Partnerships / joint ventures and VAT - the knights and the dragons are confused

• Jurisdiction: South Africa
• Author: Brian Dickinson
• DOI: 10.10520/EJC174299
• Published date: 01 December 2012
• Date: 01 December 2012
• Pages: 16-25
• Published By: Siber Ink

16 © Siber ink

Partnerships/Joint Ventures

and VAT

THE KNIGHTS AND THE DRAGONS ARE

CONFUSED

DES KRUGER • BRIAN DICKINSON1

ABSTRACT

The tax treatment of joint venture arrangements is problematic, not only

from a VAT perspective, but also from an income tax perspective. However, in

some respects the income tax treatment is less problematic in that the Income

Tax Act 58 of 1962 does not seek to create a separate taxable entity, but in

essence treats a joint venture as fiscally transparent. By contrast, the Value-

Added Tax Act 89 of 1991 deems the joint venture to be a separate person

(and accordingly a separate vendor) for VAT purposes if the joint venture can

be said to constitute a ‘body of persons, whether corporate or unincorporate

(other than a company)’ and such body of persons carries on an enterprise.

However, this seemingly simple provision can itself give rise to numerous

interpretational issues. The first, and most important, being: when does a

‘body of persons, corporate or unincorporate’ come into existence? The

premise of this article is that, under our common law, to constitute an unin-

corporated body of persons the body must constitute a universitas — which

requires the ability to contract in its own name and have perpetual succes-

sion. It is apparent that many commercial joint ventures would not qualify

should these requirements in fact be necessary.

Once one has established that the parties to a joint venture arrangement

have in fact created a separate qualifying unincorporated body of persons,

the next issue is to determine how transactions between the body of persons

and its members are to be dealt with from a VAT perspective. The article ques-

tions whether SARS is correct in its view that a supply of goods by members to

a joint venture that is regarded as a separate body of persons can be said to

be made for no consideration, merely because the members will only derive

profits and no specific consideration.

Finally, the article raises the possibility that the joint venture arrangement

could in fact merely create an agency relationship, and explains how this will

be dealt with from a VAT perspective.

Introduction

In terms of section 51 of the Value-Added Tax Act 89 of 1991 (‘the VAT

Act’), if a ‘body of persons, whether corporate or unincorporate (other

than a company)’, carries on an enterprise, that body of persons is deemed

to carry on the enterprise as a person separate from the members of the

1

Manager, Business Tax Advisory, Ernst & Young