Tax amendments complicate the VAT affairs
These entities may in future be in the less than enviable position that they may be making taxable and exempt supplies
THE Minister of Finance made certain announcements with regard to bargaining councils and political parties, as part of his Budget in 2012 Bargaining councils act for their members in regulating collective agreements and conducting dispute resolution. The councils levy administration fees which are payable by employees. The supply of goods or services by an employee organization to its members, to the extent that the consideration for such supply consists of membership contributions, is exempt for VAT purposes. The activities of bargaining councils arguably do not fall within the ambit of an employee organisation and are subject to VAT.
The Taxation Laws Amendment Bill released on October 25 this year proposes the addition of a section 12(l) to the VAT Act which exempts the supply of goods or services by a bargaining council, established in terms of section 27 of the Labour Relations Act 1995 to its members to the extent that the consideration for such supply consists of membership contributions.
In terms of the explanatory memorandum bargaining councils can be formed by trade unions and employer organisations. Bargaining councils must be registered in terms of the Labour Relations Act, 1995. The administration fee levied by bargaining councils is payable by employees who are members of that specific bargaining council. Employee organisations are currently exempt from VAT. The exemption applies in respect of membership contributions. A bargaining council is formed when a trade union and employer organisation coalesces to regulate employee-employer relationships, and is contrasted with an “employee organisation” which, although it covers a similar scope, is a stand- alone entity. As the activities of a bargaining council, although similar to that of employee organisations, arguably falls outside the exemption it creates uncertainty as to the VAT treatment of bargaining councils. As the activities of a bargaining council are not materially different from that of an employee organisation the proposal seeks to exempt bargaining councils from VAT to the extent that membership contributions are received as consideration.
Receipts and accruals of political parties registered in terms of the Electoral Act (1998) are exempt from income tax. The VAT Act does not specifically address political parties, which apparently has resulted in uncertainty. It is uncertain whether receipts and accruals of political parties constitute “consideration” for taxable supplies or “donations”.
It is therefore arguably that since the nature and mandate of political parties result in no direct reciprocal performance between the political party and the donors that receipts and accruals constitute donations.
The Taxation Laws Amendment Bill released on 25 October 2012 proposes the addition of a section 12(m) to the VAT Act which exempts the supply of goods or services by a political party registered in terms of section 15 of the Electoral Commission Act, 1996, to its members to the extent that the consideration for such supply consists of membership contributions.
In terms of the Explanatory Memorandum political parties seek to exert influence over government policy by expressing their vision, ideas and goals. Political parties gain support for their vision, ideas and goals through their membership base. Members express support for political parties through, amongst others, membership contributions (monetary or otherwise). Political parties arguably do not provide legal reciprocity for these contributions. The VAT Act, unlike the Income Tax Act (which exempts political parties), does not contain specific provisions which deals with contributions received by political parties from their members.
This arguably leads to uncertainty as to whether membership contributions by political parties could be subject to VAT. It is uncertain as to whether the contributions can be construed as “consideration” for taxable services “supplied”. The proposal seeks to exempt the supply of goods or services by a political party from VAT to the extent of any membership contributions or donations received in exchange.
The Taxation Laws Amendment Bill proposes a further amendment to the VAT Act by the insertion of section 40C which applies to the supply of goods or services contemplated in sections 12(l) or (m) before 1 January 2013 by a bargaining council or political party. Section 40C has the same effect as retrospective legislation since it provides that where SARS, before 1 January 2013, issued an assessment to levy VAT at the standard rate on the supply of goods or services as per sections 12(l) or 12(m), SARS must, on written application, reduce the assessment to the extent that the amount of tax, additional tax, penalty or interest in respect of that assessment was not yet paid on that date, provided that the reduced assessment may not result in a refund to the bargaining council or political party. SARS may not after 1 January 2013 raise an assessment in respect of such supply of goods or services. If a bargaining council or political party charged tax at the standard rate on such supply, SARS may not refund such tax or penalty or interest that arose as a result of the late payment of the tax, received or accrued from that bargaining council or political party to SARS.
The Taxation Laws Amendment Bill also proposes the insertion of a new section 8(2F) to the VAT Act which deems the value of the deemed supply, resulting from the cessation of a bargaining council or political party from being a vendor as a result of the introduction of section 12(l) or 12(m), to be nil.
Sections 12(l) and 12(m) come into operation on 1 January 2013 and apply in respect of goods or services supplied on or after that date.
The VAT amendments relating to bargaining councils or political parties do not seek to exempt these institutions from VAT entirely. Instead, these amendments seek to exempt supplies of goods or services supplied by these entities to their members from VAT to the extent that the consideration for such supplies constitutes membership contributions.
The effect thereof is that supplies of goods or services by bargaining councils and political parties can still be subject to VAT as long as these supplies aren’t the supplies envisaged by sections 12(l) or 12(m). The practical difficulty in these circumstances is that these entities may in future be in the less than enviable position that they may be making taxable and exempt supplies which may force them into applying a VAT apportionment method to calculate the extent to which the claim VAT incurred on general expenses. These amendments, although seemingly addressing certain uncertainties, may in actual fact be complicating the VAT affairs of these types of entities and increasing their VAT compliance burden.
Ferdie Schneider is tax partner for value-added tax at KPMG.