ACT: VALUE-ADDED TAX ACT, NO. 89 OF 1991 (the VAT Act)
SECTION 17(1) – APPORTIONMENT
SARS published a new Draft Binding Ruling (version 3) in October 2023 for public comment due by 03 November 2023.
This BGR prescribes the method to be used in determining the ratio contemplated in section 17(1).
Background
Section 17(1) provides the extent to which a vendor may deduct tax payable in respect of goods or services acquired partly for the purpose of making taxable supplies and partly for some other purpose (for example, exempt supplies, private use, or other non-taxable purposes) is determined by means of a ratio determined by the Commissioner in terms of a ruling contemplated in Chapter 7 of the TA Act (a binding general ruling) or a ruling under section 41B (a VAT class ruling or a VAT ruling).
The formula set out below, being the STB and the default method to all vendors in the absence of an alternative method approved by the Commissioner in terms of a ruling as described above, constitutes a BGR under section 89 of the TA Act.
Formula:
y = a × 100
———– —
a + b + c 1
With regard to the exclusions and adjustments listed below:
“y” = the apportionment ratio/percentage.
“a” = the value of all taxable supplies (including deemed supplies) made during the period.
“b” = the value of all exempt supplies made during the period.
“c” = the sum of any other amounts of income not included in “a” or “b” which was received or accrued during the period, whether in respect of a supply or not.
The following are EXCLUDED from the formula set out above:
E1 Foreign exchange differences that do not form part of any hedging activities.
E2 Accounting entries, such as fair value adjustments, resulting in income reflected in the AFS to ensure compliance with relevant Regulatory Frameworks.
E3 The sale of capital assets.
E4 Extraordinary income.
E5 The value of any goods or services supplied where input tax on those goods or services was specifically denied under section 17(2).
E6 Specific to the provision of finance:
• The cash value of goods supplied under an ICA.
• The portion of a rental payment relating to the capital value of goods supplied under a rental agreement which is entered into as a mechanism of finance.
• Capital value of loans.E7 Change-in-use adjustments under sections 18, 18A, 18C and 18D.
E8 Indemnity payments received as envisaged under section 8(8) to the extent that the indemnity payments relate to extraordinary income or capital assets.
E9 Manufactured interest and dividends received by the borrower of a securities lending transaction.
E10 The value of equities or derivatives issued as a manner of raising funds.
E11 Interest earned from:
• the vendor’s current account (meaning, the account used for day-to-day business operations); and
• the South African Revenue Service (SARS).
Adjustments to the value of certain income streams are included in the formula set out above:
A1 Interest, other than the interest excluded from the formula in E11:
• Interest from sections 8F and 8FA instruments must be regarded as dividends for apportionment purposes and be included in the formula by applying the (prime rate − JIBAR, “JIBAR” means the Johannesburg Interbank Average Rate);
• Net interest must be included where funds are borrowed with the objective of on-lend.Notes to the net interest adjustment:
1) If actual values are not available to determine the net interest value to be included, the following proxies must be used:
a) Proxy 1 – If no interest is received on the loan – then use loan value × prime interest rate
b) Proxy 2 – If there is no interest paid value – then use loan value × JIBAR
2) If the lending arrangement is between “connected persons” – then use the higher of interest using actual values or the loan value × (prime rate − JIBAR) must be used.
• Interest received on any investments, including savings accounts, must be included as follows:
Interest received for the year × (prime rate − JIBAR)
A2 Trading in financial assets
Include a 3-year moving average of the gross trading margin (selling value − buying value) on the trading of financial assets.
A3 Dividends
- Sections 8E and 8EA instruments must be regarded as interest for apportionment purposes and be included in the formula by applying the (prime rate − JIBAR) proxy as set out in A1 above.
- Dividends received from investment activities (including investments held in subsidiaries, associates, ad-hoc or, minority investments) must be included by applying the following formula:
Dividends received during the year × (prime rate − JIBAR)
A4 Debt securitisation transactions
The amount to be included in the formula must be determined using the following formula:
Proceeds on the sale of debts under a securitisation transaction during the year × (prime rate − JIBAR)
Note to this adjustment:
A proxy equal to the origination fees charged on the loan must be included in the apportionment formula to ensure that the exempt supply of granting credit is appropriately reflected, only where the loan is sold immediately after origination and before the vendor earns any interest or other consideration in relation to this exempt supply.
General notes for using the formula set out above:
N1 The exclusions and adjustments to the formula are subject to further explanations and discussions (in the second article to be published in due course).
N2 “c” in the formula will typically include items such as dividends and statutory fines (if any).
N3 The prime rate to be used for all the adjustments listed above is the applicable prime rate at the end of the financial year.
The JIBAR rate to be used for all adjustments listed above is the 12-month term rate quoted on the last day of the financial year. Where more appropriate for the vendor, or should the JIBAR no longer be applicable, the ZARONIA may be used; the rate is equivalent to the above-stated JIBAR. For ease of reference, the reference to JIBAR in this document includes a reference to the ZARONIA. “ZARONIA” means the South African Overnight Index Average.
Where it applies to loans, the relevant ratio must be applied to the loan balance on a monthly basis. Should this be impractical, the vendor may use an average value of the loan over the year and apply such average value to the relevant ratio stated above.
N4 The term “value” excludes the VAT component of the supply.
N5 The apportionment ratio must be rounded off to two decimal places.
N6 If the formula yields an apportionment ratio of 95% or more, the full amount of VAT incurred on mixed expenses may be deducted (referred to as the de minimis rule and effected under proviso (i) to section 17(1)).
N7 Vendors using their previous year’s turnover to determine the current year’s apportionment ratio are required to make an adjustment (that is, the difference in the ratio when applying the current and previous year’s turnover) within nine months after the end of the financial year, that is, the adjustment must be made in the VAT201 return submitted at the latest nine months after the financial year-end.
N8 This formula may only be used in the following circumstances:
• If the method is fair and reasonable to the vendor’s business activities.
It is the vendor’s responsibility to first determine this. If the method is not fair and reasonable, it is the vendor’s further responsibility to approach the Commissioner for an alternative method. The Commissioner is unable to retrospectively approve an alternative apportionment method and will only approve the method from a prospective date or such other date falling within the limitations set out in proviso (iii) to section 17(1).
- The vendor submits to vatrulings@sars.gov.za the following information on an annual basis at the time the annual adjustment referred to in N7 is reflected in the VAT201 return:
The vendor’s name
VAT registration number
Apportionment method and formula used
Apportionment ratio for the year. The first time that this formula is applied, the method and apportionment ratio for the past three (3) years must be submitted.
N9 The STB may not be used by a vendor if:
• such vendor operates in an industry for which an alternative apportionment method has been approved (and that method is specified as the default method for that industry); and
- an alternative apportionment method has been approved for the vendor, whether by way of a VAT ruling or VAT class ruling.
This BGR applies with effect from all financial years commencing on or after 1 January 2024 and will apply until it is withdrawn, amended or the relevant legislation is amended.
A second article will deal with the application of the exclusions and amendments to the apportionment formula.