Sales of going concerns Part I

Sales of going concerns Part I

In order to avoid the cash flow implications of paying VAT, most farmers, when disposing of the whole or a portion of a farm, would do so by selling the farm or the specific portion as a going concern.  The agreements that govern such transactions can be complex and in this series of two articles we will look at the requirements for such agreements.  In this month’s article we will look at the requirements of the Value Added Tax Act and in next month’s article we will look at general requirements applicable to such transactions.

Sales of going concerns are mostly tax driven by the need to avoid the unnecessary cash flow drain associated with paying and then reclaiming the VAT on a sales transaction.  Sales of going concerns are governed by Section 11(1)(e) of the Value Added Tax Act.  This section provides that where a supply of goods would be charged with tax at the standard rate, such supply of goods shall, subject to compliance with the provisions of Section 11(3) with Value Added Tax be charged with VAT at the rate of 0% where such supply is:

• to a registered vendor
• of an enterprise or a part of an enterprise which is capable of separate operation
• where the seller and recipient have agreed in writing that such enterprise or part thereof (as the case may be) will be disposed of as a going concern. 

The provisions of this section are compulsory and must be read with interpretation note no. 57 of 2010, wherein SARS clarifies certain of the components.  Non-compliance with this section will result in SARS refusing to treat the transaction as one subject to the payment of VAT at zero percent and will levy normal standard rated VAT of 14%.  In such a case the purchaser, even if he is a registered vendor, will have to reclaim the input tax from SARS. 

Let’s examine some of the requirements in more detail.

• It goes without saying that the seller must be a registered vendor.  If the seller is not a registered vendor, transfer duty will apply to the sale of immovable property and the purchaser will be able to reclaim the VAT tax fraction of the purchase price from SARS.
• The purchaser must be a registered vendor.  It will obviously be ideal if the purchaser is already a registered vendor at the time that the agreement is concluded.  If not, the agreement must contain a suspensive condition providing for the suspension of the agreement’s operation until such time as the purchaser is registered.  Section 11(3) now also requires the purchaser to provide the seller with a copy of his VAT registration certificate.
• The supply must be of an enterprise or part of an enterprise capable of separate operation.  An enterprise is an activity which is carried on continuously or regularly and in the course of which goods or services are supplied to another person for a consideration, whether or not for profit.
• The parties must agree in writing that the enterprise will be an income earning activity on the date that the ownership of the enterprise is transferred.  In the case of immovable property, this will usually be the date on which transfer is registered in the Deeds Office.
• The term income earning activity requires some examination: -
  • In the case where a farming operation is sold, such sale will have to include the assets necessary to conduct the farming operation, for instance the farming implements, off-take agreements, crops, etc.  If only the land is sold, that is not a sale of an income earning activity.
  • If the farming operations are conducted by a different entity such as a company, which leases the land from the seller, then the seller will be selling a rental enterprise.  The rental enterprise will consist of the land and the lease agreement.  A separate agreement will then have to provide for the sale of the farming enterprise, which in this case will be conducted by another entity.
  • Where the land is sold to the tenant, such a sale is not the sale of an income earning activity and the zero rating will not apply.
• Many farms today are used not only for conducting farming activities but also related activities such as guest houses and restaurants.  In each case the exact relationship between the owner of the land and the operator of the activity must be carefully examined to determine the exact nature of what will be sold as well as the contents of each such sale.
• The parties must also specify that the selling price is inclusive of VAT at 0%.  It is prudent, however, to provide that in the event that SARS determines that VAT is payable at any rate other than 0%, the selling price will be increased by the amount of the VAT and the purchaser will be obliged to pay such VAT to the seller.
• The parties must also record that all the assets necessary for conducting the enterprise are being sold.  If goods are included, which a purchaser may not use for the conduct of such enterprise, the purchaser may be required to make a change of use adjustment subsequent to the acquisition of such goods.

The following documents must be obtained and retained by a seller who claims a zero rating on the supply of a going concern:

• The seller’s copy of the zero-rated tax invoice;
• The contract of sale;
• The purchaser’s proof of registration as a VAT vendor (VAT 103).

You are welcome to contact Jacques Blignaut directly at Smith Tabata Buchanan Boyes:  021 406 9100 or jacquesb@stbb.co.za