On 12 September 2018 the Supreme Court of Appeal reversed the decision of the Gauteng Division of the High Court, which had in turn confirmed that of the tax court, in the matter of CSARS v Respublica (Pty) Ltd (1025/2017 [2018] ZASCA 109. The SCA found that the lease of six buildings to the Tshwane University of Technology (TUT) for student accommodation was not “commercial accommodation” as defined in the Value-Added Tax Act (ACT), 1991 and was therefore liable for VAT at the standard rate of 14%.
The taxpayer owned immovable property consisting of six buildings configured into apartment style living units for students of TUT. The taxpayer entered into a lease agreement with TUT for indefinitely renewable periods of five years. TUT was permitted to use the premises only for accommodation for its students during term time and holiday groups during university vacations.
TUT would conclude lease agreements with the students and, during vacations, the holiday groups. The taxpayer played no role in these agreements. TUT took full responsibility for control, discipline, strict compliance with the house rules and ensuring that students vacated the premises on termination of the respective leases.
TUT paid the taxpayer a monthly rental based on the number of available beds, whether or not they were occupied, and undertook to restore the premises to good condition on termination of the lease with the taxpayer. The taxpayer provided furnishings and amenities to the premises, and was responsible for routine maintenance, management services, security and repairs.
The court stated that the taxpayer’s performance under the lease agreement was a taxable supply, “unless one of the exemptions, exceptions, deductions or adjustments contained in the Act applied”. The rest of the judgment consists of an examination of these provisions to see whether any of them applied.
The taxpayer contended that it was obliged to charge VAT on only 60% of the total consideration from TUT, in terms of section 10(10) of the Act. This provided that “Where domestic goods and services are supplied at an all-inclusive charge in any enterprise supplying commercial accommodation for an unbroken period exceeding 28 days, the consideration in money is deemed to be 60% of the all-inclusive charge”. So the question was whether or not the taxpayer was supplying commercial accommodation.
Section 10(10) defines “commercial accommodation”, to the extent here relevant, as lodging or board and lodging, together with domestic goods and services, in any house, flat, apartment, room, hotel, motel, inn, guest house, boarding house or residential establishment which is regularly and systematically supplied, but excluding a dwelling supplied in terms of an agreement for letting and hiring it.
The decisive question, then, was whether the taxpayer was providing lodging to TUT. The dictionary meaning of this term is “a temporary place of residence” or a “temporary residence; sleeping accommodation”. A lodger is “a person who pays rent in return for accommodation in someone’s house”. Based on these definitions, the court made the point that a lodger must be a natural person. It followed that the notion that the taxpayer was providing lodging to TUT was inconsistent with the ordinary meaning of the word. The relationship between the taxpayer and TUT bore “little resemblance to conventional arrangements for the provision of board and lodging”.
However, the taxpayer contended that its supply to TUT met the definition of “commercial accommodation” because the accommodation supplied was used by the students, who were the lodgers. The court rejected this contention because it conflated two distinct supplies: the longer one by the taxpayer to TUT; and the shorter ones by TUT to the students. The latter supply, being incidental to the supply of educational services, was exempt under section 12(h)(ii) of the Act. The taxpayer’s approach was contrary to the general principle that the VAT consequences of a supply must be assessed primarily by the contractual arrangements under which the supply is made. The nomenclature used by the parties in a contract was not decisive; it was necessary to determine the true nature of the contract. There was no contractual nexus between the taxpayer and the students. The relevant contract was the one between the taxpayer and TUT and did not involve the supply of temporary accommodation to TUT. The fact that TUT supplied temporary accommodation to the students was irrelevant in relation to the taxpayer. Accordingly, the supply by the taxpayer did not meet the first requirement of the definition of “commercial accommodation” and it was not necessary to canvass the other requirements.
The taxpayer no doubt felt aggrieved by losing in the SCA after two victories in the lower courts. However, a moment’s reflection suggests that the taxpayer was not too hard done by. The alternative to the present arrangement, which would have brought the taxpayer within the definition of “commercial accommodation”, would have been for the taxpayer to let the units directly to the students, with all the administrative cost and stress that this would have entailed. Instead, the taxpayer was able to place this whole burden into the hands of TUT. In fact it might well be that the taxpayer was financially better off, if the 40% additional VAT paid was less than the cost of operating six apartment blocks filled with students.
