QUESTION 1 (30 marks)

Question

Decrease in extent of taxable use of capital goods or services
Ms C (a registered VAT vendor) owns a double-storey building situated in Cape Town.
The building is used for mixed purposes, in that it has 8 shops on the ground floor
used for making taxable supplies and 4 large residential apartments on the first floor
used for making exempt supplies. The building has been applied as such from
commencement of the business in March 2008 when the building was acquired for R1
368 000 (inclusive of VAT). Ms C elected to use the standard turnover-based method
of apportionment and determined that she derived 80% of her income from taxable
supplies and 20% from exempt supplies. Therefore, in the April 2008 tax period, she
deducted input tax of R134 400 (14 / 114 × R1 368 000 × 80%) in respect of the
building.
In March 2009, Ms C further purchased a computer system for R54 000 (inclusive of
VAT), intended for use in her business. At the time of purchasing the computer system,
Ms C still derived 80% of her income from taxable supplies and 20% from exempt
supplies. Therefore, in the April 2009 tax period, she deducted input tax of R5 305 (14
/ 114 × R54 000 × 80%) in respect of the computer system acquired.
At the end of February 2022, Ms C determines that the nature of her business has
changed significantly and that her income now comprises of 60% taxable supplies and
40% exempt supplies. At the end of that month the cost and OMV of the building is R1
368 000 and R2 280 000, respectively, and the computer system has an OMV of
R48 000.

Answer 1

To address the scenario concerning Ms. C and the changes in the taxable use of her capital goods related to VAT, we need to assess the implications of her change in the extent of taxable use for both the building and the computer system.

1. Change in Extent of Taxable Use

When there's a change in the extent of use of capital goods for taxable versus exempt supplies, the vendor must make an adjustment. This can result in a refund of input tax, or a requirement to pay output tax depending on the nature of the change.

a. Adjustment for the Building

1. Original Apportionment:

   • Ms. C originally claimed input tax based on an apportionment ratio of 80% taxable and 20% exempt.
   • Total input tax deducted initially: R134,400.

2. New Apportionment:

   • As of February 2022, the apportionment ratio has changed to 60% taxable and 40% exempt.

3. Calculation of Input Tax Adjustment:

   • The change in ratio necessitates an adjustment as follows:
   • Original taxable use: 80%
   • New taxable use: 60%
   • Decrease in extent of taxable use: 80% - 60% = 20%

4. Adjustment Amount:

   • The adjustment should be calculated based on the original input tax claimed and the extent of the decrease.
   • Adjusted input tax in February 2022 = Original input tax x decrease percentage: \[ \text{Adjustment} = R134,400 \times 20% = R26,880 \]

b. Adjustment for the Computer System

1. Original Apportionment:

   • Ms. C claimed input tax on the computer system at an 80% taxable use in the April 2009 tax period.
   • Total input tax deducted initially: R5,305.

2. New Apportionment:

   • As of February 2022, using the same rationale for extent of use, the adjustment applies.

3. Calculation of Input Tax Adjustment:

   • Similar calculation steps:
   • Original taxable use: 80%
   • New taxable use: 60%
   • Decrease in extent of taxable use: 80% - 60% = 20%

4. Adjustment Amount:

   • Calculate the adjustment: \[ \text{Adjustment} = R5,305 \times 20% = R1,061 \]

Conclusion

Outputs:

• For the building, Ms. C must adjust input tax to reflect the decrease in taxable use, which leads to an output tax payable of R26,880.
• For the computer system, Ms. C has an additional output tax payable of R1,061 due to the same decrease in taxable usage.

Total Output Tax Adjustment: \[ \text{Total Output Tax} = R26,880 + R1,061 = R27,941 \]

Important Notes:

• Ms. C must account for this adjustment in her VAT returns following the applicable tax laws and regulations.
• The adjustments must be communicated properly to the tax authorities, ensuring compliance with the VAT Act.