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VAT Connect Issue 18 (November 2024)

Proposed amendments

National Treasury and SARS published the following tax bills for 2024 and the explanatory memoranda relating to them on 31 August 2024, which you can access via the SARS website by clicking on the links below.

Comments on the 2024 draft TLAB, draft TALAB, the draft Regulations on determining the VAT liability in respect of casino table games of chance and draft Regulations on electronic services and Carbon Offset Regulations had to be submitted in writing by close of business on 31 August 2024 to either the National Treasury’s tax policy depository at  [email protected] or to SARS at [email protected]. However, written comments on the draft RLAB had to be submitted by close of business on 16 August 2024.

In line with the annual tax legislative process, National Treasury and SARS hosted virtual public workshops with stakeholders on 6, 12 and 13 September 2024 during which the draft RLAB, all other 2024 draft tax bills and draft Regulations were discussed.

The Minister of Finance has since introduced the 2024 tax bills in the National Assembly on 30 October 2024. The 2024 tax bills and accompanying explanatory memoranda can be accessed by clicking on the links below:

Recent amendments

The public was alerted to the publication of the 2023 draft tax bills and the draft Regulations on 30 July 2023 in VAT Connect Issue 16 and VAT Connect I17. These bills have since been promulgated and the following Acts containing amendments to the VAT Act were published. These documents can be accessed via the SARS website by clicking on the links below:

The above amendment Acts were all promulgated on 22 December 2023 as per Government Gazettes (GGs) 49894, 49947, and 49948, respectively. The amendments came into effect on 1 April 2024 unless otherwise stated.

See also the Rates and Monetary Amounts and Amendment of Revenue Laws Act 19 of 2023.

Explanatory Memoranda to the above Acts can be accessed by clicking on the links below:

A brief summary of some of the more important VAT amendments is provided below:

  • Definition of “enterprise” – A new proviso (xv) was inserted into the definition of “enterprise” in section 1(1) to provide that the activities of the Corporation for Deposit Insurance, which was established under section 166AE of the Financial Sector Regulation Act 9 of 2017, shall, to the extent that it makes supplies of deposit insurance as contemplated in section 166AF(1) of that Act, be deemed not to be the carrying on of an enterprise.
  • Financial services – A textual amendment was made to update the definition of the term “derivative” in section 2(2)(iiiA) so that it now aligns to International Financial Reporting Standard 9 (IFRS 9) issued by the International Accounting Standards Board. This amendment has retrospective effect, applicable from 1 January 2024.
  • Short-term insurance – The provisos to section 8(8) have been reworded and individually numbered to deal with ongoing interpretation difficulties and practical application of the law in the insurance industry regarding the settlement of claims under a contract of insurance. In terms of the amendments, it is clarified that the deemed supply in section 8(8) only arises in respect of cash indemnity payments made to, or on behalf of, the insured party under a contract of insurance. A new section 8(8A) has also been introduced to deal exclusively with the effect of the reinstatement of the actual goods or services covered in the policy to the extent that the claim will not be settled by way of a cash payment as contemplated in section 8(8). Under section 8(8A), the third-party supplier that supplies the reinstated goods or services is deemed to make a supply to both the insurer and the insured to the extent that each party is liable to make a payment towards the consideration for that supply. If the third-party supplier is a vendor, then a tax invoice must be issued to both the insurer and the insured parties, to the extent that each party has paid, or is liable to pay a consideration for the goods or services to be reinstated. The effect is that the input tax deduction allowed to the insurer and the insured will be limited to the extent of the respective trade and excess payments made, as evidenced by way of the tax invoices. These amendments are aligned to current industry practice and Binding General Ruling (BGR) 14 “VAT Treatment of Specific Supplies in the Short-Term Insurance Industry” published 22 May 2024. The amendments come into effect from 1 January 2024.
  • Temporary letting of dwellings by developers – On 1 April 2022 certain amendments to section 18D and related provisions came into effect (see VAT Connect Issue 16 and BGR 64 for more details in this regard.) As a result of continued difficulties identified with the application of section 18D, it was necessary for further amendments to be made. The first amendment is to section 10(29), which now provides that the consideration for the deemed supply under section 18D(2) is equal to the adjusted cost to the vendor of the fixed property (including the value of the land), and not merely the adjusted cost of the construction, extension, or improvements made. The second amendment was the deletion of section 18D(5)(c) as that provision does not find application in any circumstances. The third amendment was the introduction of a new section 18D(6) to clarify that if the temporary letting period exceeds 12 months or the property is permanently applied for a non-taxable purpose, then an adjustment must be made under section 18(1) and not under section 18D(2). There is also a transitional rule in the proviso to section 18(6), which provides for a situation in which a written sale agreement is concluded during the temporary letting period of 12 months, and the transfer of the property only occurs after the 12-month period has expired. In such a case, the output tax adjustment under section 18(1) will not apply when the 12-month period expires. Instead, the sale of the property will continue to be a taxable supply under section 7(1)(a) as per the sale agreement that was concluded during the period of temporary application of the dwelling for exempt supplies. The developer will, in that case, account for output tax on the sale of the dwelling at the time contemplated in section 9(3)(d), that is, on date of registration of transfer of the property in the Deeds Registry or the date on which any payment in respect of the consideration for the supply is made, whichever is earlier. BGR 64 was published on 22 May 2024 to incorporate these amendments. See 7.6.2 and the VAT 409 – Guide for Fixed Property and Construction for further information on this topic.
  • Credit notes in the telecommunications industry – A new provision has been inserted in the form of section 21(1)(f) to allow a VAT-registered and licensed telecommunications service provider to issue a credit note in certain circumstances in which the nature of the supply has been fundamentally varied or altered subsequent to the issuing of a prepaid voucher under section 10(19) for future services to be rendered. In such a case the output tax on the full value of the telecommunications service must be declared at the time the voucher is issued. This amendment deals with the difficulty that arises when the telecommunications supplier accounts for VAT on the full consideration for the supply, but later, part or all of that customer’s credit in respect of the unutilised portion of the service is used to pay a third-party on behalf of their customer for the supply of other goods or services. In such instances, the telecommunications supplier acts as an agent for its customer in allowing the credit to be used as payment to the third-party supplier. The telecommunications supplier may now issue a credit note under section 21(1)(f) of the VAT Act, as specified in BGR 72, and claim the corresponding input tax. The amendment addresses the inequity that arises as a result of the payment of output tax on that part of the telecommunications service that will never be supplied. See BGR 72 for further details on the particulars that must be contained in the credit note issued by the telecommunications company to the prepaid subscriber in terms of section 21(1)(f).
  • Documentary requirements for gold exports – In the gold refining or smelting process, the gold of various depositors is co-mingled and each depositor’s gold cannot be separately identified. As a result, after the refining process, and once the gold is sold or exported, depositors experience difficulty in obtaining the documentary evidence required under the Export Regulation, to substantiate the zero-rating of certain exports. In order to overcome this difficulty, section 54(2C) was introduced to allow an agent (being a vendor) that supplies or exports gold on behalf of a principal (being a vendor) that meets the conditions in section 54(2C) to retain the required documentation instead of the principal. If the agent is not in possession of the required documentation, the agent will be liable to account for output tax at the standard rate on the supply of the gold. See BGR 69 for information on the documentation to be retained by the agent.

The Domestic Reverse Charge Regulations relating to certain transactions involving gold and other “valuable metals” was published as Notice 2140 in Government Gazette 46512 dated 8 June 2022 (the DRC Regulations). Further amendments to the DRC Regulations were promulgated on 10 May 2024 as published in Government Gazette 50642. The following amendments to the DRC Regulations came into effect from 1 January 2024, unless otherwise stated:

  • Definition of “residue” – The definition has been amended to clarify that the term “residue” is specifically in relation to mining operations carried on by a holder of a mining right or a person contracted to the holder and does not include the general concept of residue.
  • Definition of “valuable metal” – The definition has been amended to eliminate confusion and clarify that the goods that contain gold must be in certain prescribed forms, that is, jewellery, bars, coins, etc. The definition has also been expanded to align to the Precious Metals Act 37 of 2005 and includes goods in the form of sponge or powder containing gold.
  • De minimis rule – The definition of “valuable metal” was also amended to exclude the supply of valuable metal containing less than 1% of gold in gross weight and a supply of gold-plated jewellery or any other gold containing items such as a gold pen, in which the gold is present as a minor constituent only. Therefore, the DRC Regulations will no longer apply to these supplies and the normal VAT rules will apply.
  • Responsibilities of the supplier and recipient – As the recipients may not always be in a position to determine the gold content of the “valuable metal” supplied to them, Regulations 2 and 3 have been amended to transfer the responsibility for declaring the percentage of the gold content in a “valuable metal” supplied, from the recipient to the supplier of the “valuable metal”.
  • Effective date – The effective date of the amendments to the DRC Regulations is 1 January 2024.

For further information on this topic refer to the Frequently Asked Questions: Domestic Reverse Charge Regulations (Issue 3) as well as the VAT Domestic Reverse Charge webpage.

Submissions for proposed amendments 2025

National Treasury invites taxpayers, tax practitioners and members of the public to submit written tax proposals of a technical nature to be considered for possible inclusion in Annexure C of the 2025 Budget Review. The technical tax proposals requested must be limited to unintended anomalies, revenue leakages, loopholes and technical matters applicable to the current tax legislation that require correction. More substantive tax policy proposals and rate changes are dealt with through a different process.

The public has until 25 November 2024 to submit technical tax proposals in writing by email to either National Treasury at [email protected] or to SARS at [email protected]

In order to clarify any issues raised in the submissions and to further assist in the prioritisation of the issues raised and to obtain further information, virtual public workshops will be held with stakeholders on 3 and 4 December 2024. A meeting request will be sent closer to the proposed dates for the workshops.

Any substantive tax proposal relating to a policy change should be addressed, separately from the technical tax proposals, to Mr Christopher Axelson (Acting Deputy Director General: Tax and Financial Sector Policy) at [email protected].

Further details and guidance on the criteria and format of the written technical tax proposals can be found in the Media Statement inviting such submissions on the National Treasury website.

Constitutional Court judgement

On 12 April 2024 the Constitutional Court issued a decision in the matter between Capitec Bank Limited v Commissioner for the South African Revenue Service.

As always, SARS welcomes the clarity and certainty provided by courts, since this is in line with its strategic intent of voluntary compliance.

This judgment is unique and specific to the circumstances surrounding this taxpayer and the particular transaction involved. Capitec originally sought to deduct the full amount of R71 million as an input claim, but the Constitutional Court noted “That is a battle that it has lost”.

SARS was substantially successful in the Supreme Court of Appeal (SCA) and legal costs was granted in favour of SARS. The Constitutional Court found, however, that Capitec’s initiation and service fees generated a surplus that covered other lending costs, and that an apportionment was appropriate. The Constitutional Court recognised, nevertheless, that the VAT Act makes “no explicit provision for apportionment in this situation” and therefore ordered SARS to consider an apportionment methodology.

SARS and Capitec are now required to engage in order to determine an appropriate apportionment methodology.

Binding General Ruling 16 updates

The Commissioner published Issue 3 of Binding General Ruling (BGR) 16 on 27 November 2023. This ruling becomes effective on all new financial years starting on or after 1 January 2024 and replaces Issue 2 from the same date. For example, if a vendor’s financial year-end is 31 March, BGR 16 (Issue 3) will be effective for the financial year commencing 1 April 2024.

Purpose and history of BGR 16

“Input tax,” as defined, refers to the VAT incurred, amongst others, by a vendor on the acquisition of goods or services when and to the extent that such goods or services are used for a taxable purpose. Section 17(1) provides for a method to be used by a vendor to determine the extent that goods or services acquired for making both taxable and non-taxable supplies (mixed expenses) are used for a taxable purpose. This method must be set out in a ruling issued by the Commissioner either under section 41B of the VAT Act or Chapter 4 of the Tax Administration Act, 28 of 2011.

To give effect to section 17(1), the Commissioner introduced the standard turnover-based method of apportionment (STB) by way of a ruling contained in the VAT 404 – Guide for Vendors (VAT 404). The first formal document issued that prescribed an apportionment method outside of the VAT 404 was BGR 16 on 25 March 2013. This ruling was effective from 1 April 2013. However, if a vendor was of the view that the STB was not appropriate for its business, such vendor had to approach SARS for a Binding Private Ruling, allowing the use of an alternative apportionment method.

Issue 2 of BGR 16 was issued on 30 March 2015. The only difference between Issue 1 and Issue 2 was the extension of the period after the end of the financial year during which a vendor had to make an adjustment to reflect the correct apportionment ratio for the previous financial year. Issue 2 remained applicable until the effective date of BGR 16 (Issue 3) as noted above.

Main differences between Issue 2 and Issue 3

The STB in Issue 2 (and prior) took a minimalistic approach to apportionment and allowed limited deviations to turnover or any other income received or accrued to a vendor to be included in the formula. Although this method was very easy to apply by vendors, the quantum of certain income streams in many instances distorted the apportionment ratio. Vendors were therefore more often than not required to approach the Commissioner for approval to use an alternative apportionment method that would better reflect their various business activities.

In Mukuru Africa (Pty) Ltd v Commissioner for the South African Revenue Service [2021] ZASCA 116, the SCA confirmed that the STB must be regarded as the default apportionment method unless or until a VAT Ruling has been issued to the vendor allowing an alternative method. Under proviso (iii) to section 17(1), this alternative apportionment method may only be applied by the vendor (being a “taxpayer” under the Income Tax Act, 58 of 1962) with effect from a date within the year of assessment in which the vendor applied to the Commissioner for such a ruling. Therefore, to reduce the administrative burden on vendors to apply for VAT rulings every few years approving an alternative apportionment method, the STB in Issue 3 attempts to more appropriately reflect the impact certain income streams have on the manner in which goods or services are applied by a business for making taxable supplies. Based on ruling applications received from vendors representing various industries over the past few years, the STB was amended to exclude certain income streams in totality from the formula or allow adjustments to certain income streams if the quantum of income is either volatile or can result in a distortion to the apportionment ratio. These exclusions or adjustments are intended to apply to all vendors on the assumption that the impact on the apportionment ratio would appropriately reflect a vendor’s activities.

Exclusions from the formula

As a default, the STB in Issue 3 excludes the following income streams that in essence have no bearing on the manner in which mixed expenses are generally used or applied by a vendor:

  • Foreign exchange differences purely as a result of entering into specific offshore transactions (not subject to any hedging activities). For instance, if a vendor obtains a loan from a non-resident financier, the foreign exchange difference at year-end relating to the capital or interest valuations.
  • Income recognised in a vendor’s Annual Financial Statements purely as a result of complying with the International Financial Reporting Standards (IFRS) or some other reporting requirements.
  • The income received by a vendor due to the sale of a capital asset. A capital asset is clearly explained and defined in the notes to the formula as contained in BGR 16 (Issue 3).
  • The receipt of monies or payments relating to both the capital value of finance provided and finance received (the latter including the issuing of shares) should not affect the apportionment ratio of a vendor.

The STB takes into account that there are instances in which a vendor undertakes certain activities to earn a specific income stream. However, the quantum of the income received is not in line with the effort incurred or resources applied by the vendor to earn that income. Some of the more prevalent adjustments made to these income streams are briefly discussed under the specified headings below.

Interest (other than interest earned from an investment activity)

There are various different types of interest. The STB now recognises that each of the different types of interest received by a vendor may result from different aspects of a business and the resources applied to earn such interest may differ.

The main exclusion applicable to interest is the interest earned from a vendor’s day-to-day operating bank account. This exclusion is based on the premise that the vendor earns the interest merely as a result of having a bank account in order to facilitate trade. The interest earned is therefore not as a result of any investment activity, but rather earned as a result of another party paying funds into the vendor’s account to acquire goods or services. The interest rates on these trading accounts are also generally so small that it would not make business sense for any vendor to keep large amounts of cash in the trading account as part of their investment activity.

A financier (being a lender of money) needs only to include the difference between the interest received on the monies lent and the interest paid on the funds obtained to provide the said loans. This is referred to as the interest margin in BGR 16 (Issue 3). The reason for including only the margin in the formula is to recognise the function of a financier as being an intermediary between borrowers and lenders in the finance market. It is important to note the following in this regard:

  • A financier may include only a margin to the extent that it relates to its lending activity. All other interest received must be treated in accordance with the guidelines stipulated for other interest revenue streams.
  • The interest charges paid may not be deducted from interest received if the interest paid relates to the financing of the vendor’s operational costs. The note to A1 in BGR 16 (Issue 3) allows for the use of a formula whereby interest paid cannot be directly attributed to a specific purpose.
  • Should a vendor not charge any interest on a loan provided, such lending activity must still be reflected as a proxy, applying the prime rate to the value of the loan granted, and must be included in the formula.
  • In the event that a financier does not incur any interest charges in the course of its lending activity (meaning, the lender funds all loans advanced from cash reserves), the vendor is allowed a proxy to determine an interest amount paid thereby ensuring a fair amount of interest is included in the formula. This proxy is determined by applying the Johannesburg Interbank Average Rate (JIBAR) to the value of the loans granted during the year.
  • There is a special anti-avoidance rule for lending activities between connected persons (as defined in the VAT Act).
  • A vendor selling goods on credit is not regarded as a financier for the purposes of BGR 16 (Issue 3). In this instance the vendor must include the gross interest received on its debtors’ accounts in the formula.

It has come to SARS’s attention, subsequent to the issuing of BGR 16 (Issue 3), that uncertainty arose on the application of BGR 16 (Issue 3) when a vendor borrows funds from various different sources, each with their own finance rate or charge attached to it. In these circumstances the funds obtained are pooled and only withdrawn when needed. A vendor is then unable to specifically allocate funds borrowed for the purpose of on-lending. In these circumstances it is acceptable to determine an average finance rate and apply this to the loans granted by the vendor in order to determine the finance charges relating to the vendor’s lending activity.

Investment income

BGR 16 (Issue 3) recognises that the amount of interest, dividend income or a profit share earned from a joint venture or partnership included in the formula purely due to the holding of investments, are regulated by external factors and may therefore fluctuate from year-to-year. In addition, the quantum of the income received from investments may far exceed the actual resources applied in earning this income. For this reason, the formula allows for the following two proxies to reflect these activities more fairly:

  • Only a portion of the investment income is included in the formula, being the investment income earned × (prime – JIBAR); and
  • An average must be applied over a three-year period when the investment income fluctuates significantly from year-to-year.

A vendor that receives no investment income during a year but it does hold investments, still has an investment activity that needs to be reflected in the formula. In this regard the formula allows for a proxy to determine the investment income to be included in the formula based on the prime – JIBAR rates applied to  the income of the preceding years.

Trading activities

It is recognised that the gross selling amount earned by vendors conducting trading activities, that is, continuously buying and selling commodities or other financial instruments, may have a limited correlation to the resources expended by the vendor in conducting its business. This is due to various reasons, most significantly the financial instrument price index that is determined based on external factors. For this reason, vendors conducting trading activities in commodities or other financial instruments may include a net trading margin, averaged over three to five years, in the formula as a proxy to reflect their trading activities.

The net trading margin is determined as the selling price less the buying price of the financial instruments being traded. No other expenses may be deducted from the selling price, regardless of the closeness between the trading activities and the relevant expense incurred.

The averaged net trading margin is included in the formula to recognise a vendor’s trading activities. In the event that a vendor stopped trading in a specific year, no value needs to be included in the next year’s formula even though the averaging of the trading activities over three to five years may result in a value.

General

There are various notes and/or requirements contained in BGR 16 (Issue 3) applicable to the use of the STB. The following are the most important changes or additions to the general requirements of using the STB:

  • The time period during which a vendor is allowed to make the yearly adjustment in the apportionment ratio (if using the previous year’s ratio during the year as an estimate) is extended from six to nine months after the financial year-end.
  • The vendor’s responsibility in relation to the use of the STB is clarified. In this regard the vendor must determine whether the STB is fair and reasonable considering its business activities. If the vendor is of the view that the STB is not fair and reasonable, the vendor has a responsibility to approach the Commissioner and request approval to apply an alternative apportionment method. The process for doing so is set out in the VAT Rulings Process Reference Guide (Issue 4).
  • All vendors are required to submit relevant information to SARS pertaining to the apportionment formula used and ratios applied for the financial year.
  • The STB is the default method applicable to all vendors unless the Commissioner has issued a ruling to a vendor or to the industry in which it operates, approving the use of an alternative apportionment method. The STB may then not be applied by the vendor in these circumstances.

Transitional rules are also in place and prescribe the recourse available to vendors if an alternative apportionment method has been approved for use by a vendor in a VAT ruling or VAT class ruling, but the vendor regards the updated STB set out in BGR 16 (Issue 3) to be fair and reasonable to its business.

Publication of rulings 

In VAT Connect Issue 16 and VAT Connect Issue 17 it was indicated that SARS intends to publish rulings that were issued on or after 1 April 2023 as well as all decisions issued under the revised section 72 from that date. The publication process has since commenced and the first batch of sanitised rulings can be accessed via the following link. Taxpayers and taxpayer representatives are therefore reminded that a sanitised template must be completed and submitted by the applicant when applying for a VAT ruling.

VAT enhancements on estimated assessments

SARS has implemented the estimated assessment functionality for VAT whereby SARS may raise an estimated assessment under section 95(1)(c) of the Tax Administration Act 28 of 2011 if a vendor does not provide the relevant material requested during the VAT verification process. For more information on this topic refer to the relevant article in the Tax Practitioner Connect Newsletter Issue 49.

Publications

Since the last issue of VAT Connect, the following documents impacting on VAT have been published on the SARS website (Refer to the Legal Counsel page and navigate to the respective subpages):

Binding General Rulings (BGRs)

Frequently Asked Questions (FAQs)

External Guides (operational guides)

Disclaimer

VAT Connect is an information guide and not an “official publication” as defined in section 1 of the TA Act and accordingly does not create a practice generally prevailing under section 5 of that Act. It is also not a binding general ruling (BGR) under section 89 of Chapter 7 of the TA Act nor a ruling under section 41B of the VAT Act. For general enquiries regarding VAT call the SARS Contact Centre on 0800 00 7277. Should there be any aspects relating to VAT on which a specific VAT ruling is required, you may apply for a ruling by completing form VAT301 and sending it together with all the necessary information to SARS by facsimile on +27 86 540 9390 or by e-mail to [email protected]. Refer also to the Quick Reference Guide on VAT Ruling Application Procedure for more details on how to apply for a ruling.

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Last Updated:

  • 25/04/2025
  • 13:24
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