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VAT apportionment · Tax Break: South African tax for professionals

• 0:11
  Welcome and thank you for joining me for Tax Break.
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  This is a podcast about South African tax 4 South African tax
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  professionals and practitioners. My name is Peter Fincham and in
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  each episode I share my thoughts with you on a topic or a recent
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  development in South African tax.
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  And I tried to keep the episode short enough that you get
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  something to take back to your practice from them, but that
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  they also fit into the, the, the, the small gap that you may
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  have in your, in your calendar. Now today we're talking about
• 0:43
  vet apportionment. Now before we go into the detail
• 0:47
  as to what formula you need to use and what the inputs are, I
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  think it's the right place to start this.
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  Maybe just to ask the question again, where exactly does that
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  apportionment fit into the bigger picture of the scheme of
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  the VAT Act? Now, if a vendor makes taxable
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  supplies, it's entitled to deduct input tax in respect of
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  goods and services that the vendor acquires.
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  Now the definition of input tax goes on to state that you can
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  deduct the input tax to the extent that the goods and
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  services acquired will be used in for purposes of making
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  taxable supplies. And we see that same purpose
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  taste in Section 17 of of the VAT Act.
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  So what that then means practically is when a vendor
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  acquires goods and services this vendor makes taxable as well as
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  non taxable supplies or exempt supplies or it uses the goods or
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  services for purposes of making taxable supplies and some other
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  purpose. Then the first thing you need to
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  do is to see whether these goods and services are perhaps
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  directly attributable to either the taxable supply or the non
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  taxable supplies. If it's attributable to the
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  taxable supply, you can claim the full input tax.
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  If it's directly attributable to the other supplies, you are not
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  entitled to claim any input tax. If you then get to the
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  conclusion to say, but these goods or services are cannot be
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  directly attributed to to the one type of supply or the other,
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  then you are probably dealing with a mixed supply.
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  And so in other words, goods or services that use partly for
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  purposes of making taxable supplies, partly for other
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  purposes. And that's when you need to
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  apply the apportionment ratio to determine.
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  But how much input tax can you then deduct?
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  So section 17 is the provision that specifically deals with our
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  all you need to Do this apportionment, and it states
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  that you need to apportion in accordance with a ruling issued
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  by SASH. Now the ruling that's currently
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  that's issued and that deals with this is binding general
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  ruling #16 and we are currently on the third issue of Binding
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  general ruling #16 so that issue was published early last year in
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  2024. Now what BGR 16 says is that
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  your default basis or your default apportionment method is
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  the standard turnover based method.
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  What this method does is it it looks at your turnover or I
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  think to, to be more accurate your income and it requires you
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  to calculate your, your income from taxable supplies as a
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  percentage of your total income. The reason why I'm saying
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  income, I think turnover could create the perception that you
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  are only looking at your, your main business operation income
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  or, or turnover. But if you look at the detail of
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  that of, of the formula, it, it goes a bit broader than just
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  your, your turnover from your main operations.
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  So, so that's why I think income is a more appropriate
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  description types, be that as it may, um, there's standard
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  turnover based method, then it uses income or turnover, but it
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  is subject to some exclusions. So for example, if you've got an
• 4:39
  eye phrase adjustment in your financial statements that gives
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  rise to income, you need to exclude that.
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  That's not something that should affect your basis of
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  apportionment. It's also subject to some
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  adjustments. So for example, if an entity or
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  vendor borrows money to to online to another person,
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  instead of including the gross income, the gross interest
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  income from the from the on lending in the in the formula,
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  the formula allows you to include the net income.
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  So I think for vendors who applied this standard turnover
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  based method of apportionment, it's absolutely critical to to
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  to look at firstly the detail of the formula.
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  So what is in the formula and our broad with those the inputs
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  go, it's a bit broader than just your, your operations and the
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  Internet understand whether there are any of the exclusions
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  or the adjustments that would apply to you.
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  Now, if a vendor believes that this method does not yield a
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  fair outcome in the context of its business or its business
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  model, then it needs to apply for an apportionment ruling to
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  such. And in practice you'll have to
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  as part of that drilling provide financial information, explain
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  why the the standard turnover based method of apportionment
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  doesn't give a fair outcome and also suggest some other basis as
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  an alternative. Now important from a date
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  perspective, if you apply for a ruling and such issues, a ruling
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  such will determine the effective date.
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  But the law only allows us to go back to the year of assessment
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  in which the tax payer applied for the ruling.
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  So you can't go further back. So in years in which you haven't
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  applied for an alternative ruling and you don't have an
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  alternative ruling, you would be required to apply the standard
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  turnover based method. Once you've got the ruling,
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  you'll be you'll have to look at the effective date.
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  Now, the reason for specifically deciding to to talk about this
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  topic today and maybe just to highlight how prevalent issues
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  around apportionment is. I've had a few consultations and
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  instructions over the last month or two specifically relating to
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  that apportionment. However, the real reason why
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  this idea came to me is that if you look at Zach's website,
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  they've started publishing VAT rulings on their websites
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  similar to what we've always had for the advance tax rulings and
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  the bad rulings. If you look at the dates, they
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  go back about a year or so ago. And what's very interesting, the
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  note is that 12 of the 1st 13 battery links that's been
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  published all deal with apportionment.
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  So it just shows you how prevalent this is and in how
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  many different instances you are likely to find yourself in a
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  position where the standard turnover based method doesn't
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  necessarily give you a reasonable or the the right
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  answer in the context of your business model, right.
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  So to conclude, I think the few points to take home from this
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  episode is to be aware when you need to apply apportionment to
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  input tax, to know that if you don't have a ruling, the default
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  basis of apportionment is a standard turnover based method
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  of apportionment. And to know that you may apply
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  for a ruling to to apply a different apportionment basis.
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  That's it for today's episode. If you've got any comments,
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  feedback, ideas for future episodes, please send me an
• 8:38
  e-mail. My e-mail address is in the show
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  notes. If you like the podcast, please
• 8:43
  go and subscribe on your favorite podcast platform and
• 8:46
  tell all your friends and colleagues about the podcast.
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  It's always nice to see a week on week as the new episodes are
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  released, that there's a few new followers every week so that
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  makes it all worthwhile. And just as always, nothing in
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  this episode was intended to be tax advice or replacement for
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  fact specific tax advice. Until next time, goodbye.