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Summary TAX3701 The Taxation of Business Activities Notes
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TAX3701 The Taxation of Business Activities complete notes covering learning units 1 through 5
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Learning Unit 1 – Value Added TaxRegistration as a vendor: Compulsory registration
A person is required to register:
• at the end of the month during which the total value of the taxable supplies for the last 12 months
exceeded R1 million;
• at the beginning of the month, if it is anticipated that the total value of the taxable supplies in written
contractual agreements will exceed R1 million for the following 12 months; or
• at the end of the month where the total value of the taxable supplies made by foreign suppliers of
electronic services has exceeded R50 000.
There is no reference to tax periods or financial years, therefore SARS will look at any consecutive period of
12 months.
The amount of R1 million refers to the value of the taxable supplies (thus excluding any exempt supplies).
In determining whether the value (turnover) exceeds R1 million, the following must be excluded:
• the supplies arising out of the cessation(termination) of an enterprise
• supplies resulting from the replacement of capital assets; and
• supplies resulting from temporary abnormal circumstances
Where a person carries on two separate businesses, he must register when the joint taxable supplies of the
two businesses exceed R1 million, since it is the “person” who conducts the enterprise, not the “enterprise”,
that registers for VAT. If each business is conducted in a separate company (or other legal person), each
company is required to register only when the taxable supplies of that company exceed R1 million.
The VAT Act provides for certain requirements that must be fulfilled before a person may register, such as
having a fixed place of residence, having a bank account and keeping proper accounting records.
Registration as a vendor: Voluntary registration
Voluntary registration will result in the levying of VAT on all taxable supplies, but this will allow the vendor to
claim input tax credits.
A qualifying welfare organisation, share-block company or municipality may register voluntarily, without any
minimum taxable supply.
A person may, however, register voluntarily if that person is conducting an enterprise and if:
• the value of the taxable supplies of all his enterprises are more than R50 000 during a previous 12-
month period; or
• the total value of taxable supplies of that person has not exceeded R50 000, but can reasonably be
expected to exceed that amount within twelve months from the date of registration as a vendor.
• that person is continuously and regularly carrying on an activity listed in a regulation made by the
Minister.
Persons supplying commercial accommodation with a value not exceeding R120 000 in any 12-month period
are not carrying on enterprises. Therefore such persons will be eligible for voluntary registration only once
the supplies exceed R120 000 for a 12-month period.
,Tax periods
Category A: Periods of two months ending on the last day of January, March, May, etc. (odd-numbered
months). This is applicable to vendors with taxable supplies that do not exceed R30 million in a 12-month
period, or farmers with taxable supplies that exceed R1,5 million in any given 12-month period.
Category B: Periods of two months ending on the last day of February, April, June, etc. (even-numbered
months). This is applicable to vendors with taxable supplies that do not exceed R30 million in a 12-month
period, or farmers with taxable supplies that exceed R1,5 million in any given 12-month period.
Category C: Periods of one month ending on the last day of each month.
The following vendors fall into this category:
• those whose taxable supplies during a period of 12 months exceed, or are likely to exceed, the value of
R30 million;
• those who have applied in writing to be placed in this category;
• those who have repeatedly been in default in terms of the VAT Act.
Category D: Periods of six months ending on the last day of February and August respectively. Vendors who
only carry on farming activities with taxable supplies of less than R1,5 million in value over 12 months fall
into this category. A vendor that is a registered micro business (see chapter 8) who has made written
application in this regard, could also qualify as a Category D vendor.
Category E: Periods of 12 months ending on the last day of their year of assessment for normal tax
purposes. Vendors falling into this category include:
• Companies and trust funds whose activities consist solely of: the letting of fixed property or movable
goods; or the administration or management of; companies that are connected persons in relation to
the vendor.
• Those connected persons are all registered vendors and are entitled to deduct the full amount of input
tax.
• Tax invoices are issued and payments are only made once a year, at the end of the year of assessment.
Output VAT: Non-supplies
A vendor is obliged to levy output VAT. The exception to this rule is if the vendor supplies goods on which
the input tax has been denied in terms of the VAT Act. If the input tax has been denied in terms of the VAT
Act, no output VAT is levied on the supply. Typical examples will be where goods or services were acquired
for entertainment purposes, or the supply of a motor car (other than an employer granting the use of a
motor car to an employee.
Example
Speedy purchased a motor car, a coffee machine for the canteen and a printer. He paid the following for
these items:
Motor car: R343 000 (including VAT – input VAT denied)
Coffee machine: R6 457 (including VAT – input VAT denied)
Printer: R6 900 (including VAT)
He then sells all three items.
Explain the VAT consequences relating to the purchase and sale of the motor car, coffee machine and the
printer.
,Solution
Provided Speedy acquired the printer for the purposes of making taxable supplies, he will be able to claim
an input tax deduction on the acquisition of the printer amounting to R847,37 (R6 900 × ).
No input tax will be claimable on the acquisition of the motor car and coffee machine, as input tax
deductions are specifically denied on the acquisition thereof.
Speedy will be required to levy output tax on the sale of the printer only, since the said supply will be made
in the course or the furtherance of his enterprise. Speedy will not be required to account for any output tax
on the sale of the coffee machine and motor car, since Speedy was denied input tax deductions on the
acquisition of these items.
REMEMBER
Where the initial input VAT was denied on a motor vehicle, but the vehicle was subsequently converted into
a game-viewing vehicle or a hearse on which input tax is allowed, the ultimate sale of the vehicle will be
deemed to be a supply in the course of the enterprise, and VAT should thus be levied on this transaction.
Output VAT: No apportionment
If a vendor acquires goods or services partly for the purposes of making taxable supplies and subsequently
sells these goods, the vendor will be deemed to make a taxable supply of goods or services in the course of
his enterprise and the total consideration received for such supply will be subject to VAT. There are two
exceptions to this rule that relate to fringe benefits and indemnity payments. For both these types of
supplies, the amount of output tax is payable only to the extent that it relates to taxable supplies made in
the course of the enterprise.
Example
BBC Bank sells a computer to CNN Bank for R12 000. This computer was used 80% for the making of taxable
supplies and 20% for the making of exempt supplies. You are required to advise BBC Bank on the VAT
consequences of the transaction.
Solution
BBC Bank will be required to account for VAT at the standard rate on the full selling price of R12 000, that is
R1 473,68 (R12 000 × ). However, BBC will be entitled to make an input tax adjustment for the 20%
exempt portion.
Supply
The first requirement for a transaction in South Africa to attract VAT is that the transaction should
constitute a supply for VAT purposes.
The term “supply” includes a sale, rental agreement, an instalment credit agreement, as well as all other
forms of supply, whether voluntary, compulsory or by operation of law, irrespective of where the supply is
affected. Supply also includes supplies under barter exchange transactions and expropriation of property.
There must be two persons involved, supplier and the recipient of the goods or services. The recipient is the
person to whom the supply is made.
, Goods
“Goods” are defined as:
• corporeal movable things;
• fixed property;
• any real right in such thing or fixed property; and
• electricity.
The following are not included in the definition of “goods”:
• Money
• Revenue stamps
• Certain rights: These are rights arising from a mortgage bond or pledge of goods.
Registration as a vendor after deregistration as micro business
Where a person deregisters as a micro business and registers as a VAT vendor, certain transitional measures
apply. The transitional measures result in:
• output tax on certain deemed supplies; and
• the prohibition/prohibiting of input tax on certain expenses.
Output tax on certain deemed supplies
Where a person deregisters as a micro business and registers as a VAT vendor, certain supplies made by that
person while that person was a micro business is deemed to be a supply by the VAT vendor.
The registered micro business is taxed on its taxable turnover on a cash basis. Supplies made in one period,
but of which the payment is only received in another tax period, could therefore escape the tax net if it was
not for this deemed supply rule.
The time of supply of these deemed supplies is the tax period during which those receipts are received.
The prohibition of input tax on certain expenses
Where a person deregisters as a micro business and registers as a VAT vendor, any VAT paid on expenditure
it incurred while it was a registered micro business may not be deducted by that VAT vendor as input tax.
The VAT Act usually provides for a five-year window period but in the case of a deregistered micro business,
only input VAT on expenses incurred after the registration as VAT vendor could however be claimed.
VAT levied: Importation of goods
In the case of the importation of goods into South Africa (even in the case of a nonvendor), VAT is levied on
the importation and collected by a Customs and Excise SARS official at the border post.
VAT is levied on the importation of goods as it would be to the disadvantage of local suppliers if persons
could buy the same merchandise overseas at a lower price because the suppliers overseas did not have to
increase their prices with 14% VAT.
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