A new binding general ruling (BGR) from the South African Revenue Service (SARS) has set out further requirements for what vendors and businesses at large need to provide the tax authority to substantiate tax deductions.
Consultancy firm PwC, in a recent report, highlighted the new BGR. According to PwC, BGR 63 specifically covers tax deductions made on a non-taxable supply of goods repossessed or surrendered under an instalment credit agreement (ICA).
An instalment credit agreement in South Africa is a loan agreement where the borrower repays the loan amount in regular, predetermined payments over a set period of time, including interest.
The payments are typically made monthly until the loan is fully repaid and is traditionally used to finance large-scale purchases.
Under section 8(10) of the Value-Added Tax Act, a debtor is obliged to make a supply of goods to a creditor where goods initially supplied are under an instalment credit agreement and are repossessed or surrendered to the creditor.
“The creditor, being a vendor, is permitted to deduct input tax on this deemed supply provided it is acquired for purposes of making taxable supplies and in possession of prescribed documentation to substantiate the deduction,” PwC said.
As a result of prescribed documentation, listed under section 20(8A) of the VAT Act, being hard to obtain, the section was amended to allow for the Commissioner of the South African Revenue Service (SARS), Edward Kieswetter, to make provisions to ensure better tax compliance, such as BGR 63.
The latest ruling provides for further documentation that needs to be retained by the creditor to substantiate its input tax deduction on repossessions or the surrender of goods.
On top of the traditional documents listed in section 20(8) of the VAT Act, a creditor must now retain the following:
If the debtor is not a vendor:
- Written correspondence that at the time of repossession to surrender, the debtor is not a vendor, or
- Written confirmation that the debtor is not a vendor at the time of entering the ICA, as contained in either the debtor’s application, the ICA agreement or any other correspondence, and
- Written communication from the creditor informing the debtor of its obligation to disclose any change in its VAT registration status.
If the debtor is a vendor:
- Written correspondence at the time of the repossession or surrender that the debtor is a vendor and does not use the goods for taxable supplies, or
- Written confirmation that the debtor acquired the goods other than for the purposes of making taxing supplies at the time of entering the ICA, and
- Written communication from the creditor informing the debtor of its obligation to disclose the goods are subsequently applied for the purpose of making taxable supplies.
PwC said that the following documents are also required under current tax obligations in the VAT Tax Act, namely:
- A system-generated statement detailing the outstanding cash value made up of the deemed supply made by the debtor to the creditor.
- A copy of the written note that the creditor is required to provide the debtor under the National Credit Act and any copy of relevant court orders relating to the repossession of the goods.
- A copy of the written notice to terminate the agreement that the debtor is required to provide under the National Credit Act, and the relevant terms and conditions agreed in the ICA.