Welfare organisations that raise funding through the sale of donated goods, quite common for the likes of the Hospice and Salvation Army, should have some concern about the latest Sars VAT Guide 414 for Welfare Organisations and Associations Not for Gain (“the Guide”).
The Guide provides the following rather surprising example: “Example 14 – Sale of donated goods Facts: Ms F purchased sport equipment from ABC, a welfare organisation and a vendor. The sport equipment was previously donated to ABC by a business in the area.
Result: The supply of the sport equipment in the course or furtherance of ABC’s welfare activities is subject to VAT at the standard rate. ABC must therefore charge output tax on the sale and may deduct any VAT incurred by it in the course of making these supplies.”
Section 12(b) of the Value-Added Tax Act (“the Act”), exempts from VAT the supply of goods by an association not for gain where such goods had been donated to it. In the Guide, Sars confirms that as a rule, welfare organisations would be associations not for gain. The VATCOM report, referred to below, states:“As a ‘welfare organisation’ is first and foremost an ‘association not for gain’ it enjoys all the advantages of such an association.” How then, logically, could supplies of donated goods by a welfare organisation also be subject to VAT at the standard rate?
The Sars Legal & Policy department’s response: “The VAT414 has merely been updated to reflect the stated policy as per the Guide for Entertainment, accommodation and catering and the Interpretation Note No. 70 (‘IN 70’).” IN 70 seems to hold the key to the apparent confusion. According to IN 70, the VATCOM Report, which set out the original policy framework of VAT in South Africa, defined “Donated goods or services” as “goods or services which are donated to an association not for gain and are intended for use in the carrying on or carrying out of the purposes of that association.”’
In aligning the Guide and the IN, it would appear that Sars has erroneously applied the definition in VATCOM as legislation. Any “donation” of goods not used directly in the course of the welfare activity itself would, in terms of this definition, not constitute “donated goods” and would, accordingly, not be covered by the exemption.
“Donated goods” is, however, not a defined term in the VAT Act and the phrase should therefore be given its ordinary meaning. The supply of any donated goods by a welfare organisation, which qualifies as an association not for gain, should therefore be exempt from VAT.
It would appear that the Hospice and Salvation Army charity shops around the country may breathe a sigh of relief. They may be well advised, however, to interrogate Sars on its published interpretation.
- Chris Eagar is a director of Finvision