707 - Input tax apportionment: BGR 16

The valued-added tax (VAT) incurred on goods and services acquired partly for the purpose of making taxable supplies and partly for some other purpose falls to be apportioned in terms of section 17(1) of the Value-Added Tax Act, 1991 (the VAT Act). Although the legislation does not stipulate a ratio for apportionment, section 17(1) states that a ratio is determinable by the Commissioner for the South African Revenue Service (SARS) by way of a ruling.

On 27 November 2023, SARS released Issue 3 of Binding General Ruling 16 (BGR16), which sets out the standard turnover-based (STB) method for determining the ratio. Issue 3 is far more detailed than its previous iterations, running to 18 pages, compared to the 2 pages of earlier versions.

The formula prescribed in Issue 3 is as follows:

In the above formula, having regard to the exclusions and adjustments listed in the BGR:

“y” = the apportionment ratio or percentage

“a” = the value of all taxable supplies

“b” = the value of all exempt supplies

“c” = the sum of any other amounts of income not included in “a” or “b” which was received or accrued during the period, whether in respect of a supply or not.

The formula remains unchanged from that contained in Issue 2. It is submitted that the use of “A” (in upper case) in the numerator is probably an error and should have been “a” (in lower case), since that is what the context and history of the Ruling indicates – it is how the formula was constituted in the previous iterations of BGR 16.

The general terms of the BGR are as follows:

- The STB formula is the default method and applies to all vendors unless they possess an approved alternative.
- The BGR applies with effect from all financial years commencing on or after 1 January 2024.
- The previous BGR 16 (Issue 2) formula applies to all financial years preceding the above financial years.
- If an alternative method was previously approved but this BGR is regarded as fair and reasonable, vendors may approach SARS to have that method withdrawn, effective for financial years commencing on or after 1 January 2024.
- Vendors are required to make an adjustment within nine months after the end of the financial year (previously within six months) where they used the previous year’s turnover to determine the current year’s apportionment ratio. No adjustment is required where the apportionment is performed monthly.

Where Issue 3 differs significantly from earlier iterations is in the comprehensiveness of its exclusions and adjustments. The exclusions and adjustments are not discussed in detail in this article. In summary, the following must be excluded from the formula:

- Foreign exchange differences, but only those which do not arise from hedging activities.
- Accounting entries such as fair value adjustments to record the true economic value of assets and liabilities in annual financial statements.
- The supply of capital assets, since these assets are generally considered extraordinary in nature, usually occur on a once-off basis, and do not form part of the pool of expenses subject to apportionment.
- Extraordinary income which is received due to exceptional circumstances that are unlikely to be repeated.
- The value of any goods or services supplied, where input tax on the acquisition of those goods or services was specifically denied under section 17(2) of the VAT Act (typically entertainment and motor cars).
- The cash value of goods supplied by a financier under an instalment credit agreement.
- The portion of a rental payment relating to the capital value of goods supplied under a rental agreement which is entered into as a mechanism of finance.
- The capital value of loans received, since it is not regarded as income.
- Change-in-use adjustments under sections 18, 18A, 18C and 18D of the VAT Act.
- Indemnity payments received as envisaged under section 8(8) of the VAT Act, to the extent that the indemnity payments relate to extraordinary income or capital assets.
- “Manufactured” interest or dividends received by the borrower in a securities lending transaction.
- The value of equities, debentures or bonds issued to raise funds.
- Interest earned from a vendor’s current account (that is used for day-to-day business operations) and interest received from SARS.

In summary, the following adjustments must be made:

- Interest arising from sections 8F and 8FA (of the Income Tax Act, 1962 (the Act)) instruments must be regarded as dividends and be included, by applying the proxy of (prime rate – Jibar (Jibar means “the Johannesburg Interbank Average Rate”)).
- Net interest must be included on funds that are borrowed with the objective of on-lending the funds.
Interest received on any investments, including savings accounts, must be included, determined as interest received for the year multiplied by (prime rate − Jibar).
- Trading in financial assets: include a three-year moving average of the gross trading margin (selling value − buying value).
- Dividends from sections 8E and 8EA (of the Act) instruments must be regarded as interest and be included, by applying the proxy of (prime rate − Jibar).
- Dividends received from investment activities (including from investments held in subsidiaries, associates, ad hoc or minority investments) must be included, determined using a three-year moving average of dividends received/accrued during the year multiplied by (prime rate − Jibar).
- Profit share from joint ventures or partnerships must be included, determined as the three-year moving average of profit share received/accrued during the year multiplied by (prime rate − Jibar).
- Debt securitisation proceeds must be included, determined as proceeds from the sale of debts under a securitisation transaction during the year multiplied by (prime rate − Jibar).

The BGR itself calls for a proper textual, contextual, and purposive reading to understand and apply it. A vendor must apply the BGR correctly or, on a factual basis, claim that it is not fair and reasonable and seek SARS approval for an alternative method. For many vendors, Issue 3 of the BGR will result in very different VAT outcomes from Issue 2. It is recommended that anyone who needs assistance in determining the BGR’s application or effects on an enterprise, should contact an expert in the field.

Editorial note: This BGR applies with effect from all financial years commencing on or after 1 January 2024, and will apply until it is withdrawn, amended or the relevant legislation is amended.

Edlan Jacobs

BDO

Acts and Bills

· Income Tax Act 58 of 1962: Sections 8E, 8EA, 8F & 8FA;

· Value-Added Tax Act 89 of 1991: Sections 8(8), 17(1) & (2), 18, 18A, 18C and 18D.