VAT 420 Guide for Motor Dealers FOREWORD

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2 VAT 420 Guide for Motor Dealers Foreword FOREWORD This guide concerns the application of the value-added tax (VAT) law in respect of vendors that supply motor cars and other vehicles (motor dealers). Although fairly comprehensive, the guide does not deal with all the legal detail associated with VAT and is not intended for legal reference. Technical and legal terminology has also been avoided wherever possible. All references to the VAT Act or the Act are to the Value-Added Tax Act, No. 89 of 1991, and references to sections are to sections in the Value-Added Tax Act, unless the context otherwise indicates. The terms Republic, South Africa or the abbreviation RSA, are used interchangeably in this document as a reference to the sovereign territory of the Republic of South Africa, as set out in the definition of Republic in section 1 of the VAT Act. Similarly, the terms motor vehicle or vehicle are also used as a reference to all types of vehicles which may be supplied by motor dealers. However, the term motor car is used in certain instances, where it is necessary to refer to this specific defined term. A number of specific terms used throughout the guide are defined in the VAT Act. These terms and others are listed in the Glossary in a simplified form for ease of reference. The information in this guide is issued for guidance only and does not constitute a binding general ruling as contemplated in section 76P of the Income Tax Act, No. 58 of 1962, and section 41A of the VAT Act unless otherwise indicated. This guide is based on the VAT legislation as at 6 March The following guides have also been issued and may be referred to for more information about specific VAT topics: AS-VAT-08 - Guide for Registration of VAT Vendors Trade Classification Guide (VAT 403) Guide for Vendors (VAT 404) Guide for Fixed Property and Construction (VAT 409) VAT Guide: Accommodation, Catering and Entertainment (VAT 411) Share Block Schemes (VAT 412) Deceased Estates (VAT 413) Associations not for Gain and Welfare Organisations (VAT 414) Diesel Guide (VAT 415) Guide for the Small Retailers VAT Package (VAT 416) Guide for Small Vendors (VAT 417) AS-VAT-02 - Quick Reference Guide (Diplomatic Refunds) (VAT 418) Guide for Municipalities (VAT 419) Should there be any aspects relating to VAT which are not clear or not dealt with in this guide, or should you require further information or a specific ruling on a legal issue, you may contact your local South African Revenue Service (SARS) branch; visit the SARS website at contact your own tax advisors; if calling locally, contact the SARS National Call Centre on ; or if calling from abroad, contact the SARS National Call Centre on For details in respect of the general operation of VAT refer to the VAT 404 Guide for Vendors which is available on the SARS website. Prepared by: Legal and Policy Division: Indirect Taxes South African Revenue Service 6 March

3 VAT 420 Guide for Motor Dealers Contents CONTENTS CHAPTER 1 INTRODUCTION Approach of the Guide Background General VAT principles 6 CHAPTER 2 DEFINITIONS AND CONCEPTS Consideration Enterprise Exported Floor plan Goods and second-hand goods Input tax and notional input tax Instalment credit agreement (ICA) and rental agreement Motor car Motor dealer Output tax Over-allowance Sale, supply and taxable supply Services 13 CHAPTER 3 AGENT AND PRINICPAL Introduction Legal principles of agency Tax invoices, credit notes and debit notes Application of agency principles 15 CHAPTER 4 TYPES OF SUPPLIES Introduction Supply of motor vehicles Outright sales Instalment credit agreements (ICAs) Floor plan agreements Exports Motor vehicles sold on behalf of other persons Consignment stock Arranging supplies and referral of customers Accessories and parts Sponsorship Rental agreements and discounted rental agreements Discounted instalment credit agreements Deemed supplies in respect of indemnity payments Licensing and registration Service and maintenance plans Warranty services Fringe benefits Repossessions Auction sales 29 3

4 VAT 420 Guide for Motor Dealers Contents CHAPTER 5 EXPORTS Introduction Direct exports New goods Second-hand goods Indirect exports Part One of the Scheme Part Two of the Scheme New goods Part Two of the Scheme Second-hand goods 38 CHAPTER 6 IMPORTS Introduction Importation of goods Goods temporarily imported for servicing or repairs Trans-shipment of goods Non-resident manufacturer warranties 41 CHAPTER 7 INPUT TAX General rules Dealer stock Second-hand goods Importation of motor vehicles Insurance Commissions paid Floor plans General overheads Denial of input tax 46 CHAPTER 8 TAX INVOICES Tax invoice Consideration exceeds R50 but not R Consideration exceeds R Examples 48 GLOSSARY 52 ANNEXURE A FORM VAT ANNEXURE B FORM VAT CONTACT DETAILS 62 4

5 VAT 420 Guide for Motor Dealers Chapter 1 CHAPTER 1 INTRODUCTION 1.1 APPROACH OF THE GUIDE For the most part, the general VAT principles as set out in the Guide for Vendors (VAT 404) will apply to motor dealers as it does for any other vendor, and the information in this guide should be read together with the Guide for Vendors. The purpose of this guide is, therefore, to expand on the application of those VAT principles as they apply to specific types of transactions which are of interest to motor dealers and the motor industry in general. The approach to the topic and the layout of the material in this guide is set out as follows: Chapter 1.This chapter sketches the policy background concerning the VAT treatment of the supply of motor cars in the Republic. An important aspect in this regard is that, as a general rule, vendors may not claim input tax on the acquisition of motor cars, but this rule does not apply to vendors that supply motor cars for a consideration in the ordinary course of conducting an enterprise. A brief overview is also provided on the basic principles of VAT and how it applies to motor dealers. Chapter 2 The purpose of this chapter is to introduce the reader to some of the more important concepts and definitions contained in the VAT Act, as well as certain terminology used in the motor industry which is relevant for the purposes of topics to be discussed in later chapters. Chapter 3 A brief overview is provided of the legal concepts agent and principal. This is important as the VAT consequences of a transaction cannot be determined until the contracting relationship between the parties is established. These concepts are particularly important to clarify as to which person is required to account for output tax and input tax in regard to transactions concluded by a motor dealer when acting as principal, and when acting on behalf of another person. Chapter 4 In this chapter the various types of supplies which are made by motor dealers are discussed in some detail. In particular, the focus is on the nature of the supplies and whether output tax must be declared by the motor dealer, or by some other vendor in the case where the motor dealer has acted as agent. Chapter 5 It is important for motor dealers that are involved in exporting vehicles to draw a distinction between direct and indirect exports, as well as new and second-hand motor vehicles exported, as the VAT treatment differs. This chapter therefore discusses the rules for applying the zero rate of VAT to different types of exports, the applicable documentation which a vendor is required to hold to justify the charging of the zero rate on exports, and the possible VAT adjustments which may be required when the export documentation is not received timeously. Chapter 6 The different circumstances under which goods are imported into the Republic are discussed. As the normal rules in this regard are discussed in the Guide for Vendors (VAT 404), this chapter focuses on specific types of imports which may be of interest to motor dealers. For example, the temporary import of vehicles for the purpose of servicing or repair, trans-shipment of vehicles destined for export countries, and certain aspects concerning warranties. Chapter 7 This chapter focuses on the different types of supplies acquired or goods imported by motor dealers in the course of conducting an enterprise, and sets out the rules with regard to the claiming of input tax on those supplies or imports. Chapter 8 In this chapter, the general rules with regard to tax invoices are set out. In addition, examples of tax invoices are provided to provide guidance to vendors, particularly with regard to the export of second-hand vehicles. 5

6 VAT 420 Guide for Motor Dealers Chapter BACKGROUND The Value-Added Tax Committee (VATCOM) was a committee consisting of members from the private and public sectors, which was appointed by the Minister of Finance (the Minister) to consider the comments and representations made by interested parties in 1991 on the Government s draft Value- Added Tax Bill. VATCOM found that by far the majority of new motor cars are acquired by or for businesses and that to some extent private consumption of motor cars is funded by businesses. This places a person with a company car in a better position than a private person who purchases a motor car with his/her own financial resources, or borrowed funds. However, provision was made for the value of fringe benefits to be considered for VAT purposes to neutralise the deduction of input tax that the employer may enjoy. VATCOM also found that in other countries, the deduction of input tax in the hands of vendors encourages the registration of private motor cars in the name of businesses. Further, that many other countries which have a VAT system of taxation also deny input tax on the acquisition of passenger type motor cars. The reasons for the disallowance of the input tax on these supplies is to a large extent based on the potential for abuse because the use of a motor car usually has both a business and personal consumption component. Conceptually, the denial of input tax is linked to the idea that a vendor who acquires a motor car for business purposes (taxable supplies) should not be in a position to deduct the full amount of input tax in a situation where there is an element of personal consumption by that vendor, an employee of that vendor, or a connected person in relation to that vendor. However, from an administrative point of view it would be very difficult to apportion, or identify separately, the extent of that personal consumption so that the input tax deduction in relation to the total VAT incurred could be adjusted accordingly. The recommendation of VATCOM (which was accepted) was therefore that the South African legislation should disallow credit for input tax attributable to motor car purchases, even if the expense is incurred in the course of conducting an enterprise. Although there have been some amendments over the years to the applicable provisions in the VAT Act, the policy of generally denying input tax on the acquisition of motor cars is still currently an integral part of the structure of the VAT law. 1.3 GENERAL VAT PRINCIPLES VAT is an indirect tax charged on the supply of goods or services in the Republic by a vendor. It is also charged on the importation of goods into the Republic, and in some cases, on the importation of services. The aim of VAT is to raise revenue for the fiscus by taxing final consumption of goods and services in the Republic. Accordingly, supplies and imports of goods or services consumed in the Republic are generally taxable for VAT purposes. A motor dealer which is a vendor for VAT purposes must levy VAT on all taxable supplies made in the course or furtherance of its enterprise. In addition, a motor dealer is required to know the rate of VAT that must be imposed on such supplies (that is, 14% or 0%). VAT charged to customers is called output tax, while the VAT paid on purchases, as well as other business expenses acquired wholly or partly for purposes of making taxable supplies, is known as input tax. The output tax less the input tax in a tax period results in the amount of tax payable by or refundable to the vendor. However, as a general rule, input tax is specifically denied in respect of certain business expenses, for example, expenses in connection with entertainment and the acquisition of motor cars. The supply of a motor vehicle, as well as the conducting of other associated business activities by a person constitutes a taxable activity and an enterprise for VAT purposes if the activities are carried on continuously or regularly in the Republic or partly in the Republic. Accordingly, a person that continuously or regularly supplies motor vehicles (for example, a motor dealer) will be required to register as a vendor if the total value of motor vehicle sales or other taxable supplies of goods or services exceeds or is likely to exceed the compulsory VAT registration threshold 1 in any 12-month period. Failure to register will render the person conducting the motor dealer activities liable to account for output tax on past supplies and that person will be guilty of an offence. 1 In terms of the Revenue Laws Amendment Act, 2008, the compulsory registration threshold for VAT increased from R to R1 million on 1 March Refer also to VAT News No. 32 and 33 for more details in this regard. 6

7 VAT 420 Guide for Motor Dealers Chapter 1 When considering the factors in paragraph 1.2 it becomes evident that an integral part of the trading environment of a motor dealer is that in most cases, customers will not be able to claim input tax on motor cars purchased. 2 The ability or inability of customers to claim input tax on a particular type of vehicle which will be used for enterprise purposes is often an important factor in influencing business and consumer choices. To compensate for the inability of most vendors to claim input tax on the acquisition of motor cars, the VAT Act provides that the subsequent sale of such motor cars by the purchaser is not a transaction in the course or furtherance of an enterprise and will not attract VAT. Accordingly no output tax should be declared on such sales. However, as an input tax deduction should, in principle, not be denied in respect of legitimate business transactions, the denial of input tax is subject to a limited list of exceptions where certain specified conditions have to be met before input tax may be allowed. The obvious exception is where the vendor is in the business of supplying motor cars, and the taxable supply or import relates to the supply of motor cars in the ordinary course of that business. Therefore, a motor dealer or bank which supplies motor cars is not subject to the disallowance rule because it is selling the motor cars in the ordinary course of its business. There are a limited number of other instances where the disallowance rule does not apply, but these will be discussed in more detail later in the guide. For a more detailed discussion on general VAT principles, refer to the Guide for Vendors (VAT 404). 2 This excludes motor dealers and motor car rental enterprises which are usually entitled to claim input tax. 7

8 VAT 420 Guide for Motor Dealers Chapter 2 CHAPTER 2 DEFINITIONS AND CONCEPTS 2.1 CONSIDERATION The term consideration basically means the total amount of money (including VAT) received for a supply of goods or services. However, consideration is widely defined to include any form of payment and any act or forbearance, whether or not voluntary, for the inducement of a supply of goods or services. Where the consideration is not in money, (for example, in the case of barter transactions) the consideration is the open market value of the goods or services (including VAT) received for making the taxable supply. The term consideration excludes any donation made to an association not for gain; and a deposit 3 which is lodged to secure a future supply of goods or services, which has not yet been applied as payment, or which has not yet been forfeited. The value of supply or amount of the consideration for VAT purposes for different types of supplies of goods or services is determined in section 10 of the VAT Act. Furthermore, since VAT is the difference between the selling price including the VAT and the value of the taxable supply, the following formulae can be derived: Consideration = Value + VAT or VAT = Consideration Value 2.2 ENTERPRISE The term enterprise is the starting point in determining whether a person is liable to be registered for VAT purposes in the Republic. A person is generally considered to be carrying on an enterprise if all of the following requirements are met: An enterprise or activity must be carried on continuously or regularly by a person in the Republic or partly in the Republic. In the course of carrying on the enterprise or activity, goods or services must be supplied to another person. There must be a consideration payable for the goods or services supplied. Therefore, where a person conducts an enterprise and the value of taxable supplies made by that person in any 12-month period exceeds, or is likely to exceed the compulsory VAT registration threshold, the person is obliged to register for VAT. In cases where the value of taxable supplies is less than the compulsory VAT registration threshold, but more than R20 000, the person may apply for voluntary registration. It is important to note that even income from only one supply, for example, the sale of one motor vehicle by a motor dealer, can render a person liable for VAT registration. 3 For example, a security deposit held in trust until the time of supply is triggered. 8

9 VAT 420 Guide for Motor Dealers Chapter 2 Example 1 Scenario Mr S is employed fulltime as a financial consultant at a local bank. However, as a sideline business which he conducts in his spare time, Mr S buys old motor cars and sells them after restoration. During the period November 2005 to August 2006 he bought and sold the following motor cars: Date of sale Description of goods supplied R 04 November Toyota Corolla December Fiat Uno February VW Citi Golf March Mercedes Benz June Opel Monza July Nissan July Audi A August VW Citi Golf September Nissan Total Question Is Mr S required to register as a vendor for VAT purposes, and if so, from which date? Answer The activity of buying, restoring and selling motor cars on a continuous or regular basis is an enterprise for VAT purposes. In the first month of trading the total value of taxable supplies was already R45 000, however, due to the erratic nature of the sales, it is not certain whether there are reasonable grounds for believing that the compulsory VAT registration threshold (R at that time) would be exceeded. However, Mr S could register voluntarily if he chooses to do so, as he has exceeded the minimum threshold of R In this case, Mr S is obliged to register as a vendor within 21 days from the end of August 2006, which is the month in which he exceeded the compulsory VAT registration threshold. Note: The monthly salary that Mr S receives from his employer is remuneration earned in the course of his employment at the local bank and is not in respect of any taxable supplies made by him. The remuneration therefore falls outside the ambit of enterprise and is not taken into account to determine the value of taxable supplies. 2.3 EXPORTED The term exported in the context of this guide, refers to a situation when motor vehicles (being movable goods) are supplied under a sale or instalment credit agreement by a South African motor dealer (vendor) and subsequently removed from the Republic so that consumption of the goods takes place in an export country. The VAT principle of consumption provides that goods should be subject to tax in the country in which they will be consumed. VAT is therefore levied at the zero rate on goods exported from the Republic as they will be subject to VAT in the country into which they are imported for consumption. If the vendor consigns or delivers the movable goods (for example, a motor car) to the customer in an export country, this is referred to as a direct export, which is subject to VAT at the zero rate, 4 provided that the necessary documentary proof of export is obtained and retained. In the case of a direct export, the supplier is in control of the movement of the goods and is responsible for delivery in the export country. On the other hand, an indirect export is when the customer receives delivery of the goods in the Republic. The vendor supplying the goods in this case is not in control of the goods after the sale and cannot be certain that they will be exported by the customer. As a general rule indirect exports are subject to VAT at the standard rate but if the goods are subsequently removed from the Republic, the customer may apply for the VAT charged on the supply to be refunded In terms of paragraph (a) of the definition of exported in section 1, read with section 11(1)(a)(i) of the VAT Act. Refer also to Interpretation Note No. 30 (Issue 2) for the documentary proof requirements. As set out in Part One of the Export Incentive Scheme, published as Notice Number 2761 in Government Gazette No , dated 13 November Refer also to paragraph (d) of the definition of exported in section 1, read with section 11(1)(a)(ii) of the VAT Act. 9

10 VAT 420 Guide for Motor Dealers Chapter 2 To qualify for a refund under Part One of the Export Incentive Scheme (the Scheme), the customer must be a qualifying purchaser 6 and the goods must be removed from the Republic to the export country either personally by the qualifying purchaser, or by a VAT-registered cartage contractor appointed by the qualifying purchaser. A different type of indirect export is where the vendor may elect under certain circumstances to supply movable goods at the zero rate to a qualifying purchaser. 7 In this case the vendor must ensure that the movable goods are initially delivered to a designated commercial harbour or airport from where the qualifying purchaser (or that person s appointed cartage contractor) will subsequently export the movable goods to an export country. (Refer to Chapter 5 for more details.) 2.4 FLOOR PLAN A floor plan is a generic term used to refer to the financing of motor vehicles that are held in stock by a motor dealer before they are sold. The motor vehicles could be in transit, in a special storage facility (for example, a manufacturer's warehouse), or on the motor dealer's showroom floor. It is a standing arrangement, involving various parties and a predetermined combination of transactions and conditions primarily aimed at funding assets during the period between manufacture, exportation or importation (or purchase by a dealer in the case of second-hand motor vehicles) and the ultimate sale of those assets to the motor dealer s customer. It is common practice in the motor industry for a motor dealer to enter into a floor plan agreement to finance the acquisition of new motor vehicles which may be purchased from local motor vehicle manufacturers or importers. Floor plan agreements may be concluded with local or foreign motor dealers, for example, South African financiers may have floor plan agreements with motor dealers located in neighbouring African countries. Although a number of variations exist which take into account different funding requirements and risk factors, the supply of vehicles under a floor plan agreement basically involves the purchase of motor vehicles by the financier for cash or on credit terms from the manufacturer; importer, or dealer; and the subsequent supply of those vehicles under Instalment Credit Agreement (ICA) by the financier to the motor dealer. A floor plan agreement need not be a financing agreement in its own right but an arrangement which sets out how finance will be provided. However, it could also constitute a master agreement (instalment credit agreement or otherwise) against which individual motor vehicles are added to the agreement, as and when they are supplied. (Refer to paragraphs for more details.) 2.5 GOODS AND SECOND-HAND GOODS The term goods includes corporeal movable things, fixed property and any real right in such thing or fixed property. The definition basically refers to any tangible property and any real right in such tangible property. The term second-hand goods includes goods which were previously owned and used. It is necessary to determine whether goods are indeed second-hand goods because if a vendor acquires second-hand goods under a non-taxable supply from a resident for the purposes of making taxable supplies, the vendor may be permitted to deduct an amount of VAT as a notional input tax deduction (refer to paragraph 2.6). 2.6 INPUT TAX AND NOTIONAL INPUT TAX The term input tax refers to the tax paid by a vendor on the acquisition of goods or services that are to be consumed, used or supplied by that vendor either wholly or partly in the course of making taxable supplies. In cases where goods or services are acquired partly for the purpose of making taxable supplies and partly for non-taxable purposes, input tax is limited to the extent that the goods or services are acquired for the purpose of making taxable supplies. The VAT incurred in the course of making exempt or other non-taxable supplies does not fall within the definition of input tax. 6 7 In brief, this is a non-resident that holds a foreign passport (and who is not in the RSA at the time of the supply), a tourist, a foreign business or a foreign diplomat. Part Two of the Scheme, read with paragraph (d) of the definition of exported in section 1 and section 11(1)(a)(ii) of the VAT Act. 10

11 VAT 420 Guide for Motor Dealers Chapter 2 Input tax may be deducted on goods or services acquired for the purpose of making taxable supplies, provided the purchaser is in possession of the relevant documentation, 8 in the following circumstances: Where VAT is charged at the standard rate on the supply of goods or services by a vendor. Where VAT is paid at the standard rate on the importation of goods into the Republic. Where second-hand goods 9 (not being fixed property situated in the Republic) are acquired from a resident under a non-taxable supply for the purpose of making taxable supplies. Notional input tax deductible by a motor dealer (vendor) on the acquisition of second-hand goods under a non-taxable supply is, in terms of the definition of input tax, limited to the tax fraction applied to the lesser of the consideration in money paid by the motor dealer to the customer or the open market value of that supply. Further, the notional input tax is limited to the extent of payment of the consideration which has the effect of reducing or discharging the obligation relating to the purchase price of the goods which has been made in the tax period. In the case of second-hand goods, the notional input tax deduction is calculated as follows: VAT (input tax) = Lesser of consideration or open market value 10 x 14 x consideration paid 114 total consideration Example 2 Scenario Miss C (a resident) intends studying in Europe and sells her 2006 Toyota Yaris to Second Time Around motor dealers (a vendor) for R which is also equal to the open market value of the vehicle. Question What are the VAT implications for Second Time Around motor dealers? Answer Miss C is not a vendor and cannot charge VAT on the agreed selling price. However, as Second Time Around has purchased the motor car from a resident for a consideration of R for the purpose of making taxable supplies, an amount of R (R x 14/114) may be claimed as a notional input tax deduction. 2.7 INSTALMENT CREDIT AGREEMENT (ICA) AND RENTAL AGREEMENT An ICA was previously known as a hire purchase or HP agreement. There are two types of ICAs for VAT purposes, namely an instalment sale agreement and a financial lease. ICA agreements are characterised by a condition that the passing of ownership of the goods or services supplied only takes place upon payment of the final instalment or once the residual amount 11 has been settled (as the case may be). The agreement will normally provide for the payment of the purchase price including finance charges at a fixed or determinable charge and the recipient accepts the risks attached to those goods insofar as loss or damage is concerned. A rental agreement (or operating lease) where the recipient does not become the owner of the goods is not an ICA Usually this will be in the form of a tax invoice. However, for second-hand goods acquired under a non-taxable supply, the purchaser is required to be in possession of a completed form VAT 264, signed by the seller declaring that the supply of the motor vehicle is not a taxable supply, and to serve as evidence of the transaction. Refer to Annexure A for an example of the form. Refer to paragraph 2.5. Refer to paragraphs 2.11 and 7.3 for more details in this regard. Also known as a balloon payment. 11

12 VAT 420 Guide for Motor Dealers Chapter MOTOR CAR The term motor car includes vehicles which have three or more wheels, are normally used on public roads and which are constructed or converted wholly or mainly for carrying passengers, for example, ordinary sedan or hatch type motor cars, SUVs, double-cab bakkies (LDVs), microbuses etc. The following vehicles do not fall within the meaning of the term motor car as defined: Vehicles capable of accommodating more than 16 persons (for example, a bus). Specialised vehicles such as hysters, graders, tractors, mobile cranes and earthmoving vehicles which can only seat one person. Hearses, ambulances and caravans. Vehicles with an unladen mass of kg or more. Single cab bakkies (LDVs), trucks and delivery vehicles. Game viewing vehicles. 12 As a general rule input tax may not be claimed on the acquisition of any vehicle which falls within the meaning of the term motor car, regardless of the mode of acquisition or whether or not it is used for taxable supplies. However, the disallowance of input tax does not apply to vendors such as motor car dealers and car rental businesses that continuously or regularly supply motor cars in the ordinary course of their enterprises. Similarly, motor dealers and car rental businesses may also claim input tax on motor cars which are acquired as stock, but initially used for demonstration purposes or used temporarily for other purposes in the business before being sold. 2.9 MOTOR DEALER The term motor dealer is not defined in the VAT Act. For the purposes of this guide, this term is used to refer to a person that in the ordinary course of conducting a business, supplies motor cars or other motor vehicles on a continuous or regular basis as an integral part of an income earning activity of that business. A person may therefore be regarded as a motor dealer if the sale or rental of motor vehicles is conducted on a sufficiently continuous or regular basis so that the enterprise test 13 is met, and is not limited to persons that are formally set up in the trading style of a motor dealership. For example, banks and motor vehicle manufacturers are also regarded as motor dealers as they supply motor vehicles in the ordinary course of their business. The same would apply in the case of an informal trader or a person that conducts a part time business activity involving the supply of motor vehicles on a continuous or regular basis for a consideration OUTPUT TAX Output tax refers to the tax levied by a vendor on the taxable supply of goods or services. The output tax is determined by applying the VAT rate to the value of a supply of goods or services. In instances where the amount charged (consideration) for the supply of goods or services includes VAT, the output tax is determined by applying the tax fraction (14/114) to the consideration. For example, where the charge including VAT is R500, output tax included in the amount is R61.40 (R500 x 14/114) OVER-ALLOWANCE Motor dealers sometimes agree to pay an amount to a customer which is in excess of the generally accepted trade-in market value 14 of a second-hand motor vehicle. The difference between this value and the amount credited or paid to the customer is referred to as an over-allowance. This usually comes about when the vehicle traded-in, is an integral part of another transaction involving the supply of a new vehicle to the same customer by the motor dealer. Refer to paragraph 7.3 regarding input tax on second-hand vehicles and over-allowances Specialised vehicles used in the tourist industry which are constructed or permanently converted for the carriage of seven or more passengers and used exclusively for game viewing in national parks, game reserves, sanctuaries or safari areas. Refer to paragraph 2.2. Motor dealers usually determine the market value of second-hand vehicles according to a publication known as the Auto Dealer s Guide. 12

13 VAT 420 Guide for Motor Dealers Chapter SALE, SUPPLY AND TAXABLE SUPPLY The term sale is defined to mean an agreement of purchase and sale and includes any transaction or act whereby or in consequence of which ownership of goods passes or is to pass from one person to another. The term supply is defined very broadly and includes all forms of supply and any derivative of the term, irrespective of where the supply is effected. The term includes transactional performance in terms of a sale agreement, rental agreement, instalment credit agreement or barter transaction. The term also includes supplies which are made voluntarily 15 or supplies which take place by operation of law. 16 Apart from the supplies mentioned above, section 8 of the VAT Act also provides for certain deemed supplies. These are events or transactions which are regarded as being included in the meaning of supply, for example the receipt of an indemnity payment under a contract of insurance; the supply of the use, or right to use any goods; and the supply of goods or services under a warranty agreement. The term taxable supply includes all supplies of goods or services made by a vendor in the course or furtherance of an enterprise. Section 7(1)(a) of the VAT Act prescribes that VAT must be levied at the standard rate (presently 14%) on a taxable supply of goods or services supplied for consumption in the Republic, except where the type of supply is listed in section 11 (for example, where goods are supplied and exported to an export country), in which case VAT is levied at the zero rate (0%), or where the supply is exempt in terms of section 12 of the VAT Act. (Refer to Chapters 4 and 5 for more details.) 2.13 SERVICES The term services is defined to mean anything done or to be done, resulting in a definition of wide inclusion. Therefore, anything that does not constitute goods or money will usually constitute the supply of a service For example, the donation of goods or services. For example, forced sales, expropriation transactions etc. 13

14 VAT 420 Guide for Motor Dealers Chapter 3 CHAPTER 3 AGENT AND PRINCIPAL 3.1 INTRODUCTION Before determining the VAT consequences of a transaction, it is necessary to establish the relationship between the parties. This is to determine if the vendor is acting as an agent on behalf of another person or as principal. Section 54 of the VAT Act contains special provisions to deal with the VAT consequences arising from an agency relationship. This chapter aims to provide clarity regarding the VAT treatment of supplies where an agent/principal relationship exists and specific examples are provided to illustrate these concepts. 3.2 LEGAL PRINCIPLES OF AGENCY In order to correctly apply the VAT legislation to the concept of agents, it is necessary to identify and understand the concept of an agent as understood in common law. An agency is a contract whereby one person (the agent) is authorised and required by another person (the principal) to contract or to negotiate a contract with a third person, on the principal s behalf. The agent in representing the principal, creates, alters or discharges legal obligations of a contractual nature between the principal and the third party. The agent therefore provides a service to the principal and normally charges a fee (generally referred to as commission or agency fee ) but does not acquire ownership of the goods and/or services supplied to or by the principal. This agent/principal relationship may be expressly construed from the wording of a written agreement or contract concluded between the parties. Where a written agreement or contract does not exist, the onus of proof is on the person who seeks to bind the principal and demonstrate that the relationship was that of a principal and agent. An understanding of the relationship between the parties is therefore a requirement in understanding the VAT treatment of supplies made by the parties. The differences between an agent and a principal can be summarised as follows: Agent The agent will not be the owner of any goods or services acquired on behalf of the principal. The agent will not alter the nature or value of the supplies made between the principal and third parties. Transactions on behalf of the principal do not affect the agent s turnover, except to the extent of the commission or fee earned on such transactions. An agent only declares the commission or fee for Income Tax and VAT purposes. Principal The principal is the owner of the goods or services acquired on the principal s behalf by the agent. The principal may alter the nature or value of the supplies made between the principal and third parties. The total sales represent the principal s turnover. The commission or fee charged by the agent forms part of the principal s expenses. The principal declares gross sales as income for Income Tax and VAT purposes, and may be allowed to claim a deduction for the commission or fee charged by the agent. In essence, the differences indicate that the principal is ultimately responsible for the commercial risks associated with a transaction, and that the agent is trading for the principal s account. The agent is appointed by and takes instruction from the principal regarding the facilitation of transactions as per the principal s requirements and generally charges a fee or earns a commission for that service. In order to correctly apply the VAT legislation, it is necessary to identify and understand the contractual relationship between the parties. The VAT treatment of supplies is determined from the fact of whether a person is acting on their own behalf, or on behalf of another person. In essence, section 54 of the VAT Act provides that where a vendor employs the services of an agent to acquire goods or services, or to make supplies on that vendor s behalf, the supplies are made to, or acquired by, the principal (as the case may be). There are also special provisions which deal with the receipt and issuing of tax invoices. (Refer to paragraph 3.3.) 14

15 VAT 420 Guide for Motor Dealers Chapter 3 As an agent merely acts on behalf of the principal, any output tax and input tax in relation to the underlying supplies made or received on behalf of the principal must be accounted for on the VAT return of the principal (if the principal is a vendor). The agent will only declare output tax and input tax in relation to the agency services supplied (if the agent is a vendor). 3.3 TAX INVOICES, CREDIT NOTES AND DEBIT NOTES The normal rule is that any tax invoice, credit note or debit note relating to a supply by, or to the agent, on the principal s behalf should contain the principal s particulars. However, the VAT Act does provide that if an agent (being a vendor) makes a supply on behalf of another vendor (the principal), the agent may issue a tax invoice or a credit or debit note relating to that supply as if the supply had been made by the agent. In this case, the agent s details may be reflected on the tax invoice, credit note or debit note and the principal may not also issue a tax invoice, credit note or debit note in respect of that same supply. The VAT Act also makes provision for the agent to be provided with a tax invoice, credit note or debit note as if the supply is made to the agent. When a tax invoice, credit note or debit note has been issued by or to an agent in the circumstances described above, the agent must maintain sufficient records so that the name, address and VAT registration number of the principal can be ascertained. In addition, the agent must, for supplies made on or after 1 January 2000, submit a statement to the principal in writing within 21 days of each calendar month, notifying the principal of a description of the goods supplied; the quantity or volume of the goods supplied; and either the value of the supply, the amount of tax charged and the consideration for that supply; or if the amount of tax charged is calculated by applying the tax fraction to the consideration, the consideration for the supply and either the amount of tax charged, or a statement that it includes a charge in respect of the tax and the rate at which the tax was charged. In these circumstances, the agent is required to retain the original tax invoices, credit notes or debit notes (if these documents are to be retained on the principal s behalf) and sufficient records should be maintained to enable the name, address and VAT registration number of the principal to be ascertained. 3.4 APPLICATION OF AGENCY PRINCIPLES According to the general principles of VAT a supply of goods or services made by an agent on behalf of, or for the principal, is deemed to be a supply made by the principal; and a supply of goods or services to an agent on behalf of, or for the principal, is deemed to be a supply made to the principal. In other words, the VAT consequences of the underlying transaction will depend on the principal's VAT status and not upon the agent's VAT status. A key element in determining whether that person contracts as a principal or agent, is to establish whether the goods or services are contractually acquired from the supplier, and then on-supplied (usually at a marked-up price) to the recipient; or by the recipient from the supplier of the goods or services, and a commission or fee is paid to the person that acts as an intermediary (agent) for arranging the supplies. A motor dealer acts as the principal in regard to the sale of a vehicle which is held as stock and paid for in full by the purchaser. However, in most cases, purchasers will require finance from a bank or other financial institution, so in practice, vehicles are usually supplied by the motor dealer to the financier, and the financier on-supplies the vehicle to the purchaser under an ICA or under an operating lease (rental agreement). The motor dealer therefore receives the consideration for the supply from the financial institution, and the financial institution may also pay a commission to the motor dealer for referring the business of the customer. 17 If the financier is a South African resident, the commission earned by the motor dealer is subject to VAT at the standard rate. 17 In these cases, there are two distinct supplies, being the supply of the vehicle itself and the supply of an arranging service. 15

16 VAT 420 Guide for Motor Dealers Chapter 3 If a motor dealer is requested to display and sell a motor vehicle on behalf of another person (that is, as agent and not as principal), the sale of the motor vehicle will not be a taxable supply by the motor dealer if the motor vehicle does not form part of the motor dealer s stock. However, the supply of the motor vehicle may be a taxable supply by the principal if the supply is in the course or furtherance of the principal s enterprise. In either case, the motor dealer (agent) is not entitled to an input tax deduction on the motor vehicle if it does not acquire the motor vehicle. The principal must account for output tax on the supply of the motor vehicle and not the motor dealer who is merely acting as the agent. However, the motor dealer must account for output tax on any commission earned for concluding the sale on behalf of the principal (whether the principal is a vendor or not). When acting as an agent for the seller, the motor dealer must establish if VAT should be levied on the sale of the motor vehicle. In addition, where the supply of the motor vehicle is a taxable supply, the motor dealer must establish if the principal will issue a tax invoice to the purchaser or whether the motor dealer is required to issue the tax invoice on behalf of the principal. (Refer to paragraph 3.3.) Example 3 Scenario Lenny is the managing director of ABC Motors (Pty) Ltd (vendor) which supplies motor vehicles in the course of its enterprise. Sam is a building contractor (vendor) and a good friend of Lenny s. During April 2007, Sam approaches Lenny to sell on his behalf (a) his private motor car; and (b) a delivery van which was used in his enterprise. The motor car was subsequently sold for R and the delivery van was sold for R during July ABC Motors (Pty) Ltd charged Sam commission of R1 500 and R3 000 respectively on the sale of the two vehicles. Question What are the VAT implications for ABC Motors (Pty) Ltd and for Sam? Answer ABC Motors (Pty) Ltd ABC Motors (Pty) Ltd (as agent) must establish from Sam if VAT must be levied on the supply of the vehicles and whether ABC Motors (Pty) Ltd is required to issue any tax invoices for the supplies. As ABC Motors (Pty) Ltd merely acted as Sam s agent in both cases, ABC Motors (Pty) Ltd will not account for any output tax on the sale of the vehicles, nor will any input tax be claimed, as ABC Motors (Pty) Ltd does not acquire the vehicles. However, ABC Motors (Pty) Ltd must charge VAT at the standard rate on Sam s behalf on the supply of the delivery van. The commission earned for arranging the sale is subject to VAT at the standard rate and ABC Motors (Pty) Ltd must provide Sam with a tax invoice in this regard. ABC Motors (Pty) Ltd must declare output tax as follows: Output tax = [(R1 500 x 14/114) + (R3 000 x 14/114)] = R R = R Sam The sale of the delivery van is in the course or furtherance of Sam s enterprise, but the sale of the private motor car is not. Therefore included in the amount payable to Sam by ABC Motors (Pty) Ltd will be the VAT charged on behalf of Sam on the sale of the delivery van. As the principal, Sam is liable to account for VAT on the supply of the delivery van. Note that Sam is only entitled to input tax in respect of the commission charged for the sale of the delivery van as the sale of the private motor car was not in the course or furtherance of his enterprise. Sam will declare VAT as follows on his VAT 201 return in respect of these transactions: Output tax = R (R x 14/114) Input tax = R (R3 000 x 14/114) = R (net output tax) 16

17 VAT 420 Guide for Motor Dealers Chapter 3 Example 4 Scenario Motor Dealer G (a vendor) is approached by Customer Y to purchase a motor car. As Customer Y was not able to pay the full purchase price in cash, Motor Dealer G assisted her in obtaining finance from Bank X. As part of the financing arrangement, the motor car was supplied to Bank X, which in turn, onsupplied the motor car to Customer Y. Motor Dealer G also arranged short-term insurance cover for her from Insurer Z. Motor Dealer G received a dealer s incentive commission from Bank X and a finder s fee from Insurer Z for referring the business of Customer Y. Question What are the VAT implications of these transactions for the parties? Answer Motor Dealer G Motor Dealer G is required to account for output tax on the supply of the motor car to Bank X, the dealer s incentive commission received from Bank X and the finder s fee paid by Insurer Z. Bank X Bank X is entitled to input tax on the acquisition of the motor car from Motor Dealer G and the dealer s incentive commission (to the extent that the vehicle is acquired for making taxable supplies). Bank X must account for output tax on the subsequent supply of the motor car to Customer Y. Insurer Z Insurer Z must account for output tax on the short-term insurance premiums received from Customer Y and may claim input tax on the finder s fee paid to Motor Dealer G. Customer Y If Customer Y is a vendor (but not a motor dealer) she would not be entitled to input tax on the acquisition of the motor car, as the input tax would be specifically denied. She would, however, be allowed to claim input tax on the insurance expense (being a running cost), to the extent that she uses the motor car in her enterprise. In order to determine the VAT implications of motor vehicles supplied on consignment, the legal and contractual relationship established between the consignor and the motor dealer as consignee must be established in accordance with the principles discussed in this chapter. (Refer to paragraph 4.5 for further details in regard to supplies of consignment stock.) Refer also to paragraph 4.17 in regard to supplies made by auctioneers as agent. 17

18 VAT 420 Guide for Motor Dealers Chapter 4 CHAPTER 4 TYPES OF SUPPLIES 4.1 INTRODUCTION Motor dealers supply new as well as second-hand motor vehicles to customers situated in the Republic or in an export country. Generally, the supply of a motor vehicle by a motor dealer (including the supply of a motor car ) is subject to VAT at the standard rate of 14% as it will be supplied in the course or furtherance of the enterprise by a person that continuously or regularly supplies motor vehicles. However, in the case of exports the rate of 0% may apply. (Refer to paragraph 2.3 and Chapter 5.) Motor dealers supply not only motor vehicles, but also a wide range of other goods and services associated with motor vehicles, and the maintenance thereof. In this chapter we take a look at the different supplies made by motor dealers and discuss the VAT consequences of the transactions concerned. 4.2 SUPPLY OF MOTOR VEHICLES The main type of supply which a motor dealer makes is the supply of motor cars and other motor vehicles, and as mentioned in paragraph 4.1, these supplies are generally subject to VAT at the standard rate. However, what is important to discuss here is the different types of transactions in terms of which motor vehicles may be supplied to, and by, motor dealers. It is important to note as a general point that any prices advertised, displayed, published or quoted to the public must be VAT-inclusive. This is so that the customer will know the final price payable upfront Outright sales Outright sales are the simplest type of transaction and may be entered into where a private person or a business has cash resources available, or has borrowed funds from a financial institution to purchase the vehicle. The VAT implications of outright sales follow the normal rules whereby output tax is declared by the supplier at the time that the transaction occurs, being the earlier of the time that payment for the supply is made, or an invoice for the supply is issued; and input tax may be claimed if the vehicle is acquired for taxable purposes, provided that the purchaser holds a tax invoice or other prescribed document which will entitle that person to claim input tax. (Refer to Chapter 7.) If the vehicle is exported, the supply may be subject to VAT at the zero rate. (Refer to Chapter 5.) Instalment credit agreements (ICAs) As few purchasers can afford to buy motor vehicles under an outright sale, the supply of vehicles is usually funded by way of an ICA. As mentioned in paragraph 2.7, there are two types of ICAs for VAT purposes, namely an instalment sale agreement and a financial lease. ICA agreements are characterised by a condition that possession and use of the vehicle passes to the purchaser, but ownership only passes once payment of the final instalment under the ICA has been made. The time of supply 18 for motor vehicles or other goods supplied under an ICA takes place at the earlier of the time that the goods are delivered; or any payment of the consideration is received by the supplier in respect of the supply. The value upon which VAT must be accounted is the cash value of the supply. 18 This establishes the tax period in which the supplier must account for output tax, and the tax period in which the recipient may claim input tax (subject to the requirement that the person must be in possession of a tax invoice for the supply). 18

19 VAT 420 Guide for Motor Dealers Chapter 4 Motor dealers may purchase and supply motor vehicles under ICAs, but usually the supply made to the final customer is financed by a financial institution and not the motor dealer. For VAT purposes, the sale of a motor vehicle under an ICA to the final customer usually results in two separate supplies in that the motor dealer supplies the motor vehicle to the financial institution, which in turn, supplies the motor vehicle to the customer. Example 5 Scenario In February 2007, Mrs D (a vendor) purchases a new delivery van to be used in her enterprise. The sale of the delivery van was negotiated with ABC Motor Dealers (a vendor) and Mrs D is granted finance for the transaction by RSA Bank Limited (a vendor). ABC Motor Dealers sells the delivery van to RSA Bank Limited for the purpose of selling it to Mrs D and providing finance for the deal. Question What are the VAT implications on the abovementioned transactions? Answer ABC Motor Dealers Although ABC Motor Dealers negotiated the sale to Mrs D, the delivery van is actually supplied first to RSA Bank Limited, and then by RSA Bank Limited to Mrs D. Since the supply of the delivery van is a supply of goods made in the course or furtherance of an enterprise carried on by ABC Motor Dealers, the sale to RSA Bank Limited is subject to VAT at the standard rate of 14%. If a commission or referral fee is paid to ABC Motor Dealers by RSA Bank Limited, that fee is also subject to VAT at the standard rate. RSA Bank Limited As RSA Bank Limited is a vendor that supplies motor vehicles in the course of its enterprise, the supply of the delivery van to Mrs D will be subject to VAT at the standard rate of 14% and the bank is entitled to deduct input tax on the acquisition of the delivery van from ABC Motor Dealers. Input tax may also be claimed on any commission or referral fee paid to ABC Motor Dealers which includes VAT at the standard rate. Mrs D As the vehicle purchased is a delivery van, and not a motor car, which is to be used in Mrs D s enterprise, she may claim input tax on the acquisition thereof. Mrs D must obtain a tax invoice from either RSA Bank Limited or from ABC Motor Dealers if the latter has been authorised to issue tax invoices on behalf of the bank Floor plan agreements As motor dealers usually require finance for their purchases of new motor vehicles, it is common practice in the motor industry for a motor dealer to enter into a floor plan agreement with a financial institution or with the manufacturer of the motor vehicles. Although there can be different types of floor plan arrangements, the discussion in this guide will be limited to the basics of the most common type. The process for the financing of new vehicles is depicted below. Delivery Motor Vehicle Manufacturer Taxable supply 1 Taxable supply 2 Financier Payment 1 Payment 2 Motor Dealer 19

20 VAT 420 Guide for Motor Dealers Chapter 4 The flow of transactions and VAT implications for the parties are as follows: The manufacturer, importer, dealer or other institution (being a vendor), sells a motor vehicle on credit or for cash to the financier and accounts for output tax. Ownership of the motor vehicle is reserved until payment is received by the financier. A cartage contractor will deliver the motor vehicle to the motor dealer (either on behalf of the financier or as contracted by the motor dealer). The financier receives a tax invoice from the manufacturer 19 and claims an input tax deduction thereon. The financier pays the manufacturer, importer, dealer or other institution after any interest-free period which may be applicable, and ownership of the motor vehicle passes to the financier. The motor vehicle is sold by the financier to the motor dealer under an ICA and placed on the motor dealer s floor plan. The financier issues a tax invoice to the motor dealer and accounts for output tax. The dealer claims input tax once the tax invoice has been received. Interest is paid to the financier by the motor dealer at predetermined intervals and the full settlement amount in terms of the ICA for that motor vehicle (including any outstanding interest) is usually paid shortly after the motor dealer has sold the motor vehicle to a customer. The financier does not declare any output tax on these payments as interest is exempt, and the VAT on the capital amount paid in respect of the motor vehicle would have already been accounted for at the time that the motor vehicle was supplied under the ICA. Similarly, no input tax may be claimed by the motor dealer on these payments as interest is exempt from VAT. Once the motor vehicle has been sold to a customer, either in terms of an outright sale for cash, or under an ICA, the motor dealer will account for the output tax. The full settlement amount in terms of the ICA for that motor vehicle is paid to the financier (including any outstanding interest) once the dealer has found a buyer or lessee. This allows ownership of the vehicle to pass to the motor dealer thus enabling the on-supply. There are no VAT implications on the settlement made to the financier as this would have already been accounted for as discussed above. The process for second-hand vehicles is depicted below. Payment 1 Taxable supply 1 Motor Dealer Taxable supply 2 Financier Payment 2 The flow of transactions and VAT implications for the parties are as follows: The motor dealer supplies the motor vehicle (acquired from a 3 rd party) to the financier in terms of a normal sale, 20 issues a tax invoice and accounts for output tax upon issuing an invoice or receiving payment from the financier (whichever event occurs first). The motor vehicle is acquired back from the financier immediately thereafter in terms of an ICA, and input tax is claimed by the motor dealer on the cash value upon receipt of the tax invoice from the financier. The financier declares output tax on the transaction Although the cartage contractor may be solicited by the financier, the cost of the delivery service is usually invoiced to the manufacturer as this is built into the price of the motor vehicle invoiced by the manufacturer or importer. If the financier entered into a similar arrangement with a private individual or vendor who was denied an input tax deduction at the time of purchase, the supply to the financier would not be subject to VAT. A notional input tax deduction can be made if a completed and signed VAT 264 form is obtained and retained. Refer to paragraph 7.3. Also, if the financier exports a motor vehicle acquired from a non-vendor in these circumstances, the supply will be subject to VAT at the standard rate, based on the special value of supply rule (original acquisition cost upon which notional input tax was claimed). Refer to paragraph