VALUE OF SUPPLY

5.3.1 General rule

Where a price is charged for goods or services, the consideration for the supply will normally be equal to the amount of money which is payable. The consideration for a supply is represented by the value plus the VAT charged. Where the consideration is not in money, the consideration will be the open market value thereof. Note that the open market value includes the VAT element. Specific value of supply rules apply to certain transactions. Note that although section 10 of the Act is titled “Value of supply”, some of the subparagraphs in that section prescribe the consideration for the supply instead of the value of the supply. Some examples follow in paragraphs 5.3.2 to 5.3.8 below.

5.3.2 Connected persons

The normal value of supply rules also apply to connected persons. However, where the supply is made for no consideration or for a consideration which is below the open market value, the consideration for the supply is equal to the open market value if-

• the recipient does not acquire the goods or services wholly for taxable (enterprise) purposes; or

• the recipient would not have been entitled to a full input deduction on the goods or services acquired, had the open market value been charged on the supply.

VAT 404 – Guide for Vendors Chapter 5

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5.3.3 Instalment credit agreement (ICA)

The consideration in money is deemed to be the cash value of the supply. The cash value includes the cost of acquisition of the goods and VAT. The cash value is normally the amount which is capitalised to the cost of an asset, for example the purchase price, import duties, transportation, installation costs, and any other costs directly attributable to bringing the asset to the location and condition necessary for it to be used as intended. The cash value does not include the cost of providing credit (that is, interest, finance charges or any amount determined with reference to the time value of money).23

5.3.4 Commercial accommodation

The supply of commercial accommodation is a taxable supply. Commercial accommodation includes board or lodging supplied together with domestic goods or services (for example, meals, laundry services, the use of a telephone) in a house, flat, apartment, room, hotel, guest house etc. The total receipts for the supply of the commercial accommodation must exceed R60 000 for a period of 12 months before the activity will fall within the definition of an “enterprise” as defined. For example, a guest house which does not supply (or is not likely to supply) accommodation together with domestic goods and services in excess of the R60 000 threshold in a 12- month consecutive period, will not be able to register as a VAT vendor. Commercial accommodation excludes the letting or hiring of a dwelling which constitutes the place of residence of a natural person or the supply of employee housing, both of which are exempt supplies. Refer to Chapter 7 for more details.

Where a person stays in an establishment which provides commercial accommodation for an unbroken period of more than 28 days, only 60% of the all-inclusive charge for the accommodation and the domestic goods and services is subject to VAT at the standard rate. Where a person stays for a period less than 28 days, the full amount charged is subject to the VAT at the standard rate. Any domestic goods or services which are charged separately and are not included in the all-inclusive tariff for the accommodation, are also taxed in full at the standard rate. Refer to the VAT 411 – Guide for Entertainment Accommodation and Catering for more information in this regard.

5.3.5 Barter transactions

In barter transactions, goods or services are exchanged for other goods and/or services. Payment may also be partly in money, and partly in goods and/or services exchanged. Where payment is in money, the consideration for the supply will be the amount of money. To the extent that payment is not in money, the consideration is the open market value (OMV) of goods and/or services received.

Example 8 – Barter transaction

Farmer A and Farmer B are both VAT vendors. Farmer A supplies 10 cattle (OMV = R200 each) to Farmer B. In exchange, Farmer B supplies Farmer A with 1 horse (OMV = R1 000), and a cash payment of R1 000. The VAT effect is shown as follows:

Farmer A Farmer B

R R

Output tax: (On the cattle supplied) Output tax: (On the horse supplied)

Money received as payment 1 000 Money received as payment Nil OMV of horse received as payment 1 000 OMV of cattle received as payment 2 000 Total consideration received 2 000 Total consideration received 2 000 VAT (14/114 x R2 000) 245.61 VAT (14/114 x R2 000) 245.61

Input Tax: (On the horse acquired) Input Tax: (On the cattle acquired)

Input tax (14/114 x R1 000) R122.80 Input tax (14/114 x R2 000) R245.61

Input tax is allowed on goods or services acquired for making taxable supplies. As cash (“money” as defined), is neither goods nor services, Farmer A is only entitled to deduct input tax on the OMV of the goods acquired (that is, the horse). However, Farmer B acquired only goods and no cash.

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5.3.6 Fringe benefits

The consideration in money is deemed to be the cash equivalent of the benefit granted to the employee as determined in the Seventh Schedule to the Income Tax Act. Where the benefit consists of a right to use a motor vehicle, the consideration is determined in terms of Regulation No. 2835 dated 22 November 1991.

Example 9 – Motor vehicle supplied as a fringe benefit

David’s Wholesalers (a vendor registered under Category B tax period) purchases a “motor car” for R114 000 (including VAT of R14 000) on 1 March 2012. David’s Wholesalers is not entitled to deduct an input tax credit on the acquisition of the “motor car” as it is a prohibited deduction. An employee of David’s Wholesalers (who is paid monthly) is granted the right to use the motor car with effect from 1 March 2012, and David’s Wholesalers bears the full cost of maintaining the vehicle.

David’s Wholesalers must account for output tax on the supply of the fringe benefit as follows:

Step 1 Consideration in money = determined value of the motor car x 0,003 (0,3%) = (R114 000 – R14 000) x 0,003 = R300