Value Added Tax Act, 89 of 1991 Indemnity Payments and Application - - PDF document

1

ILASA Southern Gauteng

Value Added Tax Act, 89 of 1991

Indemnity Payments and Application of Sections 7.1 and 8.8 Presentation by Stefan Terblanche 15 May 2014

2

Direct Tax:-  Income Tax

• Personal … progressive …18 – 40 %
• Company … 28% (small business corporation

at 10% to a certain level)  Donations Tax ………………………20%  Dividends Tax ………………………15%  Estate Duty…………………20% ˃ R3,5 million  Transfer Duty ……………..˃ R1 mill = R25k + 8%

• f amount ˃ R1mill

 Capital Gains Tax ………… Personal, 33,3% and Companies 66,6 % added to Income  Withholding Tax Indirect Tax:-  Value Added Tax  Fuel Levy ……… ± 30% + 5% Road Accident Fund

3

Chur urchi hill :-

☻ We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle. ☻ There is no such thing as a good tax.

4

Section 7(1) VAT Part II - Value-Added Tax

• 7. Imposition of value-added tax

1) Subject to the exemptions, exceptions, deductions and adjustments provided for in this Act, there shall be levied and paid for the benefit of the National Revenue Fund a tax, to be known as the value-added tax- a) on the supply by any vendor of goods or services supplied by him on or after the commencement date in the course or furtherance of any enterprise carried

• n by him;

b) on the importation of any goods into the Republic by any person on or after the commencement date; and c) on the supply of any imported services by any person

• n or after the commencement date,

calculated at the rate of 14 per cent on the value of the supply concerned or the importation, as the case may be.

5

Section 7.1:- Applies only to: Registered Vendor

• The supply of goods, or
• The rendering of services
• … in the normal course of business

6

Section 8(8) VAT Part II - Value-Added Tax

• 8. Certain supplies of goods or services deemed to be made or not

made 8) For the purposes of this Act, except section 16(3), where a vendor receives any indemnity payment under a contract of insurance or is indemnified under a contract of insurance by the payment of an amount of money to another person, that payment

• r indemnification, as the case may be, shall, to the extent that it

relates to a loss incurred in the course of carrying on an enterprise, be deemed to be consideration received for a supply of services performed on the day of receipt of that payment or on the date of payment to such other person, as the case may be, by that vendor in the course or furtherance of his enterprise: Provided this subsection shall not apply in respect of any indemnity payment received or indemnification under a contract of insurance where the supply of services contemplated by that contract is not a supply subject to tax under section 7(1)(a):

7

Section 8.8:- Applies only to a Vendor And in respect of:- Indemnity payment made to the Vendor in respect of an Insurance Contract; or Vendor is indemnified in terms of an Insurance Contract by means of a payment made to another person. Then … such payment deemed to be a payment received for services rendered

8

VAT Recovery by Vendor 'input tax', in relation to a vendor, means- (a) tax charged under section 7 and payable in terms of that section by- (i) a supplier on the supply of goods or services made by that supplier to the vendor Example:- Selling Price by Supplier

R 100.00 Sec 7.1 VAT @14% R 14.00 Total Selling Price VAT incl R 114.00 Input VAT paid by Vendor R 14.00

9

VAT Recovery by Vendor 'output tax', in relation to any vendor, means the tax charged under section 7 (1) (a) in respect

• f the supply of goods and services by that vendor

Example:-

Purchase Price incl VAT R 114.00 Added value R 20.00 Sub total R 134.00 Mark up 10% / Selling Price R 147.50 Levy/Add Section 7.1 VAT at 14% R 20.65 Total Selling Price VAT incl R 168.15 Output VAT to be paid over to SARS R 20.65

10

VAT Recovery by Vendor Can off-set Input VAT against Output VAT Example:-

Purchased raw material x 3 @ R114 VAT incl R 342.00 Input VAT component - 3 x R14 R 42.00 Sold finished goods x 5 @ R168.15 R 840.75 Output VAT component - 5 x R20.65 R 103.25 Output VAT R 103.25 Less: Input VAT R 42.00 Actual SARS payment due R 61.25

11

Section 11 – Zero Rated be charged with tax at the rate of zero percent where- Examples (not exclusive)

• supplier has exported the goods;
• supplied to a lessee or other person under a rental

agreement,

• if the goods are used exclusively in an export country;
• the supply is to the South African Reserve Bank, the

South African Mint Company or any bank registered under the Banks Act of gold in the form of bars, blank

• coins, ingots, buttons, wire, plate or granules or in

solution, which has not undergone any manufacturing process;

• the supply is of such goods used or consumed for

agricultural, pastoral or other farming purposes as are

• set forth in Part A of Schedule 2;
• the goods consist of fuel levy goods;
• the goods consist of petroleum oil and oils;
• the services comprise the transport of passengers;
• the services (including any ancillary transport services)

comprise the transport of goods.

12

(3) Where a rate of zero per cent has been applied by any vendor under the provisions of this section or section 13 (1) (ii), the vendor shall obtain and retain such documentary proof substantiating the vendor's entitlement to apply the said rate under those provisions as is acceptable to the Commissioner. Section 11 – Zero Rated

13

Section 12 – Exempt Supplies The supply of any of the following goods or services shall be exempt from the tax imposed under section 7 (1) (a): Examples (not exclusive)

• The supply of any financial services;
• the supply by any association not for gain of any

donated goods or services;

• the supply of a dwelling under an agreement for the

letting and hiring thereof, and any 'right of

• ccupation' as
• defined in section 1 of the Housing Development

Schemes for Retired Persons Act;

• the supply by any person in the course of a transport

business of any service comprising the transport by

• that person in a vehicle (other than a game viewing

vehicle contemplated in paragraph (e) of the

• definition of 'motor car' in section 1) operated by him
• f fare-paying passengers and their personal effects
• by road or railway;
• the supply of educational services

14

When MUST become a VAT Vendor? Sec 23 Registration of persons making supplies in the course of enterprises Every person who, on or after the commencement date, carries on any enterprise and is not registered, becomes liable to be registered- (a) at the end of any month where the total value of taxable supplies made by that person in the period

• f 12 months ending at the end of that month in

the course of carrying on all enterprises has exceeded R300,000;

15

The effect of the VAT Act on Insurance Insurer must pay Section 8.8 VAT in respect of any indemnity payment made to an Insured who is a registered VAT Vendor; VAT Vendor must reflect receipt of Sec 8.8 VAT payment to SARS as Output VAT; Insurer can claim Sec 8.8 VAT payment made to an Insured back from SARS as Input VAT. Creating funds for the Fiscus

16

In Practise : Not a Vendor i.e. Personal Lines Inclusive of Section 7.1 VAT Section 8.8 VAT not applicable Example:-

Various household goods R 7 000.00 Clothing R 2 500.00 Electronic Equipment R 8 000.00 Jewellery R 25 000.00 Sub Total R 42 500.00 Add Section 7.1 VAT R 5 950.00 Sub Total R 48 450.00 Less Excess (a % or fixed amount) R 1 000.00 Total Indemnity Payment R 47 450.00

17

In Practise: Not a Vendor, small Commercial Not all Indemnity Payments to business enterprises attract Section 8.8 VAT ; i.e. Micro-enterprise, 12 month income less than R300k If not a registered VAT Vendor … Include Sec 7.1 VAT Sec 8.8 VAT not applicable

18

In Practise: Vendor – Material Damage The Deductible/Excess? 1. Is this inclusive/exclusive of VAT 2. Apply deductible 1st then calculate VAT; or 3. Calculate VAT 1st then apply deductible? Sec 7.1 VAT recoverable from SARS … to be excluded from adjusted loss … if not, double payment

19

In Practise: Vendor – Material Damage The Deductible/Excess? Policy will state this to be:-

• Either a percentage; or
• A fixed amount

Example Deductible a Percentage:

Adjusted Loss excl of Sec 7.1 VAT R 500 000.00 Less Deductible @ 5 % R 25 000.00 Sub Total R 475 000.00 Add Sec 8.8 VAT R 66 500.00 Total (Incl of VAT, net of Deductible) R 541 500.00 Adjusted Loss excl of Sec 7.1 VAT R 500 000.00 Add Sec 8.8 VAT R 70 000.00 Sub Total R 570 000.00 Less Deductible @ 5 % R 28 500.00 Total (Incl of VAT, net of Deductible) R 541 500.00

20

In Practise: Vendor – Material Damage The Deductible/Excess? Example Deductible a Percentage: Adjusted Loss excl of Sec 7.1 VAT

R 500 000.00 Less Deductible @ 5 % R 25 000.00 Sub Total R 475 000.00 Add Sec 8.8 VAT R 66 500.00 Total (Incl of VAT, net of Deductible R 541 500.00 Adjusted Loss excl of Sec 7.1 VAT R 500 000.00 Add Sec 8.8 VAT R 70 000.00 Sub Total R 570 000.00 Less Deductible @ 5 % R 28 500.00 Total (Incl of VAT, net of Deductible R 541 500.00

Option 1 – Insured Receives = R475,000 Option 2 – Insured Receives = R471,500

21

In Practise: Vendor – Material Damage The Deductible/Excess? Example Deductible a Fixed Amount:

Adjusted Loss excl of Sec 7.1 VAT R 500 000.00 Less Deductible R 25 000.00 Sub Total R 475 000.00 Add Sec 8.8 VAT R 66 500.00 Total (Incl of VAT, net of Deductible) R 541 500.00 Adjusted Loss excl of Sec 7.1 VAT R 500 000.00 Add Sec 8.8 VAT R 70 000.00 Sub Total R 570 000.00 Less Deductible R 25 000.00 Total (Incl of VAT, net of Deductible) R 545 000.00

Option 1 – Insured Receives = R475,000 Option 2 – Insured Receives = R475,000

22

In Practise: Vendor – Material Damage The Deductible/Excess? Re-visit Sec 8.8 …where a vendor receives any indemnity payment under a contract of insurance or is indemnified under a contract of insurance by the payment of an amount of money to another person … that payment … shall … be deemed to be consideration received for a supply of services performed Deductible a percentage … “of the claim”, not of indemnity payment … must therefore be VAT excl Aggregate/Inner Excess Liability Claims

23

In Practise: Vendor – Material Damage Propose Correct Formula:- Section 7.1 VAT …Off-set against Output VAT, therefore excluded; Then … apply deductible to calculate indemnity payment to be made; Then … Add Section 8.8 VAT to indemnity payment (which is deemed a payment made for services rendered and attracts VAT) Money Claims … same applies

24

In Practise: Vendor – Material Damage (Example)

Fire/Buildings Combined Invoice Contractor R 1 300 000.00 Invoice Consulting Engineer R 91 000.00 Invoice Demolition, Debris Removal 280000 Sub Total R 1 671 000.00 Less: Sec 7.1 VAT R 233 940.00 Sub Total R 1 437 060.00 Less: Deductible R 25 000.00 Sub Total R 1 412 060.00 Add: Sec 8.8 VAT R 197 688.40 Total Payment (net of deductible, incl

• f VAT)

R 1 609 748.40

25

In Practise: Vendor – Business Interruption (Example)

Calculation of Rate of Gross Profit Item Description Amount 1 Turnover Financial year 2012/2013 R 51 531 757.00 2 Less: Cost of Sales R 42 441 577.00 3 Gross Profit R 9 090 180.00 4 Therefore Rate of Gross Profit - (GP/TO)% 17,64% Calculation of Value at Risk Item Description Amount 1 Sum Insured - 6 month indemnity period R 5 400 000.00 2 Turnover Financial year 2012/2013 R 51 531 757.00 3 Turnover 12 months x Rate of Gross Profit

• f 17,64%

R 9 090 201.93 4 Add Section 8.8 VAT R 1 272 628.27 5 Value at Risk R 10 362 830.21 6 Therefore: Under-insurance/Average factor 0.52 Calculation of Interim Reserve Item Description Amount 1 Interruption Period of 6 months 1.2 Loss of Turnover R 25 765 878.50 1.3 Apply Rate of Gross Profit (17,64%) R 4 545 100.97 1.4 Apply Average (0,52 factor) R 2 368 421.05

26

In Practise: Vendor – Liability Third Party …a Vendor or not? If yes, exclude Sec 7.1 VAT In passing … not New for Old, but to place back in same position Third Party …Not to ‘raise an Invoice”

• This attracts Sec 7.1 VAT
• Sec 7.1 VAT not applicable to a claim for damages

If making payment to Third Party directly:-  Less deductible, this to be recovered from Insured; or  First collect deductible from Insured and then include in payment to TP;  Sec 8.8 VAT still to be paid to Insured

27

In Practise: Vendor – Liability (Example)

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57