According to the value added tax (VAT) Act of 1991, if certain requirements are met when selling commercial property as a going concern, the sale of the property may qualify to be zero-rated for VAT purposes.
The following, among others, are requirements to qualify for zero-rated VAT when selling commercial property:
The term ‘enterprise’ is defined in the VAT Act as: “a person in the Republic or partly in the Republic supplying goods or services.”
An interpretation note (IN 57) issued by the South African Revenue Service addresses the sale of an enterprise as a going concern.
In this note, under the heading “supply of an income-earning activity” SARS states that the purchaser must be able to continue the operation of the business as it is currently operating, without the need to take any additional action.
Among others, the following may be considered leasing activities:
According to this, a vendor who carries out a leasing activity of a fixed property and who has the intention of supplying such leasing activity, must clearly state in the contract that all other aspects of the leasing activity form part of the fixed property in order to provide an income-earning activity.
In such a case where the lease contract or agreement does not include fixed property as part of the agreement, only the asset will be sold.
An income-earning activity cannot be made up of an asset that is capable of being operated as a business. Actual operation of the business must be in place. Therefore, an agreement to purchase a dormant business or a business which is yet to commence operation is not considered a going concern.
Both parties must agree upon the fact that the enterprise will be earning an income as of the date of transfer. Zero rate can then apply if the seller of the business has already started the business and can ensure that it is earning an income before transferring the business to the purchaser.
The zero rate will not apply should the purchaser choose to take ownership of the enterprise before the agreed date of transfer and the enterprise only begins to earn an income after such date.
Contact our conveyancing attorneys in Cape Town for expert legal advice and assistance with all matters regarding to Tax law.
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