The Constitutional Court (ConCourt) has ruled that second-hand gold does not generally qualify for zero-rating under the Value-Added Tax (Vat) Act.

The ruling was handed down this week after Lueven Metals, a company involved in the buying and refining of second-hand gold, challenged the South African Revenue Service (Sars) over its interpretation of the Vat Act.

Lueven argued that it was entitled to supply gold bars to Absa Bank and other customers, and to receive Vat rebates under Section 11(1)(f) of the act.

The long-running case was originally heard in the Pretoria High Court, which agreed with Sars’s interpretation, but that ruling was later vacated by the Supreme Court of Appeal. That brought it before the ConCourt for final adjudication.

The company claimed it had operated in this way for years, consistent with how newly mined gold is treated when supplied to the South African Reserve Bank (Sarb), the SA Mint and commercial banks.

Sars countered that it was not the legislature’s intention to allow second-hand gold to be zero-rated. This treatment, it argued, was reserved for “virgin” gold only.

Earlier this year, National Treasury proposed scrapping this section of the act, which has allowed the zero-rating of gold supplied in specific forms to the Sarb, the SA Mint and banks for the past 35 years.

ENS tax executives have warned that this could have serious cost implications for the Sarb, the SA Mint and commercial banks.

Lueven was required to supply customers with gold bars refined to at least 99.5% purity. To do this, it had to deposit less pure gold scrap or bars with Rand Refinery, which would melt and refine the gold to the required specifications.

Lueven had for years treated its sales to Absa as zero-rated, which effectively allowed Absa to purchase the gold bars without paying Vat.

In a unanimous judgment, the ConCourt concerned itself with the three requirements for zero-rating gold:

The buyer must be a “prescribed purchaser”: The gold must be sold to a specific type of buyer approved by Sars, typically a licensed gold refiner, authorised dealer, or another officially recognised entity in the formal gold industry.
The gold must be in one of the “prescribed forms”: In other words, an approved physical form such as standard investment bars, ingots, or coins of a certain purity and weight.
The gold must not have been manufactured (except for refining): The gold must not have undergone any significant manufacturing process beyond basic refining. Essentially, it must remain raw or refined gold that has not been turned into jewellery, coins with added design, or other finished products.

The ConCourt found the third requirement permits only two types of manufacturing process: the refining of gold and the production of one of the prescribed forms.

The gold Lueven supplied was recycled, sourced from second-hand jewellery and scrap. This meant it had previously been manufactured into “non-prescribed forms”.

The ConCourt found that while refining changes the gold’s previous form, it does not erase the fact that it had already undergone a disqualifying manufacturing process. On this basis, Lueven’s supply of recycled gold could not qualify for zero-rating.

Lueven argued that the Vat system does not regulate zero-rating based on the gold’s previous form in the supply chain, but rather on the nature of the current supply.

The ConCourt held that the Vat Act is unambiguous when it comes to zero-rating and its purpose: the supply of second-hand gold is not eligible for zero-rating.

This means businesses dealing in recycled or previously used gold must charge and account for Vat at the standard rate on such transactions.

The court’s decision, based on the text, context and purpose of the relevant provisions of the Vat Act, essentially validated the Pretoria High Court’s original ruling.

Implications

The ruling has major implications for the gold trading and refining industry in South Africa. Many players in the sector rely on sourcing scrap and second-hand gold as part of their supply chains.

The judgment increases the Vat cost burden on these transactions, potentially raising costs for refiners, traders, and ultimately jewellery manufacturers and other end users.

This article was republished from Moneyweb. Read the original here.