ZZZ Venture v CSARS (Case no VAT 2060

This tax case is an Appeal from the Tax Court of South Africa against an additional assessment issued by the Commissioner for the South African Revenue Service (“SARS”) to ZZZ Venture (“the Venture”) on 15 December 2017. The additional assessment was issued in terms of section 92 of the Tax Administration Act, 2011 (“the TAA”) read with section 22(3) of the VAT Act.

Facts

AB (Pty) Ltd (“AB”) and CD (Pty) Ltd (“CD”) carried on the business of civil contracting and formed a joint venture to construct  an overhead bridge (“the project”) for the South African National Roads Agency Limited (“SANRAL”).

Due to a number of surrounding circumstances, the project was behind schedule, and the Venture incurred extensive penalties from SANRAL. This resulted in substantial losses for the Venture.

Originally, the partners contributed the necessary capital, as the Venture possessed no assets. In addition, the partners (only AB and CD being relevant here) supplied goods and services to the Venture, for which they rendered monthly invoices to the Venture. To shore-up the failing finances of the Venture, the partners were required to make further substantial capital contributions.

On 24 August 2011, a meeting was held by the partners of the Venture. The following was agreed on in terms of a document referred to in the case as “the first addendum”:

“The Venture participants agree that in order to protect the integrity of the project the Venture Participants agree to payment of services rendered and goods supplied will only be made as and when and to the extent that the Venture cashflow permits it.” [sic]

The Venture claimed the input tax (VAT) charged by the partners on the invoices received. Through a SARS audit it was determined that the debts owing to the partners were not being paid. An assessment was accordingly issued by SARS imposing output tax in terms of section 92 of the TAA read with section 22(3) of the VAT Act. The output tax imposed was equal to the input tax claimed as was “…contained in a ‘Finalisation of Audit’ notice, dated the 15^th December 2017.”

An objection was subsequently submitted on 12 April 2018. The Venture argued that the provisions of section 22(3)(ii) of the VAT Act were not applicable but rather that section 22(3)(b)(i) of the VAT Act was. The Venture argued “[t]hat the first addendum constitutes:

“[A] contract in writing in terms of which such supply was made provides for the payment of consideration or any portion thereof to take place after the expiry of the tax period within which such deduction was made, in respect of such consideration or portion be calculated as from the end of the month within which such consideration or portion was payable in terms of that contract. . . .”

Accordingly, the output tax charged on those tax invoices was only due when the debts were paid which had not yet occurred. SARS disallowed the objection on 15 April 2019.

The Venture submitted an appeal on 27 May 2019 with almost the exact argument except that it included,

“. . . proviso (i) to section 22(3) of the VAT Act applies to the input tax amounts claimed in respect of the debt owing to AB and CD Construction. We further submit that the minutes constitutes a ‘contract in writing’ as required by the proviso.”

Issues

The main issues of this Appeal are as follows:

“(i) the proviso in subsection 22(3)(i), and the interpretation of subsection 22(3); and

(ii) the relief claimed under the concept of the operation of a “group of companies”, as envisaged in subsection 22(3A) of the Act. The Venture has abandoned this argument.”

Finding

SARS maintained that no payment would ever be made, because the Venture ran at a loss, and sufficient cash flow would never become available. The judge noted that the Venture has sued SANRAL, apparently for an amount of R100 million, arising out of the principal contract, noting that it can therefore not validly be asserted that the Venture will never pay the output taxes (or part thereof), nor that the suspensive condition is so vague as to be unenforceable.

With regard to the possible vagueness of the addendum because of the uncertainty of the payment date, the judge notes that it is not an undertaking to pay when the Venture chooses to do so, but rather when it is able to do so.

The judge highlights that it seems certain that had the partners to the Venture not concluded the addendum, “the project would have collapsed, jobs would have been lost and the finalisation of a much-needed public facility inevitably delayed”. The judge furthermore notes that “SARS has been left with a financially neutral position – a factor that a court would, in my view, almost always consider in weighing-up the merits of any tax case…”The judge consequently concludes that it was inappropriate for SARS to have delivered an additional assessment of tax based on section 22 of the VAT Act and that the Venture’s defence that its conduct falls within the provisions of subsection 22(3)(b) of the VAT Act succeeds. In respect of costs the judge agrees with counsel for the taxpayer, noting that ”as no costs were sought in the application papers, none could be awarded now”.

The appeal succeeded and the assessment made by SARS was set aside. 

Find a copy of the court case here.

11/02/2022