Maximum Profit Recovery (Pty) Ltd

VAT Ruling application for Adjusted(Varied) Input-Based method of VAT apportionment for Mafube Local Municipality

22 June 2021

The South African Revenue Service Nieuw Muckleneuk

Brooklyn Pretoria

Dear Sir,

Mafube Local Municipality

VAT No: 4000846495

Binding VAT ruling application relating to the Adjusted (Varied) Input-Based method of VAT apportionment

Introduction

Ruling request

On behalf of the applicant, Mafube Local Municipality, we hereby request a binding VAT ruling relating to the approval of the adjusted (Varied) input-based method of VAT apportionment.

Sections of the Act referred to in this application

The relevant provisions of the Value- Added Tax Act No 89 of 1991 referred to in this application are:

The definition of the term ‘Input tax’ in section 1 of the VAT Act

Section 17(1) of the VAT Act

Section 17(1) proviso(iii)

Documents

Please find attached the following supporting documentation:

Annexure A - Disclosure of required information. This annexure sets out the information required to be submitted in accordance with section 79 of the Tax Administration Act (TA Act)

Annexure B - A letter in terms of section 87(1) of TA Act whereby Mafube Local Municipality consents to the publication of the ruling by SARS

Annexure C - The proposed draft ruling

Factual Background

Background

Mafube Local Municipality is currently using the turnover based method of VAT apportionment for input tax incurred for the making of partly taxable supplies. The Receiver of Revenue has stated that the only method of apportionment that can be used without prior Revenue approval is the turnover-method. This is also confirmed in BGR 4(Issue 3).

Detailed description of the transaction

The ruling will entitle Mafube Local Municipality to use the adjusted (Varied) input- based method of apportionment for input tax incurred for the making of partly taxable supplies with effect from 01/07/2020.

Relevant provisions of the Act

The relevant sections of the Act are the following:

Section 1 definition of input tax means:

“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 provision of section 17) that the goods or services concerned are acquired by the vendor for such purpose.”

Section 17(1) stipulates that:

“where goods or services are acquired or imported by a vendor partly for consumption, use, or supply in the course of making taxable supplies and partly for another intended use, the extent to which any tax has become payable in respect of the supply to him or the importation by him, 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 a general written ruling given by the Commissioner to such vendor, as the intended use of such goods or services in the course of making supplies bears to the total intended use of such goods or services.”

Section 17(1) provisio (iii) stipulates that:

“ where a method for determining the ratio referred to in this subsection has been approved by The Commissioner, by way of such a general written ruling or a written ruling given to such vendor, the method may only be changed with effect from a future tax period or such other date as The Commissioner may consider equitable. The date that The Commissioner approves must fall within the vendor’s year of assessment during which the application for the ruling was made by the vendor.”

Tax implications

This ruling will entitle the Mafube Local Municipality to use the adjusted (Varied) input-based method of apportionment for input tax incurred for the making of partly taxable supplies with effect from 01/07/2020.

Application of the law

General

Mafube Local Municipality is currently using the turnover base method of VAT apportionment for input tax incurred for the making of taxable supplies.

Mafube Local Municipality was unaware of the availability of the adjusted (Varied) input-based method of apportionment and the fact that it provides a more accurate reflection of the extent to which goods and services are applied by the municipality for the making of taxable supplies.

The adjusted (Varied) input-base method of apportionment is widely used by municipalities and have also been discussed in previous SARS VAT404 guides, attached hereto for your perusal. We also attach examples where SARS has approved this method at municipalities.

It has been accepted by The South African Revenue Services that the normal input- base method, as set out in previous SARS guides, contained a mathematical error. Accordingly, they have granted approval for the use of the adjusted (varied) input- base method. In terms of this method, the VAT partially attributed to the making of taxable supplies, is excluded from the denominator in the formula as follows:

VAT wholly attributable to making taxable supplies x 100 VAT wholly attributable to making taxable, exempt and non-supplies 1

We submit that the application of the adjusted (varied) input-based method as set out above, has an equitable result for this municipality in respect of the apportionment of input tax.

The turnover-based method is not appropriate under the circumstances for Mafube Local Municipality, as it yields a claimable percentage much lower than the actual extent to which infrastructure is applied to generate taxable supplies. The reason for this is that a substantial part of the municipality’s income for the period under review is debtors’ interest which is exempt, and which is hardly ever received by the municipality. Very little of this municipality’s infrastructure was applied to generate this exempt income, whereas almost all its infrastructure was applied to generate taxable supplies. The turnover-based method will only yield a fair and reasonable result if there is a constant relationship between every output transaction (taxable / zero rated / exempt), and the VAT incurred on the expenses. This is not the case at this municipality, as the interest on the debtors distorts the ratio when calculated according to the output-based method and very little of the municipality’s expenses are in linked to this, as this income is never actually received by the municipality.

In view of the above argument, we believe that Mafube Local Municipality should be allowed to use the adjusted (varied) input-based method of apportionment with effect from the 07/2020 period onwards.

Conclusion

We hereby request that SARS allow Mafube Local Municipality to use the adjusted (varied) input-based method of apportionment from the 07/2020 period. The ruling has been requested prior to the end of the 2021 financial year which runs from 01/07/2020 to 30/06/2021. We therefore request that SARS allow the adjusted (varied) input-based method in terms of section 17(1) proviso(iii) with effect from 01/07/2020.

Should you require any additional information, or have any questions regarding this application, please contact the writer.

Yours sincerely,

Andre van Wyk

Senior Audit Manager

• C: +27 82 578 5202 • T: +27 12 991 8966

F: +27 86 504 4112 • E: andre.vanwyk@maxprof.co.za

ANNEXURE A

Disclosure of required information

Detailed below is the information required to be submitted in accordance with section 79 of the Tax Administration Act.

Applicant’s details

Applicant’s postal address and telephone number – section 79(4)(a)

Mafube Local Municipality

P.O. Box 2

Frankfort

9830

Telephone number (058) 8131051

Applicant’s representative’s postal address and telephone number – section 79(4)(b)

Mr. Andre van Wyk

Maximum Profit Recovery (Pty) Ltd PO Box 1700

Garsfontein East Pretoria

0060

Telephone Number (012) 991 8966

Fax Number (086) 504 4112

Reasons why the proposed ruling should be granted – section 79(4)(h)

We request that the proposed ruling should be granted, to enable the applicant to use the adjusted (varied) input-based method of apportionment for input tax incurred for the making of partly taxable supplies.

Statement in terms of section 79(4)(i)

This ruling application has fully considered the relevant statutory provisions and case law and is considered to be consistent with such provisions and law.

Statement in terms of section 79(4)(j)

This ruling will entitle the Mafube Local Municipality to use the adjusted (varied)

input-based method of apportionment for input tax incurred for the making of partly taxable supplies with effect from 01/07/2020.

Statement in terms of section 79(4)(j)

To the best of the applicant’s, as well as the applicant’s representative’s knowledge, the same or substantially the same issue upon which this ruling has been sought, is not the subject of an audit examination, investigation, ruling application, appeal or other proceedings currently before SARS, or the courts, involving the applicant or any connected person relating to the applicant.

Statement in terms of section 79(4)(n)(o)

To the best of the applicant’s, as well as the applicant’s representative’s knowledge, the applicant is fully tax compliant for all applicable taxes.

Description of the information which the applicant believes should be deleted from the final ruling prior to publication – section 79(4)(k)

All references to the applicant’s name should be deleted from the final ruling prior to publication, to protect the applicant’s confidentiality.

ANNEXURE B

Letter of consent

Person to whom this ruling applies

This ruling applies to the Mafube Local Municipality. VAT registration number: 4000846495

Relevant tax laws

Section 79(4)(i) and 87 of The Tax Administration Act

Consent

The applicant, represented by Maximum Profit Recovery (Pty) Ltd, hereby consents to the publication of the Advance Tax in accordance with section 87 of the Tax Administration Act, provided that the publication is in such a form that it does not reveal the identity of the applicant. Prior to the final publication, SARS will provide a draft copy of the edited ruling for review and comment. It is understood that SARS’ determination regarding the published ruling is final.

ANNEXURE C

The Draft Ruling Letter

Person to who this ruling letter applies

This ruling letter applies to the Mafube Local Municipality. VAT registration number: 4000846495

Relevant Tax Laws

All legislative references are to the Value-Added Tax Act No 89 of 1991 (The Act). This specific ruling has been requested in respect of section 17(1) provisio (iii).

Description of the proposed transaction

Mafube Local Municipality incurs expenses partly for the making of taxable supplies and is requesting permission to use the adjusted (varied) input-based method of apportionment for such supplies.

Specific Conditions and Assumptions

Section 78(3) of The Tax Administration Act provides that a binding private ruling may be made subject to the conditions prescribed in the ruling.

Input deductions will only be allowed if Mafube Local Municipality has in its possession valid tax invoices as stipulated in section 20(4) and 20(5) of The VAT Act.

Ruling

The ruling made regarding the proposed transaction is as follows:

Mafube Local Municipality will be entitled to use the adjusted (varied) input-based method of apportionment for expenses incurred, partly for the making of taxable supplies with effect from 01/07/2020.

Period for which the ruling is valid

This binding private ruling will be valid with effect from 01/07/2020 and will be valid for a period of 5(five) years from the date of the ruling.