Notional VAT
Reference Acts and Documents
Value-Added Tax Act
SARS VAT Tax Form 264
SARS Binding General Ruling (VAT)43 (BGR43)
SARS Interpretation No. 49 - Notional VAT and second-hand property
What is Notional VAT?
Subject to certain exceptions, the Value-Added Tax Act, Number 89 of 1991 entitles a registered VAT vendor to claim a notional input tax deduction in respect of second-hand goods acquired under a non-taxable supply, where such second-hand goods are acquired from a resident of the Republic for the purpose of consumption, use or supply in the course of making taxable supplies.
Notional VAT and Form 264 is applicable to the VAT declaration for the supply of second-hand, repossessed or surrendered goods.
Often VAT vendors purchase goods from non-VAT Vendors (who do not charge VAT on the sale of the item). Section 20(8) of the Value Added Tax Act allows the Vendor to claim an amount as input deduction on the purchase of this item.
NOTE: With effect from 1 April 2015, vendors are prohibited from claiming notional input tax deductions in respect of the acquisition of second-hand goods comprising of ‘gold’ or of ‘goods containing gold’. The exclusion was introduced to curb fraudulent notional input tax deductions in respect of the acquisition of gold and gold jewellery.
On 12 September 2017, SARS issued Binding General Ruling (VAT)43 (BGR43) which sets out and clarifies the circumstances under which the supply of gold is regarded as falling within the exceptions provided in the VAT Act’s definition of ‘second-hand goods’.
The definition of second hand goods as per Section 1 of the Act is as follows:
Second-hand goods means:
(a)goods which were previously owned and used; or
(b)in respect of the transfer of a unit in the circumstances referred to in Item 8 of Schedule 1 to the Share Blocks Control Act, such unit, (this refers to Sectional Title properties) but does not include:
(i) animals;
(ii) gold coins contemplated in section 11(1)(k);
(iii) any prospecting right, mining right, exploration right, production right, mining permit, retention permit or reconnaissance permit as defined in section 1 of the Mineral and Petroleum Resources Development Act, 2002 (Act No. 28 of 2002), or any reconnaissance permission contemplated in section 14 of that Act granted or renewed in terms of that Act or received upon conversion pursuant to Schedule II, except when that prospecting right, mining right, exploration right, production right or interest in that right is transferred, ceded, let, sublet, alienated, varied or otherwise disposed of as contemplated in section 11 of the Mineral and Petroleum Resources Development Act, 2002;
(iv) any fixed property acquired in terms of the Provision of Land and Assistance Act, 1993 (Act No. 126 of 1993); and
(v) any fixed property acquired in terms of section 42E of the Restitution of Land Rights Act, 1994 (Act No. 22 of 1994)
A further definition defined in Section 1 of the VAT Act of second-hand goods is to mean, among other things, goods which were previously owned and used, but does not include:
1. goods consisting solely of gold unless acquired for the sole purpose of supplying such goods in the same state without any further processing;
2. gold coins contemplated in s11(1)(k) of the VAT Act; or
3. any other goods containing gold unless those goods are acquired for the sole purpose of supplying those goods in the same or substantially the same state to another person.
Vendors acquiring second-hand gold or goods containing gold under a non-taxable supply are not entitled to claim a notional input tax deduction in respect thereof unless the exceptions to the definition of ‘second-hand goods’ are met.
Another example of notional tax is that of property. When purchasing a property for the generation of taxable supplies, such as the supply of commercial accommodation, the vendor is entitled to a notional input tax credit on the basis that the fixed property is now viewed in the same light as the supply of second-hand goods and property transfer duty costs still apply as normal.
The notional input tax credit is now calculated and equal to the VAT tax fraction of 15/115. The calculation is based on the purchase consideration paid or the market value of the property, whichever is the lowest. SARS Interpretation No. 49 must be consulted for further details on the requirements in this regard.
Section 16 of the VAT Act allows for the input tax credit to be claimed within a period of 5 years from acquisition of the property. It must be noted that should the input tax credit be claimed and subsequently the property no longer be used for the generation of a taxable supply (i.e. change of use of property), SARS will require the input credit so claimed to be repaid.
When claiming this input tax deduction the seller must complete a VAT264 form which requires certain information to be provided to the purchaser. These are:
1. Copy of Identity Document of the seller (if an individual)
2. Copy of the company documents/trust deed if a legal entity. The VAT264 form states a letterhead of the legal entity is sufficient.
3. Valid tax invoice from the seller (non Vendor) complying with all the requirements of a valid tax invoice.
4. The seller must also sign the VAT264 form.
Notional VAT should not be confused with that of VAT apportionment. Generally, the full amount of VAT on goods or services acquired locally or imported for the purposes of making taxable supplies can be deducted as input tax. However, if goods or services are imported or purchased locally partly for taxable and other non-taxable purposes (mixed purpose), only a portion of the VAT or notional input tax may be claimed. If goods or services are not acquired exclusively in the course of making taxable supplies, the taxable portion and claimable input tax must be determined i.e. VAT apportionment must be considered.
VAT apportionment only applies to expenses that have been incurred partly for the purpose of consumption, use or supply in the course of making taxable supplies and partly for exempt or other non-taxable purposes.
VAT apportionment will be discussed in a separate article.