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

• Jurisdiction: South Africa
• Judge: Victor J
• Judgment Date: 01 April 2013
• Docket Number: VAT 712
• Court: Tax Court
• Hearing Date: 01 March 2013
• Citation: 2013 JDR 0344 (Tax)

Victor, J:

[1]

The issues in this appeal relate to whether the currency exchange services in the duty free area of the airport rendered by the tax payer are to be VAT zero-rated or not.

2013 JDR 0344 p2

Victor, J

[2]

Of fundamental importance is the purpose of the VAT Act which is to provide for the taxation in respect of the supply of goods and services and the importation of goods. The respondent issued VAT assessments at the standard rate of 14% in respect of the period October 2003 to January 2005 on commission and fees charged by the appellant. Section 7 of the Value Added Tax Act No 89 of 1991 (the VAT Act) [1] provides that there shall be payment of VAT on goods or services supplied by a vendor (in this case the appellant) unless the VAT Act provides otherwise. On 7 January 2005 the Commissioner for the first time issued VAT Ruling 440 in respect of the purchasing and selling of foreign currency in duty free areas of the airport would not be zero-rated.

[3]

Section 12 of the Vat Act exempts certain supplies e.g S12(a) "The supply of any financial services, but excluding the supply of financial services which, but for this paragraph would be charged with tax at the rate of zero per cent under section 11". The proviso to S2(1) of the VAT Act however makes it clear that a fee or commission charged in respect of a financial service is not zero-rated.

[4]

Broadly speaking S11(1) of the VAT Act deals with the zero-rating of goods whilst S11(2) deals with the zero-rating of services. Clearly the Legislature intended that goods and services are to be considered separately.

2013 JDR 0344 p3

Victor, J

[5]

S1 of the VAT Act defines goods as "..corporeal movable things... but excluding money" and services are defined as "anything done or to be done ...... but excluding a supply of ........ money". Goods and services as defined in S1 of the VAT Act can only be zero-rated in terms of the instances referred to S 11.

[6]

S1 of the VAT Act also defines the Republic as the geographical territory of South Africa including territorial waters. Hence the duty free area within an airport would be within the Republic unless the President or some other statute which has application on the VAT Act or the VAT Act itself determines otherwise.

[7]

Goods mean corporeal moveable things but not money. The statutory interpretation of the supply of "services" in connection with money cannot be interpreted within the statutory framework of "goods". The relevant definitions are clear. In addition for a non-resident to qualify for a zero-rating in regard to financial services rendered in the Republic at the time of supply of the service, the appellant bears the onus to prove this.

[8]

The question for determination is whether the appellant's reasoning on goods, services and the location of the transaction justifies zero-rating on the services involving the exchange of currency.

[9]

The central and decisive issues in this appeal is whether money constitutes moveable property and whether the supply of services in the duty free area of the airport is in the Republic.

2013 JDR 0344 p4

Victor, J

RELEVANT BACKGROUND FACTS

[10]

The appellant is a foreign currency exchange dealer. It had been awarded a tender in 1999 to operate two bureaux de change in the duty free area of the departure hall of the O R Tambo International Airport. The appellant had for 4 years paid the standard VAT rate on the services rendered by it but changed this to zero-rating for the reasons referred to in this appeal.

[11]

Prior to this the Reserve Bank did not allow South African residents to trade in the duty free area of the airport. It had lost R30million in revenue by dealing with non-residents only in compliance with the SA Reserve Bank's instruction. Pursuant to a request by the appellant to the South African Reserve Bank it granted the appellant permission to trade with South African residents in the duty free area. The letter is quite clear: "I thank you for the information furnished and advise that we should, from an Exchange Control point of view, have no objection to your branches situated in the duty free areas transacting with South African residents". This seems to have been one of the primary reasons for the appellant to change from the standard rating of 14% to the zero-rating on its services. In my view the emphasis in the letter is restricted to an exchange control point of view and the Reserve Bank directive does not purport to allude to the application of the VAT Act.

2013 JDR 0344 p5

Victor, J

[12]

Mr F who testified on behalf of the appellant stated that he was the General Manager - Finance for the period 1998 to February 2000. He was then again employed by the appellant as Financial Director for the period April 2002 to March 2009. He is a qualified chartered accountant. He had an intimate knowledge of the business. The two branches in the duty free section could deal only in travel related transactions. The appellant would "sell" foreign currency and add on a fee. There would also be a fee per transaction and a commission fee on each transaction. Rennies was one of the appellant's shareholders and when the appellant succeeded in the tender they continued to utilise the same "point of sale" software system which automatically provided for VAT.

Point of Sale Software

[13]

For four years prior to 2003 when the point of "point of sale" software system was changed, the appellant charged VAT. Thereafter the VAT calculation function could be turned on or off. Mr F of the appellant took the decision to turn it off. His view was that it was a duty free area and there were general complaints from the public about having to pay VAT. This meant both residents and non residents were not paying VAT on the services rendered by it in the duty free area. He did not consider it necessary to take legal advice or obtain a directive from the respondent at the time he turned off the VAT function key. He regarded services rendered in the duty free area as services supplied in connection with moveable property from the Republic by the recipient for conveyance to an export...