A taxpayer is a plumbing industry membership association, which is a non-profit organisation (NPO) and is a registered public benefit organisation (PBO) in terms of 10(1)(d)(iv)(bb) of the Income Tax Act. The PBO pays output tax on all its membership
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
The VAT Act The general charging section Section 7(1)(a) of the VAT Act imposes VAT on the supply of goods or services made by a vendor in the course or furtherance of the VAT enterprise carried on by the vendor. VAT is imposed at the standard rate of (currently 15%), unless the supply qualifies to be supplied at the zero-rate in terms of section 11 of the VAT Act or is exempt from VAT in terms of section 12 of the VAT Act. “Consideration” is defined in section 1(1) of the VAT Act as any payment made or to be made, whether in money or otherwise, or any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of any goods or services. The definition includes payments made by a person for the supply of goods or services to any other person. The definition excludes any payment made by any person as a donation to any association not for gain. “Donation” is defined in section 1(1) of the VAT Act as “a payment … voluntarily made to any association not for gain … in respect of which no identifiable direct valuable benefit arises or may arise in the form of a supply of goods or services to the person making the payment or …. to any other person who is a connected person in relation to the person making the payment ...” Sections dealing with the supply of exempt educational services Section 12(h)(i)(cc)(A) of the VAT Act defines as an exempt supply “the supply of educational services by any public benefit organisation as contemplated in paragraph (a) of the definition of “public benefit organisation” contained in section 30(1) of the Income Tax Act that has been approved by the Commissioner in terms of section 30(3) of that Act and which has been formed for adult basic education and training including literacy and numeracy education, registered under the Adult Basic Education and Training Act, 2000 (Act No. 52 of 2000), vocational training or technical education.” Sections dealing with foreign donor funded projects Section 8(5)(b) of the VAT Act determines that a vendor, being a foreign donor funded project, is deemed to supply services to the international donor to the extent that the international donor funding received from an international donor. “Foreign donor funded project” is defined in section 1(1) of the VAT Act as: “A project established as a result of an international donor funding agreement to supply goods or services to beneficiaries, to which the Government of the Republic is a party, and which – (i) is binding on the Republic in terms of section 231(3) of the Constitution of the Republic of South Africa, 1996; and (ii) provides that the international donor funding must not be subject to tax.” Section 11(2)(q) of the VAT Act zero-rates supplies deemed to be supplied in terms of section 8(5B) of the VAT Act.
The law: Meaning of “donation” The mere fact that a donation is made with a condition attached thereto, for example that a donation must be used for a specific purpose, does not result in the amount not qualifying as a donation for VAT purposes. We base the above contention on the history of the term “donation” in the VAT Act. The VAT Act originally referred to “unconditional gift”. The definition of “unconditional gift” was deleted in 2004 and replaced with the definition of “donation”. The Explanatory Memorandum on the Revenue Laws Amendment Bill of 2004 explains the reason for the change as replacing the term “unconditional gift” with a “more appropriate” term. In our opinion the term “donation” was more appropriate as the term “unconditional gift” denotes a situation where no conditions of any sorts may attach to the donation. This assumption is devoid of reality in practice as most donations are subject to some conditions precedent, especially in the case of large donations. Application of the principles International donor funded projects If the arrangement constitutes an international donor funded project as defined in section 1(1) of the VAT Act, the amounts received will constitute consideration for taxable supplies for VAT purposes (section 8(5B) of the VAT Act). The rate of VAT applicable to the consideration of the taxable supplies would be zero percent (section 11(2)(q) of the VAT Act). Should the arrangement constitutes a foreign donor funded project, the project will need to be registered for VAT purposes as a person separate from the NPO. Exempt training If the funding funds technical training as envisaged in section 12(h)(i)(cc)(A) of the VAT Act, the receipts would constitute consideration for exempt supplies and would not be subject to VAT. Donations The fact that certain conditions are attached to funding the technical training (presumably oversight over the quality of the training provided) does not mean that the amounts paid cannot constitute donations within the meaning of the definition thereof in section 1(1) of the VAT Act. To determine whether the conditions attaching to the donor funding would preclude the funding from being classified as “donations” for VAT purposes, regard must be had to the relevant donor funding agreement. If none of the above applies If none of the above applies to the donor agreement, the amounts received will constitute consideration for taxable supplies of services made to recipients that are in South Africa at the time that the services are rendered. As such the amounts will be subject to VAT at the standard rate of VAT (currently 15%).