[FAQ] Input tax on the purchase of plastic from bin collectors

[FAQ] Input tax on the purchase of plastic from bin collectors

• 18 May 2021
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2021.

Background

A taxpayer is a registered VAT vendor and has a business of recycling plastic. He buys the plastic from the homeless people who collect it from the neighbourhood bins.

Can he claim VAT on the expense incurred when he bought the plastic from the homeless people?

Answer

The VAT Act

Paragraph (b) of the definition of “input tax” in section 1(1) of the VAT Act defines as input tax an amount equal to the tax fraction of the lesser of any consideration in money given by the vendor for or the open market value of the supply (not being a taxable supply) to him by way of a sale by a resident of South Africa of any second-hand goods situated in South Africa. The deduction is limited to the extent that the vendor acquires the second-hand goods for the purposes of consumption, use or supply in the course of making taxable supplies.

“Second-hand goods” is defined in section 1(1) of the VAT Act as goods that were previously owned and used.

Section 16(3)(a)(ii)(aa) of the VAT Act determines that input tax referred to in paragraph (b) of the definition of “input tax” in section 1(1) of the VAT Act may only be claimed to the extent that payment of any consideration which has the effect of reducing or discharging any obligation relating to the purchase price for the supplies of the second-hand goods has been made during a tax period.

Section 16(2)(c) of the VAT Act determines that no deduction of input tax in respect of the supply of second-hand goods may be made unless records are maintained as required by section 20(8) of the VAT Act where the supply is a supply of second-hand goods. Section 20(8) of the VAT Act determines that where a supplier makes a supply (not being a taxable supply) of second-hand goods to a recipient, being a registered vendor, the recipient must in the form as the Commissioner for SARS may prescribe, maintain a declaration by the supplier stating whether the supply is a taxable supply or not. The current form that must be completed and retained is the VAT264.

Further to the above the recipient must obtain sufficient records to enable the following particulars to be ascertained (this information must be attached to the VAT264 and retained for SARS audit purposes).

(a) The name of the supplier.

(b) Where the supplier is a natural person, the identity number of the person and a photocopy of the person’s identity document.

(c) Where the supplier is not a natural person, the name and identity number of the natural person representing the supplier in respect of the supply and any legally allocated registration number of the supplier. The recipient must retain a copy of the supplier’s letterhead or other document confirming the registration number of the supplier.

(d) The address of the supplier.

(e) The date on which the second-hand goods were acquired.

(f) A description of the goods.

(g) The quantity or volume of the goods.

(h) The price paid for the goods.

(i) Proof and date of payment.

Application of the principles

The plastic purchased from the homeless people would constitute second-hand goods as envisaged in the VAT Act. A notional input tax deduction would accordingly be available subject to the suppliers being South African residents and obtaining the necessary supporting documentation.

The amount of the notional input tax deduction is computed by applying the tax fraction (15/115) to the amount paid for the second-hand plastic.

As far as residency of South Africa is concerned, it is likely that many of the suppliers would not qualify as South African residents. Purchases from non-residents would never qualify for a notional input tax deduction. Should the second-hand goods be purchased from a resident of South Africa, obtaining the necessary documentation prescribed by the VAT Act furthermore often proves to be prohibitive in practice.

To overcome the above challenge consideration could be given to buying the second-hand plastic through a single channel (for example a community project). Where the plastic is purchased from various suppliers (the collectors) it will be extremely challenging in practice to obtain any VAT relief in respect of the purchases thereof due to the practical hurdles involved.

Webinar Commentary

Refer to webinar commentary on the Tax Dispute Resolution: Dealing with Audits and Queries from SARS (Pre-Assessment) - Session 1 – 2021 here.

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