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Input tax on business expenses · Tax Break: South African tax for professionals

• 0:11
  Welcome and thank you for joining me for Tax Break.
• 0:13
  This is a podcast about South African tax for South African
• 0:16
  tax professionals and practitioners.
• 0:19
  My name is Peter Vanderzwan and each episode I share my thoughts
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  with you on a topical recent development in South African
• 0:25
  decks. And I try to keep the episode
• 0:27
  short enough that you can listen to them whenever you've got the
• 0:31
  break somewhere. Now, there is often the
• 0:34
  perception that as long as an expense relates to your business
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  and the business involves making taxable supplies from a bad
• 0:41
  perspective, that you should be able to claim the input tax.
• 0:45
  Now today I'm going to talk about the case.
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  That's a reminder that this is not always the case.
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  So I'm looking at the Supreme Court of Appeal case of being
• 0:54
  mining shafts and underground versus the Commissioner of South
• 0:58
  African Revenue Services. So are Bing was a vendor, a bad
• 1:03
  vendor and its main business was to construct, to sink shafts and
• 1:08
  construct mines. Now for some of the projects, it
• 1:12
  would then employ employees at the site or in the area where
• 1:16
  the the the project was. And it would provide these
• 1:19
  employees with accommodation and food, some meals at the site or
• 1:24
  close to the site where they worked.
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  And I've been claimed input tax on this expense.
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  Now, when this case was before the tax code, the, the tax code
• 1:35
  spent quite a bit of time to do, to analyse the definition of, of
• 1:39
  entertainment. And it concluded that
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  irrespective of our whether you're looking at luxury
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  accommodation, luxury types of meals or basic accommodation and
• 1:49
  meals, if something is accommodation and meals, it
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  meets the definition of entertainment.
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  So the appeal court case, didn't it, it accepted that
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  interpretation that that wasn't a point of contention.
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  The judgment seems to indicate that are being based its
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  deduction of the input tax due to a large extent on the
• 2:13
  principle of neutrality. So in other words, from a that
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  perspective, neutrality would mean that that should not be a
• 2:21
  cost to a business. And the way that the VAT Act
• 2:24
  achieves this is to say that if a VAT vendor conducting a
• 2:29
  business where it makes taxable supplies incurs an expense
• 2:33
  inclusive of that, then that vendor is entitled to claim
• 2:37
  input tax to put it back on the basis where it doesn't pay the
• 2:41
  burden of, of the VAT. Now, there's a few important
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  things from the from the, from the judgment.
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  I think the first one I would like to, to, to dialight babes
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  is a bit of a lesson in interpretation and just reminder
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  again. So the courts in South Africa
• 2:59
  follow both of approach to interpretation.
• 3:03
  So in other words, the court looks at the the wording of the
• 3:07
  legislation that takes itself, but also the context and the
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  purpose to to form an interpretation.
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  Now why Judge Glenn said in this case is the following.
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  The text and the structure have a gravitational pull that's very
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  important and often conclusive. So in other words, the the
• 3:26
  wording of the law and the structure of the law, and
• 3:30
  irrespective of if you're looking at it from a conceptual
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  perspective, the context and the purpose, the actual wording used
• 3:37
  in the law and the structure of how the law itself operates is
• 3:41
  still very important. You can't override and ignore
• 3:45
  the the actual wording of the law by looking at the context
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  and the broader purpose. So in all instances,
• 3:52
  irrespective of whether you've got the view that makes
• 3:54
  conceptual sense, you still need to consider and base your
• 3:58
  position on the actual wording of the legislation.
• 4:03
  Now, if we're looking at the actual wording of the VAT Act,
• 4:06
  that prohibits the deduction of entertainment of input tax on
• 4:11
  entertainment costs unless that cost or that entertainment
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  qualifies for an exception. What the case or the judgment
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  also highlights for us is that one shouldn't be too liberal in
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  interpret interpreting these exceptions.
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  So these are exceptions to costs that would otherwise be prone to
• 4:32
  potential abuse. So entertainment costs, as you
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  can well imagine, there's a very fine line between in most cases
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  entertainment for business purposes and potential
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  entertainment for, for, for personal or private purposes,
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  right. So looking at the exceptions,
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  there's some exceptions that apply to entertainment
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  businesses. So in other words, we the
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  ordinary activities of the vendor is to provide
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  entertainment and the code concluded and I believe rightly
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  so, that this was not a being's ordering activity.
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  So therefore it didn't qualify for these these exceptions.
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  The other exception that could have though that that could come
• 5:17
  into play was that there is an exception where entertainment is
• 5:22
  required to provide meals and accommodation to employees who
• 5:27
  work away from their home and their normal place of
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  employment. Now, in this specific case, this
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  was not the case because the employees were specifically
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  employed to work at the project or on the project at this
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  specific site. So there's exception also there
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  in the ply. And based on this, the code
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  dismissed are things appeal. So in other words, they were
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  left with input tax remaining not deductible.
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  So in summary, what can you possibly take from this?
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  I think the first point in my mind is the the point on
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  interpretation, that despite context and purpose that we
• 6:02
  specific answer might make sense, the actual wording and
• 6:07
  structure of the law remains very important.
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  You can't override the actual wording by looking at context
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  and purpose only. The second point is if you're
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  looking at entertainment and similarly vehicles is often.
• 6:20
  There's a similar argument. The fact that the the expense
• 6:26
  relates to your business where you make taxable supplies is not
• 6:29
  enough to deduct the input tax. There's actually a higher
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  threshold here because these expenses are potentially
• 6:36
  susceptible to private use or, or potential abuse.
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  So you need to go through the the actual wording and see if
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  you meet the threshold. That's it for today's episode.
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  If you've got any questions or comments for future episodes,
• 6:54
  please send me an e-mail. My e-mail address is in the show
• 6:57
  notes. If you like the podcast, please
• 7:00
  go and subscribe on your favorite podcast platform, tell
• 7:03
  all your friends and colleagues about it and like it on YouTube.
• 7:06
  And just finally, as always, a reminder that nothing in this
• 7:10
  podcast is intended to be tax advice.
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  It's only for awareness purposes.
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  If you need to, if you're looking at the specific fact
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  that, then you must still get tax advice.
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  Until next time, goodbye.