Tax amend­ments com­pli­cate the VAT af­fairs

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Ferdie Schneider

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.

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