Rennies Travel (Pty) Ltd v SARS [2022] ZASCA 83

Facts

The appellant, Rennies Travel (Pty) Ltd (“Rennies”), conducts a travel agency enterprise.  Part of its business is to make arrangements for the international travels of its clients, including the sale of airline tickets for international flights. 

Rennies derives income in respect of this part of its business from three contractual sources, namely: a service fee charged to the client; a flat rate charged to the relevant airline in respect of the sale of an international airline ticket, i.e the standard commission; and an additional increased commission charged to the airline in the event that Rennies reached targets of international airline ticket sales, i.e the supplementary commission. 

The South African Revenue Service (“SARS”) was of the view that the supplementary commission, was not a supply of services that attracted VAT at zero percent under the Value-added Tax Act No 89 of 1991 (“VAT Act”) and raised additional assessments. 

The tax court agreed with SARS but granted Rennies leave to appeal.

Issues before the SCA

Issue 1: Whether or not Rennies appeal was lodged timeously; and

Issue 2: Whether the supplementary commission was a taxable supply at zero percent as provided for under sections 11(2)(a) and (d) of the VAT Act.

Background and Findings

The Supreme Court of Appeal (“SCA”) found that Rennies did submit the appeal timeously and that no condonation was required.

With regard to the second issue, SARS accepted that the services of arranging the transport of international passengers were rendered through the sales of airline tickets.  This formed the basis of the concession that the standard commission was zero-rated under section 11(2) of the VAT Act. 

The concession mentioned above was the result of a written settlement agreement between SARS and Rennies reached during the alternative dispute resolution proceedings. 

No agreement was reached on the supplementary commission since SARS believed that Rennies received the additional commission as incentives for promoting the sales of international airline tickets above the agreed targets, the payment of which was conditional upon Rennies achieving the predetermined sales targets. 

It should also be noted that the tax court determined the matter, (on grounds on which SARS did not rely on), based on the assumption that the supplementary commission had been paid for the supply of services of marketing and promotion of the sales of airline tickets for international travel.  As per this argument, the commission was only payable because of successful marketing and promotion campaigns. 

However, the SCA found that this was a wrong approach since the agreements between Rennies and the various Airlines had separate agreements in place for marketing and promotional services, while one Airline did not even include a marketing and promotional services provision in its agreement. 

The SCA, therefore, took a step back since VAT can only be paid if there is a supply of services, and therefore, one must look at what service was supplied. 

In the tax court, SARS argued that the service rendered was for the promoting of airline tickets, but changed its stance in the SCA. 

In the SCA, SARS argued that the supplementary commission was earned on “meeting the revenue targets” and not for arranging the transport of passengers. 

SCA finding:

The court stated that the “meeting of revenue targets” cannot be seen as a supply of services. Services must be supplied in order to reach those targets.  Since the supplementary commission was earned for exactly the same supply of services rendered as the standard commission, the SCA determined that the supplementary commission should also be a taxable supply at a zero rate as provided for in section 11 of the VAT Act.

Find a copy of the court case here.

08/07/2022