Page 442 - Juta's Indirect Tax

IN 57 VaLue-added tax act: InterPretatIOn nOtes IN 57
4.4 Time of supply
As the disposal of an enterprise as a going concern is deemed to be a supply of goods, the time of supply is, subject to section 9 (2), determined in section 9 (1), that is, the earlier of the time an invoice is issued for the supply or any payment of consideration is received by the seller. This time of supply rule applies even when xed property forms part of the disposal of the enterprise.
In this regard, an ‘invoice’ is de ned in section 1 as a document notifying of an obligation to make payment. With regard to payment of consideration, any deposit (not being a deposit for a returnable container) received in respect of the purchase price is not regarded as consideration received until such time that the deposit is applied as payment for the supply of goods or services. As a result, the time of supply is not triggered when payment of a deposit is received. 4.5 Date of registration
A vendor supplying a going concern to a purchaser on or after the commencement date of the purchaser’s enterprise but before the purchaser’s registration as a VAT vendor, must ensure that the purchaser has applied to be registered as a vendor prior to concluding the agreement for the purchase of the enterprise. In the event that the purchaser has not applied for registration before concluding the agreement, the supply cannot be zero-rated and must therefore be subject to VAT at the rate of 14%.
4.6 Registration numbers
The seller’s VAT registration number cannot be allocated to the purchaser and the purchaser of the business will receive a new VAT registration number (unless the purchaser is already registered).
4.7 The enterprise must be a going concern
The term ‘going concern’ is effectively de ned in paragraph (i) of the proviso to section 11 (1) (e) and consists of various criteria. The criteria for a supply of an enterprise to constitute a going concern as contemplated in section 11 (1) (e) are—
• the seller and purchaser must agree in writing that the enterprise will be an income-earning activity;
• the assets which are necessary for carrying on such enterprise are disposed of by the seller to the purchaser; and
• the seller and purchaser must agree in writing that the consideration for the supply of the enterprise is inclusive of tax
at the zero rate.
4.8 Supply of an income-earning activity
The contracting parties must, at the conclusion of the contract, agree in writing that the enterprise will be an income- earning activity on the date the ownership of the enterprise is transferred. This must be stated speci cally in the agreement. The agreement must provide for the sale of an independent income-earning activity together with the necessary infrastructure. The purchaser must be placed in possession of a business which can be operated in that same form, without any further action on the part of the purchaser. The parties must, therefore, agree that the enterprise will remain active and operating until its transfer to new ownership. It is, however, not necessary that the purchaser indeed intends to
carry on the particular activity of the enterprise. The contract must merely create a ‘capacity to continue’.
The following scenarios provide guidelines as to what will or will not constitute an income-earning activity.
4.8.1 Farming activities
The mere sale of a farm property constitutes the supply of a capital asset of a business and not the farming enterprise. In order to supply a farming enterprise as a going concern, the seller and the purchaser must agree that the income- earning activities of the farm, its equipment, crops and assets necessary for carrying on the farming activities will be transferred.
4.8.2 Leasing activities
Leasing activities generally consist of, amongst others,
• an underlying asset that is the subject of a lease; and
• a contract of lease.
Accordingly, a vendor who conducts a leasing activity in respect of xed property and who intends to supply such leasing activity must make provision in the contract stating that the other aspects of the leasing activity are disposed of together with such xed property in order to constitute an income-earning activity. In instances where the agreement does not provide for a property together with the lease agreements to be transferred, only the asset is sold and section 11 (1) (e) will not apply.
4.8.3 Fixed property sold to the tenant
An agreement to sell a xed property to the sole tenant does not constitute the disposal of a going concern, as the income-earning activity (being the leasing activity) is not sold to the purchaser. The purchaser obtains a capital asset without the capacity to continue the leasing activity.
4.8.4 Sale and lease back
There is no agreement to sell an income-earning activity where the agreement provides that the seller being the occupier/user of an asset will lease it back from the purchaser.
4.8.5 Business yet to commence or dormant business
An asset which is merely capable of being operated as a business does not constitute an income-earning activity. There must be an actual or current operation. For this reason, the agreement to dispose of a business yet to commence or a dormant business is not a going concern.
As the parties must agree that the enterprise will on the date of transfer thereof be an income-earning activity, the zero rate can apply where the seller is in terms of the contract obliged to start the business and ensure it is income-earning before transfer thereof. However, in instances where the purchaser takes possession of the enterprise before the date of transfer, and the enterprise is only income-earning after the date of transfer, the zero rate will not apply.
434 Juta’s IndIrect tax 2016