Value-Added Tax Implications on Municipal Entities

Given the various legislative duties and responsibilities that Municipalities bear, responsibilities such as the planning and development of towns and cities, provision of electricity, water and refuse removal, of which these services must be facilitated over various geographical areas, Municipalities can decide to establish entities that will carry out specific duties of the municipality.

The duties that are apportioned to an entity become the entity’s mandate and its sole reason for existence. Such created entities are called Municipal Entities. An example of such an entity is the Joburg Market. The Joburg Market is a platform to promote the buying and selling of fresh produce at reasonable wholesale prices. This is an entity established by the City of Johannesburg Metropolitan.

Municipalities may create Municipal Entities to better facilitate the performance of its duties, in the form of effective and efficient service delivery. Municipal Entities can be private companies that are under the sole control of the founding Municipality and/or Municipalities. These entities are separate juristic persons to the founding Municipalities, keeping their own separate accounting records, and having their own separate bank accounts. As a result, these entities must register for VAT separately if the value of their taxable supplies is in excess of the compulsory VAT registration threshold.

In carrying out enterprise activities, Municipal entities are operating on their own accord, meaning they are transacting for themselves and their own benefit. As a result, VAT implications arising from these transactions must be accounted for in their accounting records. However, a Municipal Entity can be an agent for the founding Municipality. In all instances where the Municipal Entity is legally an Agent, the VAT implications arising from the transactions entered into under the Agent Principal arrangement, must be accounted for by the founding Municipality (the Principal). For VAT purposes, an Agent merely facilitates transactions between the Principal and the third-party customer/supplier, hence, the Agent accounts for no VAT in their records. However, in facilitating such transactions, the Municipal Entity may charge a fee/commission and charge it to the founding Municipality. In such instances, the Municipal Entity must account for Output VAT on the commission charged.

For example, if Johannesburg Social Housing Company (JOSHCO) (a Municipal Entity) facilitates a low-cost housing project costing R5,000,000 as per the invoice of the third-party contractor, and charges a facilitation fee of 5% to the founding Municipality (City of Johannesburg Metropolitan), JOSHCO will settle the invoice from the contractor and the invoice the Metro a total amount of R5,250,000 (R5,000,000 + 5% fee). The Metro will settle the invoice of R5,250,000 to JOSHCO and then claim Input VAT of R684,782.61 (R5,250,000 x 15 / 115), and JOSHCO will declare Output VAT of R32,608.70 (R250,000 x 15 / 115). Notice that JOSHCO does not claim any Input VAT on this transaction, only declaring Output VAT based on the 5% fee they charged.

Municipal entities whose mandate duties are exempt supplies account for VAT differently when there are mixed supplies. Mixed suppliers refer to the performance of services (or delivery of goods) that are in part exempt and in part standard-rated. For instance, JOSHCO is mandated to provide social housing to those in need. These include hostels and temporary residential houses for victims of disasters, who have lost their shelters. The provision of a dwelling under the agreement of letting or hiring is an exempt supply, but what about the professional services rendered before and after the actual building and letting of the dwelling, such as land surveying, house planning and drafting letting documents. A company that provides these services for JOSHCO, is providing a mixed supply, in which case JOSHCO is entitled to an Input VAT claim on these services.

Main Considerations

  1. Eligibility To Be a VAT Vendor

Does the entity make taxable supplies whose value is in excess of R1,000,000 in any given 12 months? If yes, the entity must register as a VAT vendor. If no, the entity may voluntarily register as a VAT vendor but does not have to.

  1. Accounting Basis

Generally, the South African VAT system requires VAT vendors to register for VAT on the Invoice Basis, wherein a supply occurs before an invoice is issued or received, or when payment is made. If the Municipal Entity supplies electricity, and water or refuse removal, it can elect to account for VAT on the Payments Basis upon registration as a VAT vendor.

  1. Time of Supply

The value of supply for a Municipal Entity is the consideration for the supply less the VAT charge. In cases where consideration for a supply is not in money, to account for VAT consideration of supply will be deemed to be the Open Market Value for the supply.

In conclusion, in determining the VAT implications of a Municipal Entity, one should consider the transacting capacity of the entity (own capacity or an Agent) and the nature of the supply (standard-rated, zero-rated, exempt of mixed supply).

Written by:

Mr. Mthokozisi Gumede, Auditor


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