25. SARS VAT Vendors Guide.pdf

Ruling that has been granted to the vendor turn out

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ruling that has been granted to the vendor turn out to be inappropriate, at a later stage, the vendor cannot make the choice to use the turnover-based method without requesting a further ruling from SARS to that effect. In deciding whether the turnover-based method is appropriate, the vendor must apply a common-sense approach which would be applied by a reasonable person. The method must therefore achieve a “fair and reasonable” result which is a proper reflection of the manner in which the vendor’s resources (business inputs) are applied for making taxable and non- taxable supplies respectively. Although the term “fair and reasonable” will usually be perceived as a subjective concept, vendors applying the turnover-based method of apportionment should try to be objective and consider that the result must be perceived as “fair and reasonable” from the Commissioner’s perspective as well. The result must also be capable of being justified as appropriate in the vendor’s circumstances. For example, where a company applies a method of apportionment and it undergoes a major restructuring, or the nature of the business changes so that the extent of taxable and non-taxable supplies are significantly different after that event, the vendor is required to approach the Commissioner to confirm whether the current method is still appropriate. Alternatively, if it is clear from the outset that the apportionment method will not yield a fair and reasonable result after the changes, a ruling should be obtained to apply another method which results in a more fair and reasonable proportion of VAT being deducted as input tax in the year that the changes occur, and in any subsequent years. The apportionment percentage should not be excessive or extreme so that either a 0% or 100% result is achieved. If an extreme result is achieved, it may be an indication that either the formula is inappropriate, or it is not being applied correctly. The effective date of application of a change in an approved methodology will be within the year of assessment (where the vendor is a taxpayer) or within 12 months ending on the last day of February or the last day of the vendor’s financial year (where the vendor is not a taxpayer), during which the application for the aforementioned method was made. 81 80 See section 17(1) and Chapter 7 of the Tax Administration Act. 81 Proviso (iii) to section 17(1). 62
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VAT 404 – Guide for Vendors Chapter 8 Following on from the diagram under 8.4.2 , the second level of enquiry in establishing the apportionment percentage is illustrated in the diagram below. The formula for the turnover-based method is as follows: FORMULA: TURNOVER-BASED METHOD OF APPORTIONMENT 82 Formula: y = a × 100 (a + b + c) 1 Where: y = the apportionment ratio/percentage; a = the value of all taxable supplies (including deemed taxable supplies) made during the period; b = the value of all exempt supplies made during the period; and c = the sum of any other amounts of income not included in “a” or “b” in the formula, which were
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