Background
In the case of Claremont Library Development Company (Pty) Ltd v The Commissioner for the South African Revenue Service, the Tax Court recently considered the question of whether crediting a loan account constitutes “payment” of full consideration for purposes of the Value-Added Tax Act, 1991 (the VAT Act), with specific reference to section 22(3) of the VAT Act.
This question is important as section 22(3) of the VAT Act provides that where a vendor has claimed an input tax deduction in respect of the acquisition of a taxable supply, but has not made payment of the full consideration in respect of such supply within 12 months, that vendor shall be liable to account for deemed output tax equal to the tax fraction of the outstanding amount not paid.
Applicable Case Law
Claremont Library Development Company (Pty) Ltd (CLDC) relied on the decision of Commissioner SARS v Scribante Construction (Pty) Ltd, in which a dividend declared as interest, which was credited to shareholders’ loan accounts with the company, was found to constitute a payment by the company to the shareholders and as an actual deposit.
CLDC also relied on the case of Commissioner for Inland Revenue v Guiseppe Brollo Properties (Pty) Ltd in terms of which the enquiry turns on the overriding purpose of the loan account liability incurred.
Court Ruling
The presiding judge stated that:
“In the relation to the supply of goods and services to any person “consideration” includes “any payment made or to be made” whether “in money or otherwise, or any act or forbearance”. To the extent that payment amounts to the discharge of an obligation to another, there is no reason as to why an obligation under an invoice may not be discharged through the creation of another liability such as one under a loan. As much was accepted in Scribante Construction in which it was accepted that it was permissible for payment of a dividend declared, at interest, to take the form of a credit to shareholders’ loan accounts. The effect is to discharge one obligation through the creation of another.”
It was held that the purpose of the loan liability incurred by CLDC was to discharge the debt owed to Corevest. The crediting of Corevest’s loan by CLDC therefore amounted to payment of consideration in respect of the taxable supply invoiced. Appellant CLDC therefore won the case against SARS on 5 September 2016.
Lessons
Notwithstanding the fact that this judgment deals with a transaction between group companies that is now specifically provided for by section 22(3A) of the VAT Act, it remains that the principles may be applied to transactions between non-group entities that enter into transactions, or make payment of consideration, on loan account.
When entering into a similar transaction:
- Ensure that there is a written agreement between the parties involved clearly stating that the obligation under the invoice in question will be discharged through the creation of a loan account or being setoff against a loan account.
- Ensure that all the relevant documentation regarding the transaction is available for any SARS verification or audit.
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Source Reference
http://www.saflii.org/za/cases/ZATC/2016/6.pdf
https://www.saipa.co.za/1-can-payment-form-loan-account-constitute-payment-vat-purposes/
https://www.saica.co.za/Integritax/2017/2589._Payments_on_loan_account.htm