The income tax implications of buying and selling a car bought under an instalment credit agreement and a lease agreement have been the focus of my last two columns. But what about the implications of Value Added Tax (VAT)?
Firstly, it is important to remember that if it is a car you are buying, and you are not in the business of buying and selling cars or in the car rental business, then there is no VAT implication. This is because you are prohibited from claiming the VAT charged to you in respect of a car as a VAT input tax refund.
When we look at a car, we are looking at any motor vehicle used on public roads, which has three or more wheels (ie not a motor bike), and which is constructed and adapted wholly or mainly for the transport of passengers. It specifically excludes:
* Vehicles only capable of carrying one person or more than 16;
* Vehicles with an unladen mass of more than 3 500kg;
* Caravans and ambulances; and
* Vehicles constructed for a special purpose other than the transport of persons and which have no accommodation for carrying persons other than incidentally.
So, if the vehicle you are buying falls outside this definition and you will be using it in your business, you can claim the input tax you paid on buying the vehicle as a deduction against output taxes or as a refund.
However, if you use the vehicle as a bus or taxi, you may not claim the refund, because the fares you receive will be exempt from VAT, that is, you may not charge VAT to your passengers.
There was at some stage some controversy about bakkies. The objective of the definition seems to be to exclude vehicles that are built primarily for the transport of passengers (their actual use is irrelevant). So where does a double cab bakkie fit in?
Due to the confusion, the South African Revenue Services has confirmed that it treats a double cab bakkie as a car so there is no VAT refund.
What if you buy a vehicle, or another kind of asset for which you are entitled to claim an input tax deduction or refund and when can you claim it if you purchase under the various different purchase options?
If you buy in terms of an instalment credit agreement, you will be entitled to claim the VAT immediately, since you are simply borrowing to buy an asset.
In this instance, for income tax purposes, you will claim the depreciation allowances on the price of the asset less the VAT refunded to you.
Once you've paid off the instalment credit agreement, nothing further happens from a VAT point of view until you sell the asset.
If you buy the asset in terms of a financial lease, the VAT Act considers this to be so similar to an instalment credit agreement that you may also claim the full amount of the VAT as a refund as soon as you purchase the asset.
For income tax purposes you will be claiming the actual lease payments as a deduction over the course of the lease.
However, the amounts that you may deduct on a monthly basis must be reduced, proportionately, by the amount of the VAT claimed as a refund at the beginning of the lease.
At the end of the lease there may be a further VAT implication, depending on what is done with the asset.
If you keep the asset, no further VAT implications would arise. If a minimal rental is paid, VAT will be charged and claimable on those rentals. If you keep the asset and subsequently sell it, output tax may arise.
If you simply lease an asset in terms of an operating rental, the VAT will be charged and claimable as those payments are made. For income tax purposes you will only claim the net rental as a tax deduction. There is no implication at the end of the lease.
It's important to appreciate the different VAT implications, as well as the income tax implications when you buy an asset.