Criminally charging VAT and The Malaysian Agreement

Pecanwood Corruption Watch response to VAT letter of Pecanwood Homeowners Association (PHOA)

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On 19 May 2022 the PHOA published their response to our Newsletter, Criminally Charging VAT on Levies, dealing with the VAT Exemption offer that was not taken up by the Association.

Our article was written in response to several emails from members informing us that they have over the years queried the VAT charged on levies and have either received no response from the PHOA or received half-baked answers. As a result of our members’ concerns, we decided to publish useful information on the subject in our Newsletter.

After the damning contents of our article, the PHOA have now dug into their archives to produce the application to waiver VAT de-registration mentioned in our Newsletter. We have made their letter and its attachments available on the downloads page of our website. Of significance is that none of the contentions raised in our Newsletter are disputed.

For members not familiar with VAT, we add this note:

· Output VAT – VAT charged on invoices to your clients/customers for VATable services or goods sold. Output VAT must be paid over to SARS.

· Input VAT – VAT charged by companies or persons you buy services or goods from. Input VAT is a claimed back from SARS against what must be paid over to SARS.

· Subject to certain rules, companies and persons who are registered with SARS as VAT vendors participate in the offset of Output and Input VAT process.

A) According to the appeal that was sent to SARS on 29 September 2014 (one day before the dead line of the 30th) by the then estate manager H. Kruger, and in his capacity as Public Officer, there were five reasons stated why the PHOA had to remain VAT registered, i.e.,

1. A deemed output VAT on the fixed assets.

2. An apparent unsubstantiated claim that various members in 2014 were VAT vendors and able to claim the VAT back in their businesses.

3. An assumption that the output VAT would exceed R1 million whilst the input VAT would be lower.

4. Members who paid in advance would be negatively affected.

5. The issue of input VAT on bad debts.

On the surface the above appear to be valid points. Here is why they are not, without going into too much technical detail: -

1. As stated in our “Criminally charging VAT on Levies” Newsletter, the fixed assets of the PHOA were acquired at no cost from the developer and input VAT cannot be claimed on the leased bakkies because they are not used to generate an income for the PHOA. It is therefore highly unlikely that any VAT would have become due to SARS upon VAT de-registration.

2. It is equally unlikely that most residents were VAT vendors at the time. The VAT issue only benefitted a few property owners. Companies who purchase property on estates usually do so as a buy-to rent investment and rental income would have had to exceed R1 million per annum to remain VAT registered. An additional consideration for those who purchased property in a company would be the capital gains tax implications that are higher for a company than if you purchase property as an individual. Capital gains tax was introduced in 2001 and would have been applicable at the time of the VAT waiver application to SARS, making it unlikely that many people would willingly subject themselves to a higher rate of capital gains tax by purchasing property in a company.

3. The assumption that the output VAT would at some unspecified time exceed R1 million while the input VAT would be lower, created the impression that output VAT would be due to SARS and that VAT de-registration would result in a loss to SARS.

4. An impression was created to SARS that the output VAT charged on the levies to members who paid in advance would adversely affect members. This was based on a fundamental misunderstanding of the principle that levies were no longer considered as payment for services rendered as of 01 March 2014, the date SARS set for the VAT de-registration of all homeowners’ associations. If the PHOA complied to the request to deregister on the 01 March, the beginning of its then financial year, levies invoiced in advance would not have attracted VAT. As the case was and still is, the output tax on an invoice for advance levies becomes due to SARS immediately when the invoice is raised and on the other side the input VAT becomes claimable at the instance the invoice is paid. The PHOA invoices all monthly levies in advance. The claim about a negative impact to members was therefore misleading.

5. The reason given in this item must be carefully analysed and read in conjunction with item (4), above. It states that whilst bad debts are “rarely written off” because of the clearance certificates that must be issued by the PHOA, there are some monies that may be written off depending on the outcome of the legal action taken and that VAT would have to be claimed back from SARS when that occurred.

The biggest issue in this regard is the fact that the Malaysian company, Country Heights Holdings, the owners of the golf and country club, the boat club and the property situated at 65 Woodlands Drive were in arrears with their levies at the time and are still not paying any levies. Country Heights has never considered selling their properties on the estate and therefore the PHOA cannot exert leverage on them to pay outstanding debt by withholding any clearance certificates. The situation is further complicated by the lease agreement that the PHOA illegally entered with the Malaysians. In terms of this lease agreement the Association is responsible for all payments due by Country Heights in South Africa (including levies). The terms include settling the bad debts incurred by the Malaysians prior to the establishment of the lease agreement in 2018, a liability that approximates R7.2 million after discounts negotiated by the PHOA and of which R1.2 million is due to SARS.

B) SARS response letter dated 18 March 2015. We will cover two points in this letter as all other points were covered in our Criminally Charging VAT on Levies Newsletter and in item (A), above.

1. Item 1.3 of the SARS letter includes the Pecanwood Golf and Country Club and the Boat Club as members of the Association as per the Memorandum of Incorporation (MOI).

2. Item 1.7 of the SARS letter states that members of the PHOA decided to remain registered for VAT.

Regarding item (1) above, members should note that SARS recognized that the Golf and Country Club and the Boat Club were members of the Association with the same standing as all other members. This fact has been ignored by the PHOA in their haste to enter into the lease agreement which has had an enormously detrimental effect on the finances of the Association while enhancing the property of the Malaysians. To date no legal action has been taken against the Malaysians to recover outstanding levies on all their stands, rather the debt has disappeared from the Association’s books because of fancy foot working the books.

Pecanwood Corruption Watch has studied the minutes of the AGM for 2014 and can find no record of a resolution passed by members to remain VAT registered. As SARS was under the impression that members agreed to the decision, it can only be because they were under the impression that the Directors were acting in accordance with a resolution passed in that regard, and that H. Kruger was merely the conduit for the actions of the Board.

In his letter dated 19 May 2022, “Frequently asked questions: What is the PHOA Board’s position on governance and corruption”, the Chairman of the Board Moses Kgosana states that the status quo in place at the time of the waiver for VAT exemption in 2014 remains.

This is completely misleading as no lease agreement between the PHOA and the Malaysians was in place then. The operating structure of the Association as a nonprofit company focused on maintaining communal property has changed. The PHOA has evolved into a fully-fledged for-profit company utilizing levies to advance its undertakings, chief of which is to maintain and upgrade the property of the Malaysians and to benefit individuals aligned to those ideals.

Pecanwood Corruption Watch is gathering evidence to bring the matter to the attention of SARS and request that members in possession of supporting documents forward it on to us as soon as possible. Email us at pecanwoodcorruptionwatch@gmail.com

© Pecanwood Corruption Watch