VAT Apportionment - SARS issues BGR 16 (Issue 3)

The South African VAT seeks to tax final domestic consumption, through taxing local private domestic consumption, and removing tax from exports through the zero-rating mechanism (destination-based VAT system). The ideal VAT system is broad-based with no or limited exceptions of supplies of goods or services not subject to VAT. However, certain supplies by their very nature cannot be taxed under a VAT system. These include difficult to tax supplies such as certain components in financial services that do not represent immediate consumption but elements of saving or investment, which should by design not be subject to VAT. These are often subject to VAT exemption, such as advancing of credit (which contains an interest component). Exempt or semi-exempt businesses are effectively treated as final consumers as they are not permitted to claim some or all of their VAT on expenses incurred.

Other supplies not subject to VAT are often referred to as meritorious goods or services, which escapes the VAT net due to socio-economic or other meritorious reasons, although the mechanisms applied by some VAT systems may have had an inverse effect. Using a tax system to achieve non-tax objectives are a contentious issue.

Generally, the full amount of VAT on goods or services acquired locally or imported for the purposes of making taxable supplies can be deducted as input tax. However, if goods or services are imported or purchased locally partly for taxable and other non-taxable purposes (mixed purpose), only a portion of the VAT or notional input tax may be claimed. If goods or services are not acquired exclusively in the course of making taxable supplies, the taxable portion and claimable input tax must be determined.

Before applying VAT apportionment, the first step is to determine whether the expense can be directly attributed to a taxable or non-taxable purpose. Direct attribution means that the VAT expense will have to be attributed according to the intended use or purpose of the goods or services acquired. Direct attribution means that permissible expenses are incurred either wholly for the making taxable supplies, in which case the VAT can be deducted in full or wholly for the making exempt supplies or other non-taxable purposes, in which case no VAT can be claimed as an input tax deduction.

VAT apportionment only applies to expenses that have been incurred partly for the purpose of consumption, use or supply in the course of making taxable supplies and partly for exempt or other non-taxable purposes. If it is clear that the expense must be apportioned, the next step is to calculate the proportion of VAT which may be claimed as an input tax deduction. This is termed the apportionment ratio and is expressed as a percentage. The most common VAT on expenses incurred that needs to be apportioned are general business overhead expenses, bur for certain exceptions.

SARS issued BGR 16 on 27 November 2023. BGR 16 is a comprehensive ruling on the standard turnover-based method of apportionment. This is an extension of the previous more simplistic standard method and now includes various additions which cover many rulings granted by SARS in the past. The basic method is still mathematically the same and includes taxable supplies in the numerator and all income inclusive of taxable supplies in the denominator. The formula now excludes 11 items which favours the ratio, including for example current account and SARS interest, manufactured interest and dividends received by borrowers in scrip lending arrangements, capital assets, and extraordinary income. The formula now also provides for five adjustments. These include using net interest if funds are borrowed to on-lend, including a 3-ear moving average of the gross trading margin of financial assets, using a 3-year moving average in case of dividends received from certain investment activities, and limiting the negative impact of debt securitisation transactions. The ruling also contains nine notes that clarify the application of the formula.

All in all BGR 16 is now a comprehensive apportionment ruling that contains principles previously adopted by SARS and is well considered.