THE VAT CONSEQUENCES OF CHANGE IN INTENDED USE OF GOODS

A1_bIt happens ever so often that a business would purchase goods, and subsequently apply those goods in a different manner than it had initially intended to at the time that those goods were acquired. For example, a sole proprietor dealing in motor vehicles may decide to take one of those vehicles and apply it towards personal use. So too a property developer may decide to rather use one of its properties, up for sale, as new office premises for itself.

It is often said in tax circles that Newton’s law (that every action has a reaction) should be extended: every action also has a tax consequence. This is certainly also true where asset continue to be held by taxpayers, albeit with a different intention of how the asset is to be applied.

Where an asset is applied differently from what it has been applied towards in the past, certain tax consequences arises, both on a VAT and income tax account. This article deals specifically with the VAT consequences of such a change in use.

From a VAT perspective, where goods are no longer applied for purposes of the furtherance of a VAT enterprise, those goods are deemed to have been supplied by that VAT enterprise. As a result, output tax is required to be accounted for by the taxpayer on the open market value[1] of those goods deemed to have been supplied.[2] There is some logic to this from a theoretical perspective: the VAT vendor would have claimed input tax when it acquired the goods in question originally. Section 18 is therefore the statutory mechanism whereby the input tax claimed (on the basis that the goods would have been applied towards generating taxable supplies) is effectively reversed.

Where the goods are only partly used for purposes other than in the furtherance of the VAT enterprise, the input tax adjustment will also only be partly required to be accounted for.

An interesting exception to the above is where property developers let their properties temporarily for a period of less than 3 years. In practice, it quite often happens that property developers may decide to let property on a temporary basis due to the slow turnover of stock associated with the industry. Even though technically trading stock of the VAT registered developer would then be used for purposes not forming part of its property selling enterprise, the VAT Act[3] allows for a temporary reprieve from having to account for output tax, and does so based on practical considerations. This pragmatic approach presents an alternative to what would otherwise have only amounted to a cash flow issue: property developers may be required to account for output VAT once the property stock-in-trade is used to supply residential rental income, only to be reutilised as trading stock once sold in a year or two later (and when input tax may then be claimed again). Although therefore of little consequence to SARS (which remains neutral after the rental period in the example), many property developers are heavily dependent on cash flows and would be severely prejudiced, and many would be forced to close shop, had it not been for this practical concession granted in this limited instance.

[1] Section 10(7) of the VAT Act, 89 of 1991

[2] Section 18(1) of the VAT Act

[3] Section 18B of the VAT Act

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

TEN TIPS FOR SMALL BUSINESS OWNERS DURING TOUGH FINANCIAL TIMES

A2_bWhen the economy is slow, small business owners struggle to survive, many for the first time. Financial problems consume valuable time and business resources, yet must be dealt with proactively. Also make use of your financial advisor or your banker; they have the expertise and knowledge regarding your business and its financial well-being.
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  1. In tough times cash is king. Have a close look at every purchase you need to make, and decide if it is worth the money. Will the product generate enough cash to pay for itself? If not, don’t buy it.
  1. Let your budget show the way. Without a budget, you will find it difficult to cope with hard financial times. Adapt it regularly and do the same with your personal expenses. If you don’t keep track of expenses, they will become a bottomless pit into which all your cash will disappear.
  1. Look at your business’s financial position and performance objectively. Do you get maximum returns from your investments? Could you sell those that are not making you money? When times are tough, survival is the only goal.
  1. Examine how your debt is structured. If you have an imbalance between short-term and long-term debt you should restructure your long-term debt so that you can pay back the short-term debt over a longer period. Be careful not to take a loan against long-term assets, except if you are in critical need of money.
  1. Prepare for your meeting with your banker. Make sure you have all cash flow and balance sheets and inventories at hand for your banker. This will make your review time more productive. Write down any ideas regarding your financial position and discuss them with your banker.
  1. Ask your banker about guaranteed loan programs. Your banker could be able to restructure your business debt over a longer period if you are able to secure a credit guarantee on your loan to the bank. If your business is situated in a qualifying rural area, you may qualify for a guaranteed loan. Ask your banker about any additional resources which may be of use to your business.
  1. Review your insurance coverage. Increase your deductibles and your premium will decrease. Items that are low-risk or obsolete should be removed from your inventory list.
  1. Examine your life insurance policies. Some whole life policies have provisions that enable you to borrow against the cash surrender value at very low rates, or you could deduct the cost of the premiums from the cash surrender value. Determine whether your life insurance is worth the money or whether you couldn’t get by at a lower cost. Make sure all key personnel in your company have life insurance so that business can continue in any of the key players’ absence.
  1. Deal with financial problems immediately. As soon as a financial problem arises, deal with it immediately. Keep your banker informed of any problems and make him part of your inner circle of confidants. Use your team as a soundboard to discuss financial difficulties and brainstorm solutions.
  1. Get some perspective. Sometimes you need to get some distance from your work to solve the problems. Take a weekend off or go and watch a movie – whatever you do, leave your worries behind for a short while and focus on something else – it will make you and your business a lot stronger.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)