed by the Minister by regulation for which applications for rulings in terms of this section may not be accepted.

For the purposes of this section—

“VAT class ruling” means a written statement issued by the Commissioner to a class of vendors or persons regarding the interpretation or application of this Act;

“VAT ruling” means a written statement issued by the Commissioner to a person regarding the interpretation or application of this Act.

The IT Act

Section 10 – Exemptions

(cA) the receipts and accruals of–

any institution, board or body (other than a company registered or deemed to be registered under the Companies Act, 2008 (Act No. 71 of 2008), any co- operative, close corporation, trust or water services provider, and any Black tribal authority, community authority, Black regional authority or Black territorial authority contemplated in section 2 of the Black Authorities Act, 1951 (Act No. 68 of 1951)) established by or under any law and which, in the furtherance of its sole or principal object--

(aa) conducts scientific, technical or industrial research;

(bb) provides necessary or useful commodities, amenities or services to the State (including any provincial administration) or members of the general public; or

(cc) carries on activities (including the rendering of financial assistance by way of loans or otherwise) designed to promote commerce, industry or agriculture or any branch thereof;

any association, corporation or company contemplated in paragraph (a) of the definition of ‘company’ in section 1, all the shares of which are held by any such institution, board or body, if the operations of such association, corporation or company are ancillary or complementary to the object of such institution, board or body:

Provided that such institution, board, body or company–

has been approved by the Commissioner subject to such conditions as he may deem necessary to ensure that the activities of such institution, board, body or company are wholly or mainly directed to the furtherance of its sole or principal object;

is by law or under its constitution–

not permitted to distribute any of its profits or gains to any person, other than, in the case of such company, to its shareholders;

required to utilize its funds solely for investment or the object for which it has been established; and

required on dissolution–

(aa) where the institution, board, body or company is established under any law, to transfer its assets to some other institution, board or body which has been granted exemption from tax in terms of this paragraph and which has objects similar to those of such institution, board, body or company; or

(bb) where the institution, board, or body is established by law, to transfer its assets to–

some other institution, board or body which has been granted exemption from tax in terms of this paragraph and which has objects similar to those of such institution, board, body or company; or

to the State: Provided further that–

where the Commissioner is satisfied that any such institution, board, body or company has during any year of assessment failed to comply with the provisions of this paragraph, he may withdraw his approval of the institution, board, body or company with effect from the commencement of that year of assessment;

where the institution, board, body or company fails to transfer, or take reasonable steps to transfer, its assets as contemplated in paragraph (b)(ii) of the first proviso, the accumulated net revenue which has not been distributed shall be deemed for the purposes of this Act to be an amount of taxable income which accrued to such institution, board, body or company during the year of assessment contemplated in paragraph (a); and

any decision of the Commissioner in the exercise of his discretion under this paragraph shall be subject to objection and appeal;

Section 18A – Deduction of donations to certain organisations

Notwithstanding the provisions of section 23, there shall be allowed to be deducted from the taxable income of any taxpayer so much of the sum of any bona fide donations by the taxpayer in cash or of property made in kind which was actually paid or transferred during the year of assessment to–

any–

public benefit organisation contemplated in paragraph (a)(i) of the definition of "public benefit organization" in section 30(1) approved by the Commissioner under section 30; or

institution, board or body contemplated in section 10(1)(cA)(i), which–

(aa) carries on in the Republic any public benefit activity contemplated in

Part II of the Ninth Schedule, or any other activity determined from time to time by the Minister by notice in the Gazette for the purposes of this section; and

(bb) complies with the requirements contemplated in subsection (1C), if applicable, and any additional requirements prescribed by the Minister in terms of subsection (1A);

…

(2A) A public benefit organisation, institution, board, body or department may only issue a receipt contemplated in subsection (2) in respect of any donation to the extent that—

in the case of a public benefit organisation, institution, board or body contemplated in subsection (1)(a) which carries on activities contemplated in Parts I and II of the Ninth Schedule, that donation will be utilised solely in carrying on activities contemplated in Part II of the Ninth Schedule;

in the case of a public benefit organisation contemplated in subsection (1)(b)-

that organisation will within 12 months after the end of the relevant year of assessment distribute or incur the obligation to distribute at least 75 per cent of all funds received by way of donation during that year in respect of which receipts were issued: Provided that the Commissioner may, upon good cause shown and subject to such conditions as he or she may determine, either generally or in a particular instance, waive, defer or reduce the obligation to distribute any funds, having regard to the public interest and the purpose for which the relevant organisation wishes to accumulate those funds; and

if that public benefit organization provides funds to public benefit organisations, institutions, boards or bodies that carry on public benefit activities contemplated in Part II of the Ninth Schedule and to other entities, that donation will be utilised solely to provide funds to a public benefit organisation, institution, board or body contemplated in subsection (1)(a), which will utilise those funds solely in carrying on activities contemplated in Part II of the Ninth Schedule; or

in the case of a department, that donation will be utilised solely in carrying on activities contemplated in Part II of the Ninth Schedule.

The provision of ‘‘higher education’’ by a ‘‘higher education institution’’ as defined in terms of the Higher Education Act, 1997, (Act No. 101 of 1997).

ANNEXURE B

ANNEXURE C

STANDARD CONDITIONS AND ASSUMPTIONS

Basis of this VAT ruling and the rulings given in this letter

This ruling letter and the rulings set forth herein are based solely upon the following –

the information, documents, representations, facts and assumptions that are included or referenced in this ruling being true and accurate;

any legal agreements or contracts entered into (or proposed to be entered into) in connection with the transaction being legally valid and enforceable in accordance with their stated terms, the parties to those agreements timeously satisfying their obligations under those agreements, and those agreements otherwise being carried out in accordance with their terms; and

the tax laws, regulations, binding general rulings, and cases in effect as of the date of this VAT ruling. In particular, the rulings set forth in this VAT ruling are based solely upon the interpretation and application of the tax laws as amended and in effect as of the date of this VAT ruling, as well as any applicable regulations, general binding rulings or cases in effect, as of that date.

The ruling set forth in this ruling letter only applies to the provisions of the tax laws identified in this VAT ruling in connection with the transaction described herein.

The Commissioner’s understanding of the transaction

This ruling letter and the rulings set forth herein are based upon the Commissioner’s understanding of the transaction as described herein.

Please note that if you believe that this understanding is incorrect, inaccurate or incomplete, it is your obligation to notify the Commissioner immediately. The failure to rectify a misunderstanding of a material fact may result in the ruling being withdrawn or modified.

Subsequent changes in the tax laws

This VAT ruling will cease to be effective upon the occurrence of any of the following circumstances:

The provisions of the tax laws that are the subject of this VAT ruling are repealed or amended; or

A court overturns or modifies an interpretation of the provisions of the tax laws on which the rulings set forth herein are based unless –

the decision is under appeal;

the decision is fact-specific and the general interpretation upon which the rulings were based is unaffected; or

the reference in the decision to the interpretation upon which the rulings were based is obiter dicta.

In any of these situations, the ruling letter and any rulings set forth herein will cease to be effective immediately upon –

the effective date of the repeal or amendment of the provisions in question; or

the date of the judgment,

This ruling letter and the rulings set forth herein are void ab initio if any of the following circumstances exist or occur –

any facts stated in your application regarding the transaction are materially different from the transaction actually carried out;

there is fraud, misrepresentation or non-disclosure of a material fact; or

any condition or assumption stipulated by the Commissioner in this VAT ruling is not satisfied or carried out.

A fact is considered material if it would have resulted in a different ruling had the Commissioner been aware of it when issuing this VAT ruling.

Other requirements and limitations

This VAT ruling as set out in paragraph 5, is binding in terms of section 41B of the VAT Act, subject to any other requirements and limitations set forth in Chapter 7 of the TA Act, as well as any requirements and limitations set forth in any binding general ruling issued by the Commissioner pursuant to section 90 of the TA Act.

THIS RULING LETTER AND THE RULINGS SET FORTH IN IT ONLY APPLY TO THE APPLICANT IDENTIFIED HEREIN. PURSUANT TO SECTION 82(4) OF THE TA ACT, THIS RULING LETTER MAY NOT BE CITED IN ANY PROCEEDING BEFORE THE COMMISSIONER OR THE COURTS OTHER THAN A PROCEEDING INVOLVING THE APPLICANT IDENTIFIED HEREIN.