VAT Apportionment in South Africa: A Practitioner's Guide to BGR 16 (Issue 3)

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VAT Apportionment in South Africa: A Practitioner's Guide to BGR 16 (Issue 3)

• 21 January 2026
• VAT
• The Tax Faculty

The apportionment of input tax remains one of the most technically demanding areas of Value-Added Tax administration in South Africa. With the issuance of Binding General Ruling (VAT) 16 (Issue 3), SARS has provided practitioners with a comprehensive framework for determining the extent to which input tax may be claimed where goods or services are acquired for mixed purposes. This article examines the key principles, practical application, and compliance requirements that every VAT practitioner should understand.

Understanding the Foundation: What Constitutes Input Tax?

Before delving into apportionment methodology, it is essential to revisit the definition of input tax under the Value-Added Tax Act. Input tax encompasses VAT charged to a vendor on the supply of goods or services, VAT paid on the importation of goods, and notional input tax on qualifying second-hand goods, together with any other "deemed input tax" categories expressly permitted under the VAT Act.

However, VAT only qualifies as input tax to the extent that goods or services are acquired for the purpose of consumption, use, or supply in the course of making taxable supplies.This qualifying criterion is the genesis of the apportionment requirement; where acquisitions serve both taxable and non-taxable purposes, the input tax must be apportioned accordingly.

The extent of taxable use must be determined in terms of section 17 of the VAT Act, with the methodology governed by BGR 16 (Issue 3).

The Legislative Framework

The body of law governing apportionment comprises several interconnected provisions:

The Value-Added Tax Act provides the primary legislative framework through the definition of input tax in section 1(1), the general charging provision in section 7(1), the deduction provisions in section 16(3)(a) and (b), and critically, the apportionment section in section 17(1). Section 41B addresses ruling applications for alternative methods.

The Tax Administration Act supplements this framework through the advance ruling provisions, which govern applications where vendors seek approval for alternative apportionment methods.

Binding General Ruling 16 (Issue 3) provides the detailed methodology and compliance requirements that give practical effect to the legislative provisions.

It is worth noting that case law confirms the VAT Act's "fair and reasonable" standard is paramount in apportionment matters. BGR 16 provides SARS's default methodology, but a different method may be defensible where it demonstrably better reflects actual taxable use,provided it is properly substantiated and, where required, approved through the appropriate ruling channels. Departures from BGR 16 are exceptional and

require robust justification; practitioners should not interpret judicial pronouncements as licence to disregard the ruling without SARS engagement.

The Three Input Tax Pools: A Conceptual Framework

The apportionment methodology rests on a conceptual separation of input tax into three distinct pools.

Input Tax Pool One comprises expenses wholly incurred to make taxable supplies. The classic example is trading stock acquired for resale to customers. The input tax on such acquisitions is directly attributable to taxable activities, and 100% may be claimed.

Input Tax Pool Two encompasses expenses wholly incurred to make supplies other than taxable supplies — for instance, expenses incurred to supply exempt financial services. The input tax here is directly attributable to non-taxable activities, and consequently, 0% may be claimed.

It is important to recognise that "other than taxable" encompasses not only exempt supplies but also private use, out-of-scope activities, and other non-supply purposes. The formula's variable "c" specifically contemplates receipts that may not constitute supplies at all

Input Tax Pool Three contains the problematic category: expenses incurred partially for taxable purposes and partially for other purposes. The rental of premises where both taxable and non-taxable activities are conducted represents a typical example. It is this pool that requires application of the apportionment methodology.

Practical Application: A Step-by-Step Approach

Direct Attribution: Documentation Expectations

Before applying the apportionment formula to Pool Three, vendors must demonstrate that they have properly attributed input tax to Pools One and Two where direct linkage exists. SARS typically expects vendors to maintain documentation evidencing the basis for direct attribution, including cost centre allocations, project codes linking expenses to specific revenue streams, procurement records identifying the purpose of acquisitions, and a documented methodology consistently applied. Only genuinely indivisible overhead expenditure should flow to Pool Three  aggressive allocation of costs to the apportioned pool invites scrutiny.

Step 1: Identify Revenue Pools

The first step requires identification of all income sources generated by the organisation, distinguishing between taxable and non-taxable revenue pools. Standard-rated and zero-rated supplies constitute the taxable pool, while exempt supplies form the non-taxable pool.

Step 2: Attribute Input Tax 

The second step involves a systematic allocation of input tax incurred to each revenue pool:

Step 2.1 Identify input tax directly linked to the making of taxable supplies and allocate to Pool One.

Step 2.2 Identify input tax directly linked to the making of non-taxable supplies and allocate to Pool Two.

Step 2.3  Where input tax cannot be directly attributed to either Pool One or Pool Two, allocate to Pool Three. This pool is subject to apportionment.

Practical Illustration

Consider a vendor with the following financial information for a tax period:

Revenue Source Amount

Standard-rated sales R500

Zero-rated sales R250

Exempt supplies R300

Input Tax Category Amount : Attributable to taxable supplies R100 Attributable to non-taxable supplies R200 Not directly attributable R300

The R100 directly attributable to taxable supplies qualifies for full deduction. The R200 directly attributable to non-taxable supplies yields no deduction. The R300 in Pool Three must be multiplied by the apportionment percentage to determine the claimable amount.

Calculating the ratio:

Taxable supplies (a) = R500 + R250 = R750

Exempt supplies (b) = R300

Other income (c) = R0 (assuming none)

Ratio = 750 ÷ (750 + 300 + 0) = 750 ÷ 1,050 = 0.7142... 0.71 (rounded to two decimal places using conventional rounding)

Determining the claim:

Pool Three deduction = R300 × 0.71 = R213

Total input tax claimable = R100 (Pool One) + R0 (Pool Two) + R213 (Pool Three) = R313

The Standard Turnover-Based Formula

The standard apportionment formula is expressed as:

Y = a ÷ (a + b + c)

Where:

Y = The apportionment ratio expressed as a decimal (e.g., 0.71, not 71%), rounded to two decimal places using conventional rounding

a = The value of all taxable supplies (including deemed taxable supplies)

b = The value of all exempt supplies

c = The sum of any other income not included in "a" or "b", whether in respect of a supply or not (such as dividends and statutory fines)

The De Minimis Rule

Section 17(1) provides an important de minimis threshold that practitioners should not overlook. Where a vendor's taxable supplies constitute 95% or more of total supplies, the vendor may treat all input tax as fully deductible without applying apportionment. Conversely, where taxable supplies constitute 5% or less of total supplies, no input tax may be claimed. This 95/5 threshold significantly simplifies compliance for vendors with predominantly single-purpose activities.

When May the Standard Method Be Used?

The standard turnover-based method may only be applied if it renders a fair and reasonable estimation of the level of taxable supplies made by the vendor. If the method does not produce a fair and reasonable result, the onus falls on the vendor to apply to SARS for approval of an alternative method.

The standard method may not be used in industries where alternative apportionment methods have been approved for that industry, nor where an alternative method has been approved for the specific vendor or a class to which the vendor belongs.

Compliance Requirements

A vendor using the standard turnover-based method must submit an annual declaration to SARS containing:

The vendor's name

The vendor's VAT registration number

The apportionment method and formula used

The apportionment ratio for the year

Where the method is used for the first time, the method and apportionment ratio for the preceding three years

The declaration should be retained as part of the vendor's VAT records and submitted within the timeframes prescribed by SARS. Where the apportionment ratio changes materially from prior periods, vendors should document the reasons for the variance to support audit defensibility.

Provisional Ratios and Annual Adjustment

In practice, vendors typically apply a provisional apportionment ratio during the year (often based on the prior year's actual ratio) and perform an annual "wash-up" adjustment once actual figures are available. The adjustment ,whether positive or negative is reflected in the VAT return for the period in which the annual

ratio is finalised. This true-up mechanism ensures the cumulative input tax claimed aligns with the vendor's actual taxable use for the year.

Exclusions from the Apportionment Formula

BGR 16 (Issue 3) identifies several categories of income that must be excluded when computing the apportionment percentage.

Exclusion 1: Foreign Exchange Differences (Non-Hedging)

Where an exchange difference arises from general transacting that is, the spot rate at transaction date differs from the settlement rate  the resulting profit or loss is regarded as an accounting entry and must be excluded from the apportionment computation.

Important distinction:

Foreign exchange differences arising from hedging transactions must be included in the apportionment formula. Hedging involves active management of financial risk through instruments such as options, futures, or forwards. As this represents active financial trading, the resulting gains and losses form part of business activities.

The classification of hedging-related amounts between the formula variables (a, b, or c) depends on the character of the underlying transaction and the identity of the counterparty. Amounts constituting consideration for zero-rated supplies (typically with non-resident counterparties) belong in variable "a", while amounts representing exempt financial services belong in variable "b". The critical compliance point is that hedging profits and losses cannot be offset against each other  both must be treated as absolute values and aggregated for inclusion in the appropriate variable.

Exclusion 2: Accounting Entries Not Resulting from Supplies

Entries that arise from compliance with regulatory accounting requirements rather than actual supplies must be excluded, to the extent they do not represent consideration for a supply or other amounts required by BGR 16 to be included. This typically encompasses IFRS adjustments, foreign currency revaluations (excluding hedging), and fair value adjustments of fixed and intangible assets but practitioners should evaluate each adjustment on its merits to determine whether it represents or proxies supply consideration.

Exclusion 3: Supply of Capital Assets

BGR 16 (Issue 3) provides guidance for distinguishing capital assets:

Trading stock is never a capital asset

The asset is held with a degree of permanency over a lengthy period

The asset type is not commonly traded by the vendor

The asset remains substantially intact while generating wealth (the tree versus fruit principle)

Exclusion 4: Extraordinary Income

Non-recurring income received due to exceptional circumstances unlikely to be repeated must be excluded. The BGR specifically identifies dividends received from section 44, 46, or 47 reorganisations or liquidations as examples

Exclusion 5: Supplies Where Input Tax Was Denied

Supplies of goods or services acquired for entertainment, motor cars, or club subscriptions  where input tax deduction was originally denied must be excluded from the formula upon subsequent disposal.

Exclusion 6: Specific Financing Arrangements

The following must be excluded:

• Cash value of goods under instalment credit agreements
• Capital value of rental agreements entered into as financing mechanisms
• Capital value of loans

Exclusion 7: Change-in-Use Adjustments

Adjustments made under sections 18, 18A, 18C, and 18D constitute input tax adjustments and must be excluded regardless of accounting treatment.

Exclusion 8: Certain Indemnity Payments

The exclusion is limited to indemnity payments received under section 8(8) relating to extraordinary income or capital assets. Other section 8(8) indemnity payments must be included as consideration for supplies.

Exclusion 9: Manufactured Interest and Dividends in Security Lending

In security lending arrangements, the borrower who receives interest or dividends on borrowed instruments must exclude such amounts, as they are payable to the lender as consideration for the lending arrangement.

The lender must include manufactured interest or dividends using the formula: Manufactured interest/dividend × (Prime – JIBAR)

Exclusion 10: Capital Raised Through Equity or Debt Issuance

The capital value of equity, debentures, or bonds issued to raise funds is excluded.

Exclusion 11: Current Account Interest

Interest earned on accounts used for day-to-day business operations is excluded. Other interest is dealt with through the adjustment formula discussed below.

Adjustments for Non-Financial Enterprises

Several categories of income require adjustment before inclusion in the apportionment formula.

Interest Received

Interest earned on day-to-day operational accounts is excluded entirely. Investment interest must be included using the formula:

Amount included = Interest received × (Prime rate – JIBAR)

This adjustment mechanism warrants explanation. The (Prime – JIBAR) formula is not an error but a deliberate design feature of BGR 16. It approximates the economic margin or value-add relevant for apportionment purposes, recognising that the full nominal interest amount would overstate the vendor's actual contribution to exempt financial services. The underlying receipt is not ignored — it is adjusted in this prescribed manner to produce a more appropriate apportionment outcome.

Where:

Prime rate is the rate at financial year-end

JIBAR is the 12-month term rate quoted on the last day of the financial year

ZARONIA may be used where more appropriate or if JIBAR becomes unavailable

Example: A vendor with a 30 June year-end receives R100,000 interest on a fixed deposit. With Prime at 10.75% and JIBAR at 8.26%, the amount included in the apportionment computation is:

R100,000 × (10.75% – 8.26%) = R2,490

Interest on outstanding debtor accounts must be included at the gross amount.

Trading in Financial Assets

Traders must include the gross trading margin — gross profit from buying and selling financial assets with no expense deductions. Any income received while holding the assets (dividends, interest) is treated separately.

The gross profit margin must be computed on a three-year moving average. Where a loss occurs in any year, the absolute value of that loss must be included in the calculation.

A formula exists to split zero-rated (foreign counterparty) and exempt (local counterparty) elements of trading margins.

Dividends

Dividends must be included using: Three-year moving average × (Prime – JIBAR) Four rules govern the moving average calculation:

Rule 1: Use the current and two preceding financial years.

Rule 2: If no dividend is received in the current year, use the three years prior to the current year.

Rule 3: If no dividends are received in at least two of three years, use a five-year moving average (provided dividends were received in at least two of the five years).

Rule 4: If a holding company fails to meet the above requirements, include management fees charged to subsidiaries as a proxy for dividend income — without the (Prime – JIBAR) reduction and without the moving average.

Critical warning on double counting:

Management fees are ordinarily taxable supplies already included in variable "a" of the formula. The Rule 4 proxy mechanism does not require the same fees to be included twice. Where BGR 16 requires management fees as a proxy for dividend income, this proxy replaces the dividend inclusion that would otherwise be required it is not an addition to amounts already recognised as taxable

supplies. Practitioners must ensure their application of this rule does not result in the same fees appearing in both "a" (as taxable turnover) and again as an adjustment.

Profit Shares from Joint Ventures and Partnerships

Include using: Three-year moving average × (Prime – JIBAR)

The same rules governing the three-year period for dividends apply.

Debt Securitisation Transactions

For debts sold subsequent to the supply of goods or services: Capital value of debts sold × (Prime – JIBAR)

For debts sold immediately after origination: Include an amount equal to the origination fees charged (already included in "a").

Rules for Financial Enterprises

Financial institutions face more complex requirements, including the net interest margin in their apportionment computations. Special rules address linking interest received to borrowed funds, interest linked to exempt and zero-rated supplies, and interest linked to bad debts.

Transitional Provisions

BGR 16 (Issue 3) applies to financial years commencing on or after 1 January 2024. Vendors with existing specific rulings may apply for withdrawal by submitting a request to vatrulings@sars.gov.za before the end of the financial year commencing 1 January 2024.

Where previous financial year information is used to compute the apportionment percentage for years commencing on or after 1 January 2024, the previous formula must initially be applied, with an adjustment made within nine months of the financial year-end.

Vendors computing apportionment on a monthly basis may implement BGR 16 (Issue 3) immediately.

Transitional timeline example: A vendor with a 30 June year-end would have its first financial year "commencing on or after 1 January 2024" begin on 1 July 2024 (i.e., the year ending 30 June 2025). If this vendor uses prior-year data to set its provisional ratio, it would apply its existing method during the year and then perform the BGR 16 (Issue 3) adjustment within nine months — by 31 March 2026.

Start-Up Vendors and First-Year Apportionment

Newly registered vendors without prior-year data face a practical challenge in establishing their apportionment ratio. In such cases, vendors should prepare a reasonable estimate based on budgeted or projected turnover, applying the formula to anticipated taxable and non-taxable activities. This estimated ratio should be reviewed as actual data becomes available, with appropriate adjustments made. Documentation supporting the basis for the initial estimate is essential for audit purposes.

Conclusion

The apportionment of input tax under BGR 16 (Issue 3) demands meticulous attention to the classification of revenue streams, accurate attribution of input tax to the appropriate pools, and careful application of the various

exclusions and adjustments. While the standard turnover-based method provides a default framework, practitioners must constantly evaluate whether it produces a fair and reasonable result for their specific circumstances.

The interplay between the VAT Act, the Tax Administration Act, and BGR 16 creates a comprehensive but complex compliance landscape. Vendors making mixed supplies would be well advised to establish robust systems for tracking and categorising their input tax, maintain contemporaneous documentation supporting their apportionment methodology, and seek advance rulings where the standard method may not produce appropriate results.

This article is based on CPD webinar presented by Christo Theron CA(SA) on VAT Apportionment. Access the on demand webinar here: Click here

Disclaimer: This article provides general information and should not be construed as professional advice. Practitioners should consult the relevant legislation, BGR 16 (Issue 3), and seek professional guidance for specific circumstances.

 

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