Commissioner for the South African Revenue Services v Tourvest Financial Services (Pty) Ltd

Tourvest Financial Services (Pty) Ltd, trading as American Express Foreign Exchange, is a licensed foreign currency dealer operating 52 branches countrywide with a centralised treasury division. The company conducts currency exchange operations where it buys and sells foreign currency at rates set by the treasury division, building in a margin. In addition to the margin, the company charges a commission (on which VAT is levied) based on a percentage of the transaction value. Prior to September 2013, Tourvest completed VAT returns applying an apportionment under s 17(1) of the VAT Act, accepting that relevant goods and services were acquired partly for taxable supplies and partly for exempt supplies. After receiving tax advice, Tourvest changed its position in September 2013, taking the view that goods and services obtained for branches were used wholly in making taxable supplies. Tourvest then claimed an input tax deduction of R24,389,036.58 for overpaid VAT over the prior five years, which SARS paid on 19 November 2013. After an audit on 5 April 2016, SARS issued an additional assessment adding back this amount, on the basis that apportionment of input tax was necessary as the goods and services were used for both taxable and exempt supplies. Tourvest's objection failed but its appeal to the Tax Court succeeded, and SARS appealed to the Supreme Court of Appeal.

• Whether a vendor conducting currency exchange business through branches makes both taxable and exempt supplies or only taxable supplies
• Whether VAT incurred on goods and services acquired for use in currency exchange operations must be apportioned between taxable and exempt supplies under s 17(1) of the VAT Act
• The proper interpretation of s 2(1)(a) of the VAT Act and its proviso regarding the exchange of currency as a financial service
• Whether the consideration for currency exchange includes only the commission/fee or also the margin built into exchange rates
• Whether the entire input tax deduction claimed by Tourvest for unclaimed VAT expenses over five years was permissible

The appeal was upheld with costs including those of two counsel. The order of the Tax Court was set aside and substituted with: 'The appeal is dismissed.' There was no order as to costs in the Tax Court.

The proviso to s 2(1) of the VAT Act does not cause the activity of currency exchange to lose its exempt status entirely but creates a mixed supply - one that is partly exempt and partly taxable. The proviso's effect is limited to ensuring that any commission or fee charged for currency exchange attracts VAT, while the underlying activity of currency exchange remains an exempt financial service. Where a vendor conducts currency exchange operations charging both a margin (built into the exchange rate) and a separate commission/fee, the activity constitutes both an exempt supply (the exchange activity itself) and a taxable supply (to the extent of the fee/commission). Consequently, VAT paid on goods and services acquired for such operations must be apportioned under s 17(1) of the VAT Act, and only the portion attributable to the taxable supply may be deducted as input tax. A vendor cannot deduct the entire VAT charge as input tax where the underlying activity involves both taxable and exempt supply components.

The Court noted that the appellant had initially sought to rely on s 39(7)(a) of the VAT Act regarding remission of interest but eschewed this provision at the hearing in favor of s 190(5) of the Tax Administration Act 28 of 2011. The Court observed that s 190(5) had not been invoked by the appellant when assessing the respondent to tax and therefore, for present purposes, did not find application. While counsel suggested it remained open to the appellant to invoke s 190(5), the Court stated this question remained for another day and need not detain the Court. Regarding costs in the Tax Court, the Court observed that it could not be said that the respondent's grounds of appeal were unreasonable, particularly as the respondent's change in stance was consequent upon legal advice obtained, which justified not making a costs order against the respondent in the court below despite the appeal being upheld.

This judgment clarifies the tax treatment of currency exchange operations under the VAT Act and the proper interpretation of s 2(1)(a) and its proviso. It establishes that the proviso to s 2(1) creates a mixed supply (partly taxable, partly exempt) rather than converting an exempt financial service into an entirely taxable supply. The case is significant for understanding the scope of input tax deductions available to vendors engaged in currency exchange and similar financial services that involve both fee-based and margin-based revenue components. It demonstrates the application of the apportionment principle under s 17(1) of the VAT Act where goods and services are acquired for use in making both taxable and exempt supplies. The judgment also provides important guidance on the legislative policy underlying the VAT treatment of financial services following the Katz Commission recommendations.