The Value-Added Tax Act 89 of 1991 contains general time and value of supply rules. There are however specific time and value of supply rules that are applicable to connected persons. A special value of supply rule is essentially triggered where connected persons are not dealing at arm’s length.
Connected persons
A ‘connected person’ is defined in the VAT Act and includes but is not limited to:
A company and any other company which has control or the shareholders which are substantially the same
A company and any natural person where that natural person owns more than 10% of the shares or voting rights in the company
Time of supply
The general time of supply rule, the earlier of the invoice or payment, is replaced with the following time of supply for connected persons:
If goods are to be removed – the date of removal
Other goods – the date when the goods are made available to the buyer
Services – when the services are performed
The special time of supply rule for connected persons does not apply where the time of supply is triggered by the general time of supply rules on or before the date that a return was submitted, or where the whole or part of consideration cannot be determined at the time of supply to be made to a connected person who is entitled to a full input tax deduction.
Value of supply
The general value of supply is as follows:
Where the consideration is in money the amount of money which is payable as the price charged for the supply. and
Where the consideration is not in money then the consideration will be the open market value of that consideration
A special value of supply rule applies to connected persons where no consideration is received, or consideration is below the open market value or the consideration cannot be determined at time the supply is made and the purchaser would not be entitled to a full input tax deduction on the goods or services acquired had an open market value been charged then the value of the supply is the open market value. This rule does not apply where the supply made is a fringe benefit provided to an employee.
To whom does the rule apply?
The special value of supply rule for connected persons only applies to the seller. The rule effectively determines the value of supply as the open market value for the seller. The purchaser will be entitled to an input tax deduction in accordance with the definition of ‘input tax’ read with section 16. The purchaser must also be in possession of a valid ‘tax invoice’ in compliance with section 20 of the VAT Act. The purchaser will therefore be entitled to an input tax credit based on the actual invoice. SARS will not allow the purchaser to claim an input tax credit based on the open market value.
Muneer Hassan CA(SA) is a Tax Consultant, Senior Lecturer in Taxation at UJ and lecturer on the Gauteng Board Course
