COVID-19 has caused mass financial turmoil to virtually all entities. Welfare organisations, in particular, are suffering as philanthropic donations have significantly decreased during this time. Accordingly, it is necessary for welfare organisations to leverage all the benefits that are purposefully provided for by legislation. To this end, the value-added tax (VAT) regime in South Africa (SA) can be extremely beneficial for welfare organisations.
The Value-Added Tax Act 89 of 1991 (the Act) does not have the same, more commonly known reference to public benefit organisation, as used for income tax purposes and rather refers to ‘welfare organisation’. Welfare organisations qualify for special treatment in terms of the Act, provided they are eligible to register as such.
Registration for VAT holds significant benefits for welfare organisations. Any entity that is regarded as a ‘welfare organisation’ in terms of the Act can make use of this benefit. In essence, the benefit provides that an input tax deduction will be allowed for goods and services supplied to it, while these entities are only required to levy output tax when there is a charge for the supply of any goods or services by it. Thus it is entirely possible for a welfare organisation to qualify for a VAT refund and thereby benefitting from registration.
The Act defines ‘welfare organisation’ as any public benefit organisation that has been approved in terms of s 30(3) of the Income Tax Act 58 of 1962. These welfare organisations must carry on or intend to carry on any ‘welfare activities’ contemplated in the GN112 GG27235/11-2-2005. The following activities are broadly covered –
In this regard, there is somewhat of an overlap between public benefit activities, as used for income tax purposes, and ‘welfare activities’. Importantly where a public benefit organisation performs activities, which are not regarded as ‘welfare activities’, they will not be classified as welfare organisations and thus cannot claim this VAT benefit.
Registration for VAT is required to utilise the benefit offered. Section 23 of the Act provides two requirements before an entity can register for VAT. Firstly, the entity must be regarded as carrying on an enterprise. The definition of ‘enterprise’ in s 1 of the Act makes provision for certain activities to be automatically included. Subsection (b)(ii) of that definition provides that an enterprise includes ‘the activities of any welfare organisation’. Notably therefore, in granting ‘welfare organisations’ this specific inclusion in the ‘enterprise’ definition, the first requirement for registration will automatically be satisfied for welfare organisations.
The second requirement for VAT registration is entirely based on a monetary requirement. Welfare organisations are offered a compromise though. In terms of s 23(3)(a) an organisation can apply for VAT registration even when it does not meet the minimum monetary requirements, provided that the organisation qualifies as an enterprise in terms of subs (b)(ii) of the definition of ‘enterprise’.
Thus, ‘welfare organisations’ can voluntarily register for VAT purposes. These exceptions created by the Act are important as they extend the benefits to ‘welfare organisations’ by allowing them to register for VAT where they otherwise might not have qualified.
Certain goods and services supplied by a VAT vendor qualify as zero-rated supplies, which require vendors to levy output tax at a rate of zero percent in making said supplies. In terms of s 11(2)(n), ‘welfare activities’ (performed by welfare organisations) are zero-rated. The effect of this is simply that the supply of welfare activities by welfare organisations does not create an output tax levying obligation for welfare organisations. This does not, however, extend to all supplies made by welfare organisations. Supplies made by welfare organisations that do not comprise welfare activities would still be subject to carry the standard rate (15%) of output tax.
In terms of s 17(1) of the Act, an input tax deduction is allowed on goods or services acquired by a vendor for the use, consumption or supply in the course of making ‘taxable supplies’. The definition of ‘taxable supply’ in s 1 includes the supply of goods or services that are charged at a rate of zero percent under s 11. Accordingly, the benefit that exists for welfare organisations is that all their ‘welfare activities’ are regarded as taxable supplies, even though they are zero-rated. Where a welfare organisation, therefore, incurs certain costs in respect of goods or services, which they intend to use in the course of making taxable supplies (viz the rendering of welfare activities) and VAT was charged on those supplies to the ‘welfare organisation’, that VAT registered ‘welfare organisation’ will be allowed an input tax deduction equivalent to the VAT paid. This notwithstanding, s 17(1)(i) still applies. Therefore, where entities do not make more than 95% taxable supplies, the input tax deduction must be apportioned.
Furthermore, welfare organisations are also entitled to deduct input tax in respect of soliciting donations as this activity is regarded as an integral part of conducting the welfare activities and thereby falling within their enterprise; yet another example of where legislation has adopted a supportive stance towards welfare organisations. However, where the actual donations received by a welfare organisation are not made in the furtherance of an enterprise, the welfare organisation will be denied an input tax deduction.
Where the goods or services are used partly for making taxable supplies and partly for non-taxable or exempt supplies, the input tax deduction must be apportioned to the extent that it is used for taxable supplies. The turnover-based method is the only standard method that has been approved by the South African Revenue Services and which may be used for apportioning input tax without prior approval provided that the method is fair and reasonable.
An input tax deduction will not be allowed on the goods or services acquired to make exempt supplies. This raises the importance for welfare organisations to be aware of the exempt supplies as listed in s 12. Welfare organisations should pay attention to the effect of s 12(b), which could deem their welfare activities to be exempt supplies as opposed to zero-rated supplies. In terms thereof any supply by that association of any donated goods or services or any other goods made or manufactured by such association may result in those goods or services being deemed exempt supplies, if at least 80% of the value of the materials used in making or manufacturing such other goods consists of donated goods.
Importantly where more than 80% of the funds generated by public benefit organisation’s consist of donations, it could mean that the supplies of that organisation are regarded as exempt supplies. As a result, the input tax deduction cannot be apportioned and, therefore, no input tax can be claimed on any of those costs incurred by the welfare organisation. It is important for welfare organisations to take note of this provision to avoid an erroneous claim of the input tax deduction.
The legislature evidently recognised the need to provide VAT benefits to welfare organisations to establish much needed financial relief. In effect, they benefit from qualifying automatically to register for VAT purposes. Considering that the supply of welfare activities qualifies as a zero-rated supply, it enables welfare organisations to claim input VAT, without having to levy output VAT on their qualifying activities.
The financial burden placed on welfare organisations has been exacerbated during the recent trying financial times. Considering the pivotal role that they play in spearheading activities which support the upliftment of communities and the environment, they must be aware and make use of the fiscal stimulus provided by through the VAT benefits mentioned above.
Deoran Bobby Wessels BAcc LLB (Stell) is a tax consultant at AJM Tax in Cape Town.
This article was first published in De Rebus in 2021 (Jan/Feb) DR 7.
