Commissioner, South African Revenue Service v Marshall NO and Others 2017 (1) SA 114 (SCA)

By Pallans Vuma

Value Added Tax (VAT) is a form of tax that is incurred when participating in a commercial transaction and its primary difference from income tax, is that the latter is part of direct tax and the former is part of indirect tax. It is the major source of revenue for the government and it is under the custodianship of the fiscal policy, and headed by the Minister of Finance. For a taxpayer to be entitled to a VAT refund from the South African Revenue Services (Sars) or to make additional payments to Sars, the taxpayer must first be a registered VAT vendor after meeting specific requirements, inter alia, they must deal with taxable supplies in the furtherance or course of an enterprise for a consideration, in terms of Value Added Tax Act 89 of 1991 (the Act).

The Act prescribes that any transaction that involves taxable supplies, attracts an obligation to pay VAT at the standard rate of 14% or 0% when the supplies are zero rated. In some cases, supplies that are not taxable supplies in their crude nature are deemed to be taxable supplies, provided the requirements of the Act are met. When a transaction involves a zero rated taxable supplies it is usually to the benefit of the VAT vendor as Sars would be obligated to refund the VAT vendor.

Parties

The appellant was the Commissioner for the Sars (the Commissioner), and the respondents were seven trustees of the South African Red Cross Air Mercy Service (the Trust), who were involved in supplying aero-medical services to the provincial health department. The Trust was a non-profit organisation that met the requirements of s 30 of the Income Tax Act 58 of 1962, hence, it was an approved public benefit organisation. All receipts and accruals in favour of the Trust were exempt from income tax in terms of s 10(1)(cN) of the Income Tax Act. Furthermore, the Trust was also a registered VAT vendor in terms of the Act.

The dispute

The Trust provided services to the provincial health department and then asserted before the Commissioner that payments for such services are a ‘deemed supply’ in terms of s 8(5) of the Act, which opened the door to the Trust to invoke s 11(2)(n). Section 11(2)(n) rendered the ‘deemed supply’ to be zero rated, which favoured the Trust. The Commissioner was unsatisfied with the Trust’s assertions, thus the matter was taken to the Gauteng Division of the High Court in Pretoria, where Pretorius J, granted an order declaring that such payments qualified for a zero rating, in favour of the Trust.

Argument: Are the services rendered actual or deemed?

The legal arguments advanced before the Supreme Court of Appeal (SCA), and discussed in paras 11 and 12 are as follows:

• The Commissioner submitted that s 8(5) is only applicable where unrequited or gratuitous payments are made by a public authority or municipality to a designated entity. These would be payments received as donations, subsidies and grants; the aforementioned provisions do not apply in respect of services actually rendered by a designated entity and that payments received by a designated entity from a public authority or municipality for such services constitute ‘consideration’ for taxable supplies in terms of s 7(1)(a) of the Act, and VAT was, therefore, payable at the standard rate.
• The Trust submitted that the Commissioner’s submissions militated against the clear wording of s 8(5), particularly the words ‘any payment’ and more specifically the word ‘any’ as a word of ‘wide and unqualified generality’. The Trust argued that the legislature must have intended that the deeming provision be applicable in respect of all payments received by a designated entity from a public authority or municipality and that the Commissioner misconstrued the definition of ‘consideration’, because if the legislature had intended to limit the application of s 8(5) to grants and subsidies, which are defined in the Act, it would have expressed itself accordingly. Underpinning its submissions the Trust further argued that the purpose of s 8(5) was to enable public authorities to claim input tax under s 16(3)(a) of the Act and if the Commissioner’s argument is upheld, the purpose would be undermined.

The judgment

The SCA upheld the appeal with costs and ordered that the court a quo order be set aside and replaced with the following: ‘The application is dismissed with costs’. The reasons for the judgment, among others, were aptly provided in paras 15 and 26. The supply of goods and services by the Trust constituted ‘performance’ in terms of the written agreement, which also specified the fees to be paid by the provincial health department; and as correctly submitted by the Commissioner, it is only where a payment cannot be linked to any performance it is necessary to ‘deem’ it in terms of s 8(5). So, services actually supplied are not deemed to be anything other than what they are, and can therefore, not be zero-rated in terms of s 11(2)(n).

Conclusion

The SCA judgment provides clarity regarding the appropriate treatment of a VAT transaction where a designated entity is involved in commerce with other public entities, and most importantly the distinction between actual and deemed services.

Pallans Vuma BCom Accounting Science (Law) LLB (NMMU) is situated in Port Elizabeth. Mr Vuma is currently seeking employment.

This article was first published in De Rebus in 2017 (June) DR 53.