ABC (Pty) Ltd v Commissioner for the South African Revenue Service

• Jurisdiction: South Africa
• Judge: K M Savage J
• Judgment Date: 05 September 2016
• Docket Number: VAT 1247
• Court: Tax Court
• Hearing Date: 05 September 2016
• Citation: 2016 JDR 1699 (Tax)

Introduction

[1]

This is an appeal against an assessment by the respondent, the Commissioner for the South African Revenue Service ('SARS'), issued against the appellant, the Claremont Library Development Company (Pty) Ltd, in respect of liability for Value-Added Tax ('VAT') in terms of s 22(3) of the Value-Added Tax Act 89 of 1991 ('the Act').

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[2]

In 2008, Corevest (Pty) Ltd ('Corevest') became the sole shareholder of the appellant, which became its wholly owned subsidiary. During 2009 the appellant made land owned by it available to Corevest. On the land, Corevest undertook the development of residential property units in a development known as 'The Quadrant' and commercial property in Library Gardens, Claremont, Cape Town. By agreement between Corevest and the appellant during the development process, Corevest funded the appellant's cash flow requirements on loan account via inter-company shareholder loans to avoid external finance to fund business operations being obtained.

[3]

On 2 April 2009 Corevest issued tax invoice number 152 ('the invoice') to the appellant in respect of a taxable supply of R82 095 000, inclusive of VAT at the rate of 14%, in respect of the development of the residential component of phase 2 of the Quadrant development, including the pool, gym and other infrastructure. There is no dispute that Corevest was obliged to invoice the appellant for VAT in terms of section 15 of the Act. Following receipt of the invoice, the appellant claimed an input tax deduction in respect of the VAT in the amount of R10 081 842.10 and received payment of this amount from SARS. After the appellant had paid the input tax it received from SARS to Corevest by way of a cash payment, Corevest paid the output tax to SARS in the same amount. The remaining liability due to Corevest in terms of the invoice, being R72 013 158.00, was credited to the loan account of Corevest in the books of the appellant, in accordance with the funding arrangement between the two companies. SARS was not out of pocket in that the invoice gave rise to output tax obligations on the part of Corevest and enabled the appellant to claim an input tax deduction equal to the amount for which Corevest was obliged to account to SARS.

[4]

Both Corevest and the appellant considered that the liability under the invoice had been paid after Corevest's loan account was credited. The February 2010 annual financial statements of the appellant and Corevest recorded the amount as neither a current liability nor current asset. In the

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appellant's financial statements it was converted to a long-term debt, while in Corevest's financial statements it was dealt with as a non-current asset on the understanding that the long-term debt liability would be paid as and when the development properties were sold through increasing and decreasing the loan accounts between the two companies. Given the agreed funding arrangement, the amount could not have been claimed by Corevest as a bad debt for VAT purposes, or any other purpose. Had the appellant been required to pay Corevest the amount invoiced, it would have had to borrow the funds from Corevest to do so, in which case Corevest's loan account in the books of the appellant would have been credited with the same amount.

[5]

An audit conducted by SARS in 2013, four years after the invoice was raised, determined that the consideration in respect of the service was not paid in a period of 12 months after the expiry of the tax period in which the input tax was claimed as required by the provisions of s 22(3) of the Act. Section 22(3) provides that:

'Where a vendor who is required to account for tax payable on an invoice basis in terms of section 15 –

(a)

has made a deduction of input tax in terms of section 16(3) in respect of a taxable supply of goods or services made to him; and

(b)

has, within a period of 12 months after the enquiry of the tax period within which such deduction was made, not paid the full consideration in respect of such supply,

an amount equal to the tax fraction, as applicable at the time of such deduction, of that portion of the consideration which has not been paid shall be deemed to be tax charged in respect of a taxable supply made in the tax period following the expiry of the period of 12 months […]'

[6]

The effect of this provision is that where a vendor has claimed an input tax deduction on the basis of a tax invoice, but has not made payment of the relevant consideration within a period of twelve months, the transaction is effectively reversed, which has the result of counteracting the benefit of the input tax previously deducted because the consideration has not been paid.

[7]

The Act was amended with effect from 10 January 2012 through the addition of subsection 22(3A) into the statute, which provides that:

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'Subject to section (6)(a), subsection (3) shall not be applicable in respect of a taxable supply made by a vendor which is a member of a group of companies, to another vendor which is a member of the same group of companies for as long as both vendors are members of the same group of companies.'

[8]

While s 22(3A) has no bearing on the current matter given that it arose after the tax period in issue in this matter, it is noteworthy that the effect of this insertion into the Act is that s 22(3) does not apply where the supplier and recipient in question are both members of the same...