Notional Input Tax: Eligibility, Calculation, and Records

Notional input tax is a deemed VAT or GST credit that a registered business can claim when it buys second-hand goods from a seller who is not registered for tax. Because the unregistered seller cannot issue a tax invoice, the buyer creates its own prescribed record and applies the tax fraction to the purchase price (or the open market value, if lower) to recover the tax embedded in that price.

Why the Credit Exists

A VAT or GST chain works because each registered business claims back the tax charged by its supplier and then charges tax on its own sale. The chain breaks when the supplier is a private individual, an estate, or any other entity outside the tax system. That seller cannot issue a tax invoice, yet the price they charge almost certainly has old tax costs baked into it from when the goods were originally sold new.

Without a fix, the buying business would absorb that hidden tax and then charge full tax again on resale. The end consumer would effectively pay tax twice on the same value. The notional input tax mechanism closes the gap by treating the purchase price as if it already contains a tax component and letting the business deduct that deemed amount. Second-hand dealers, auctioneers, and any business sourcing used goods from the public can then compete on roughly even terms with businesses that buy exclusively from registered suppliers.

South Africa, New Zealand, and Canada each allow a form of this credit, though the details differ.¹²³ The rules below draw mainly on the South African framework, which is the most detailed, with New Zealand parallels where relevant.

Who Can Claim It

Three conditions run through every version of the rule.

The items must be second-hand: previously owned and used. That covers movable property like vehicles, machinery, and equipment. In South Africa it extends to immovable property such as land and buildings, though fixed property has its own added rules.⁴
The seller must not be registered for VAT or GST. If the seller is registered, they should be issuing a proper tax invoice and charging tax in the normal way.
The buyer must acquire the goods for use in making taxable supplies: reselling them, incorporating them into a manufacturing process, or using them in operations that generate taxable revenue.

Goods bought for personal use or to make exempt supplies do not qualify. Some jurisdictions also exclude items like gold coins, fine metal, and certain financial instruments from the definition of second-hand goods, because those assets do not depreciate or transform like ordinary consumer products.

How to Calculate the Credit

The calculation uses the tax fraction: the tax rate divided by 100 plus the tax rate. At a 15 percent rate, that fraction is 15 ÷ 115, or roughly 13.04 percent.⁴ South Africa’s VAT rate remains 15 percent after a proposed increase was reversed before taking effect.⁵ New Zealand’s GST rate is also 15 percent, so the same fraction applies there.⁶

Apply the fraction to the lower of two amounts: what you actually paid, or the open market value of the goods.⁴ The lower figure prevents an inflated purchase price from generating an outsized credit. If you pay R100,000 for a vehicle worth R80,000 on the open market, the fraction applies to R80,000, giving a notional credit of R10,434.78.

Records You Have to Create

No tax invoice exists, so the buyer has to create the substitute. In South Africa the prescribed form is the VAT 264 declaration, and Section 20(8) of the VAT Act sets out what it must contain:¹

The seller’s full name and physical address.
The seller’s identity number, ideally with a photocopy of the identity document.
A description of the goods, including quantity, volume, or mass as appropriate.
The date of payment or trade-in.
The selling price and proof of payment, such as a cheque number, receipt number, or bank transfer reference.

Other jurisdictions ask for equivalent detail even if the form differs. The tax authority needs enough information to verify that the transaction happened, at the price stated, with an identifiable private seller. Weak records are the fastest way to lose a claim during an audit.

In South Africa these records must be kept for at least five years from the date the return is submitted, and longer if the transaction becomes part of an audit or dispute.⁷ Digital backups alongside physical documents are standard practice for businesses that process these transactions regularly.

When You Can Claim, and When You Get Paid

The credit goes on the periodic VAT or GST return for the period in which payment is made. In South Africa the deduction follows the cash actually paid. If you agree to buy an asset for R200,000 but only pay R120,000 during the current tax period, you can only claim the notional credit on R120,000. The balance becomes claimable as further payments are made.¹

Where the return produces a net refund, SARS must process the payment within 21 business days of receiving a correctly completed return.⁸ Returns flagged by automated risk profiling may be held for verification, which extends the timeline. Accurate documentation and a consistent filing history reduce the chance of triggering that review.

Buying From Someone You Are Connected To

Most jurisdictions restrict the credit when the buyer and seller are associated. The concern is obvious: buying a vehicle from a spouse, a family trust, or a company you control invites an inflated price and an inflated credit. New Zealand’s GST law explicitly limits the deduction in associated-person transactions, and South Africa’s open-market-value cap does similar work.²

If you are buying second-hand goods from anyone you have a personal, family, or corporate connection with, treat the transaction with extra caution. The tax authority will test the price against market comparables, and losing an associated-person argument usually means repaying the full credit plus interest.

What Happens if the Goods Get Used Differently Later

The credit is not necessarily permanent. If you bought second-hand equipment for a taxable manufacturing operation and then shift it into an exempt activity, most VAT systems require you to repay some or all of the credit. In the UK’s partial exemption rules this is called a clawback, and the adjustment goes on the return for the period in which the change of use occurs or the revised intention is formed.⁹ The UK clawback window extends up to six years from the original claim. South Africa and New Zealand have equivalent adjustment mechanisms.

The principle is consistent: the credit was granted because you said you would use the goods for taxable purposes. When that stops being true, the credit unwinds. Businesses that acquire high-value second-hand assets should track actual use carefully, because a change-of-use adjustment years down the line can create a significant cash outflow.

Land, Buildings, and Transfer Duty

Buying second-hand land or buildings from an unregistered seller adds a wrinkle in jurisdictions that impose transfer duty. In South Africa, SARS has ruled through Binding General Ruling 57 that transfer duty paid to the government is not part of the consideration for purposes of the notional input tax calculation.⁴ Transfer duty is a separate tax payable to SARS, not an amount paid to the seller, so only the actual purchase price paid to the seller feeds the tax fraction.

The distinction matters on large property deals. A business buying a commercial building for R5,000,000 and paying R400,000 in transfer duty cannot apply the tax fraction to R5,400,000. The notional credit is calculated on R5,000,000, or the open market value if that is lower. Missing this point is a common audit finding, and the correction comes with interest.

1
South African Revenue Service. Value-Added Tax Declaration for the Supply of Second-Hand Goods
2
Inland Revenue. IS 25/22 – GST – Secondhand Goods Input Tax Deduction
3
Canada.ca. Calculation of the Notional Input Tax Credit That May Be Claimed by a Creditor Under Subsection 183(7)
4
South African Revenue Service. Binding General Ruling 57 – Whether the Term Consideration Includes an Amount of Transfer Duty
5
South African Revenue Service. Value-Added Tax
6
Inland Revenue. GST (Goods and Services Tax)
7
South African Revenue Service. Record Keeping
8
South African Revenue Service. VAT Refunds for Vendors
9
GOV.UK. Partial Exemption (VAT Notice 706)