Motor dealers may in certain instances pay an amount to a customer for a second-hand vehicle over the generally accepted trade-in market value reflected in the Auto Dealers’ Guide (motor dealers usually determine the market value of second-hand vehicles according to a publication known as the “Auto Dealers’ Guide”). The difference between this value and the amount credited or paid to the customer is referred to as an “over-allowance”.
The effect of paying an “over-allowance” is that the open market value is less than the consideration paid to the customer. In terms of paragraph (b) of the definition of “input tax” in the Value-Added Tax Act, No. 89 of 1991, input tax is limited to an amount equal to the tax fraction of the lesser of the consideration in money given or the open market value of the supply. As a result, the notional input tax to which the dealer is entitled is limited to the tax fraction of the open market value of the vehicle traded in.
An over-allowance is generally paid when the trade-in of a second-hand vehicle is an integral part of the supply of another vehicle to the same customer by the same motor dealer. In these circumstances, the overall position for the motor dealer is the same with regard to the VAT payable if:
- The generally accepted trade-in value (that is, the open market value) of the second-hand vehicle is paid and a discount is granted to the customer on the new vehicle; or
- A smaller or no discount is granted on the sale of a vehicle, and instead, an over-allowance is paid to the customer on the second-hand motor vehicle traded in (in other words, the amount of the discount given on the new vehicle is reduced or not given so that a higher value can be given for the vehicle traded in). In both instances, the value of the smaller discount combined with the over-allowance given for the traded-in vehicle would equal the value of the discount given on the new vehicle.
Until now, SARS has created a special dispensation allowing motor dealers to deduct input tax on the full consideration (including any over-allowance amount) paid or credited to the supplier for a second-hand vehicle traded in under a non-taxable supply. That dispensation applied where:
- The trade-in of the second-hand vehicle transaction is dependent on the supply of another vehicle by that same motor dealer to the same customer;
- The parties are trading at arm’s length and are not “connected persons”;
- The over-allowance given by the vendor does not exceed the total discount that is permissible on the vehicle being sold; and
- The required records as prescribed in the VAT Act must be retained, as well as –
- a detailed list of the second-hand vehicles traded in and the subsequent sale thereof (where applicable);
- the details of the over-allowance; and
- the net accounting effect of the combined transactions involved (the trade-in and sale).
Motor dealers are advised that this special dispensation has ended on 31 December 2021 and no longer applies. The industry anxiously awaits further correspondence from SARS on any potential extension.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).