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Notional input tax · 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
• 0:17
  professionals and practitioners. My name is Peter Vanderzwan and
• 0:21
  in each episode, Ashley, my thoughts with you on a topic or
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  a recent development in South Africa and tax.
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  And I've tried to keep the episode short enough that you
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  can listen to them whenever you've got a few minutes to
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  spay. Now I'm talking about something
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  today that it's probably one of the first principles you learn
• 0:39
  when you get to, to deal with that at university.
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  But I've realised that in practice in, in one or two
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  recent consultations, there are some uncertainties and questions
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  around this concept. That's the concept of notional
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  input tax. So what I would like to cover in
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  this episode is the concept itself, when it applies, and
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  what's required to claim the notional input tax.
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  So let's maybe start at the the broader concept.
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  What exactly is an optional input tax?
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  So if a vendor requires certain goods that are not subject to
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  VAT. So in other words on the
• 1:18
  acquisition transaction the seller did not charge output
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  tax. The vendor may claim input tax
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  despite the fact that no output tax was charged.
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  So remember that if you look at the the normal VAT system, the
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  the input tax that the vendor can claim is normally based on
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  the output tax that the supplier charged the vendor.
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  So the concept of notional input tax is an exception to that
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  rule. If you look at the the the both
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  technical requirements, we find that if the concept of notional
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  input tax in paragraph B of the definition of input tax in
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  Section 1 of the VAT Act. So the requirements that you
• 2:00
  must meet to be entitled to claim the notional input tax is
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  that you must be looking at goods, specifically second hand
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  goods situated in South Africa that was supplied as a sale to
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  the vendor, but that sale must have not been a taxable supply.
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  So are they gonna happen? There's probably a few
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  scenarios. The the one is the seller might
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  not have been a vet vendor, then the cell wouldn't have been a
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  taxable supply. Or if the seller was a vet
• 2:32
  vendor, it could be that the person that seller used these
• 2:37
  these assets to make exempt supplies and therefore didn't
• 2:41
  charge VAT on on selling them to do the vendor.
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  Now the last requirement that must be made is that the seller
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  must be a resident of the Republic.
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  So I think if we look at this definition and you start delving
• 2:56
  into it a bit, if you if you have to consider it and deal and
• 3:00
  deal with the scenario where it could potentially apply, there
• 3:04
  are some elements of this that's got a bit more to them from a
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  technical perspective. So if you look at for example,
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  the concept the resident of the Republic, there's a specific
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  definition for that in Section 1 or the concept of second hand
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  goods. There's also a definition for
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  that in Section 1 of the VAT Act, right?
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  So they, they, there could be a few things to consider if we
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  then look at the remaining requirements.
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  So seeing that this still forms part of the bigger definition of
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  input tax, the same requirement that applies to normal input tax
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  that the vendor must acquire these goods for purposes of
• 3:43
  making taxable supplies also applies to this.
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  So these second hand goods must still be acquired by the vendor
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  for purposes of its activities where it makes taxable supplies.
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  If the vendor can climb the input tax, the notional input
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  tax, you need to determine the basis for the notional input tax
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  and that's the lesser of the consideration.
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  So what was paid for this or the market value of the goods and
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  and do this you apply the tax fraction of 15 / 115 to give you
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  what amount of that or notional that can you can you claim there
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  used to be a limit or link to transfer duty.
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  That's no longer the case that was removed around 2012.
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  So you only looking at the the formula of the laser of
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  consideration and market value and applying the tax fraction to
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  that. Now one of the questions that
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  came up in consultation is can this be right?
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  Why would it just sounds too good to be true?
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  Why would this Sarge and the VAT system in in in broader terms
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  allow for something like this? And I think the best explanation
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  for this comes from the Watcom report when VAT was introduced
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  back in 1991. So what the VAT KCOM report said
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  about these second hand goods is that where goods move from a
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  private person, so private person in this context meaning
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  someone outside of the VAT net back into a business in and the
• 5:25
  business is a proxy for someone inside the vaccinate.
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  So there could of course be some businesses that are outside of
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  athlete and then the same principles would apply.
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  If that's the case that a private person outside the vet
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  need acquired an asset, that person would consider the cost
• 5:43
  of the asset to be the the cost including the VAT that the
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  person paid because that person was not as a non vendor is not
• 5:50
  entitled to claim input tax. So conceptually, if that person
• 5:55
  sells the asset, the person would try to recover the actual
• 5:59
  cost inclusive of that. So in other words, the, the, the
• 6:04
  burden of VAT would be charged onto the to when the, the asset
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  is sold and the, the vendor that purchases this asset would pick
• 6:16
  up the vet, although it's now in the form of the selling price,
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  it's no longer called vet because the seller is not a vet
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  vendor. Now in that case, that would
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  then in the absence of notional input tax claim become a burden
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  or cost for the business, the the person who is within the
• 6:34
  vaccinate. And conceptually that's not
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  right. So a business should be neutral
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  from that perspective. So what the notional input tax
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  is really intended to do is to restore the neutrality that
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  would have existed at the vendor purchased the goods new.
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  So there is a, a rationale to all of this and why the, the VAT
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  Act allows for this. The last point I would like to
• 7:01
  talk about is what do you need, if you want to, if you are
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  entitled to claim the input tax, what do you need to support
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  your, your input tax claim? So section 20, sub eight of the
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  VAT Act gives the detailed requirements of what
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  documentation is required. And of course, if, as you can
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  imagine, this poses quite a significant risk to the fiscus
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  if people are claiming notional input tax.
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  So it is quite important to make sure you've got all the
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  document, the documentation in place.
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  So the a document that's quite central to the whole process is
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  the VAT 264 form. And there is some.
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  So that's got some of the information that you need to
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  keep and it specifies some supporting documentation that
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  you need to keep, right. So in summary, what can you take
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  home from this episode? Firstly, there is a concept of
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  an optional input tax on second hand goods.
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  And theoretically, this is intended to restore the
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  neutrality of the VAT system for VAT vendors.
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  Secondly, if you are entitled to claim an original input tax, it
• 8:11
  is important to adhere to the documentation requirements.
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  You you need to be able to keep the documentation to prove that
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  you are entitled to this input tax.
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  That's it for today's episode. If you've got any questions,
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  comments, ideas for future episodes, please send me an
• 8:30
  e-mail. My e-mail address is in the show
• 8:32
  notes. If you like the podcast, please
• 8:35
  subscribe on your favorite podcast platform.
• 8:38
  And of course, please tell all your friends and colleagues
• 8:40
  about it. Just a reminder, as always,
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  nothing in this episode was intended to be tax advice.
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  The podcast is intended to be for awareness purposes only.
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  Until next time, goodbye.