Page 444 - Juta's Indirect Tax

IN 57 VaLue-added tax act: InterPretatIOn nOtes IN 57
Result:
The agreement of sale of the business read together with the lease agreement will constitute the disposal of assets which are necessary for carrying on the manufacturing activity. In instances where the building was not an integral part of the manufacturing activity of Company A (i.e. the business could still continue trading if relocated to a differ- ent venue), the sale agreement comprising only the sale of the business activity together with the assets necessary for carrying on the business, would satisfy the requirements of an income-earning activity.
4.9.1 Disposal of shares
There is no supply of a going concern where ownership of an enterprise changes through the sale of shares in a company. The supply of shares is a nancial service contemplated in section 2 (1) (d) and is therefore exempt in terms of section 12 (a).
4.10 Agreement in writing between the parties
The parties must agree in writing that the enterprise is disposed of as a going concern and is a zero-rated supply for VAT purposes. The failure by the parties to agree about this aspect in writing will result in the zero rate not being applicable, even if the enterprise is indeed transferred as a going concern.
In instances where the contract speci cally states that an enterprise (for example, a property leasing enterprise) is disposed of as a going concern at the zero rate and it is subsequently found that the enterprise was not disposed of as a going concern (as, for example, the sale agreement provides for the transfer of a vacant building which cannot constitute an income-earning activity), the zero rate cannot apply. In this instance the seller will be required to charge VAT at the standard rate of 14%. In addition, the seller will also be liable for interest and penalties on the late payment of the VAT relating to the supply of the enterprise.
In such a case there can be no argument between the parties as to whether the purchase price includes VAT or not, or the rate of VAT provided for. As the parties reached agreement on the purchase price based on an incorrect rate of VAT, the purchase price should be adjusted accordingly.
It is therefore advisable for the contract to make provision for VAT to be levied at the rate of 14% in the event that the supply does not qualify to be zero-rated in terms of the provisions of section 11 (1) (e).
4.11 Supply of part of an enterprise
The supply of part of an enterprise which is capable of separate operation is zero- rated where the requirements discussed above are met. The transfer of a ‘stand-alone’ division of a business or of some of the outlets of a business which are operated at more than one geographical location can therefore qualify for zero-rating.
Section 8 (15) provides for a supply to be apportioned between zero-rated and standard-rated components where, if separate considerations had been payable, a single supply would be subject to tax partly at the standard rate and partly at the zero rate. Such apportionment requires a suf cient distinction between the parts of the supply to make it reasonable to sever them and apportion accordingly.
A contract for the sale of an enterprise concluded in circumstances where the entire enterprise is not disposed of as a going concern will require an apportionment to be made between the activities which are disposed of as a going concern [section 11 (1) (e)] and the portion which is not a going concern [section 7 (1) (a)].
4.12 The supply of goods or services used only partly for purposes of a going concern
4.12.1 General
The supply of goods or services which were applied partly for taxable and partly for other than taxable purposes is deemed to be made wholly in the course of an enterprise and is, therefore, fully taxable in terms of section 8 (16). The supply of the ‘portion’ of such goods or services that are used partly to make other than taxable supplies (e.g. exempt purposes) is thus also subject to VAT. The vendor making such supply may make a deduction that was previously denied in respect of the ‘non- taxable’ portion of the supply in accordance with section 16 (3) (h). However, the purchaser will be required to make an adjustment contemplated in section 18A if the enterprise will be used by the purchaser partly for making taxable supplies.
4.12.2 Goods or services used mainly for purposes of a going concern
Goods or services which were before the supply of the enterprise as a going concern used mainly (that is, more than 50%) for the purposes of such enterprise and partly for other purposes and are supplied as part of the supply of a going concern, are deemed to form part of the going concern [refer to proviso (ii) to section 11 (1) (e)].
Example 3 — Goods or services used mainly for purposes of a going concern
Facts:
Farmer B, a registered vendor, used his farm for taxable purposes (farming), exempt purposes (provision of ac- commodation to labourers) and private purposes (the farm house). Farmer B sells the entire farm to Farmer Z. The farming enterprise entails crop farming and to a lesser extent cattle farming. The land on which the farm is situated is used mainly for the enterprise activity (60% of the farm land is used for planting crops and 10% used for grazing land and the balance of 30% is the land on which the labourers accommodation and farmhouse is situated). The parties agree that the crop farming part of the enterprise will be transferred as an income-earning activity at the zero rate.
Question:
Can the supply of the entire farm, including the portion used for exempt and private purposes constitute a going concern which is zero-rated in terms of section 11 (1) (e)?
Result:
As the farm was used mainly for purposes of the going concern, the total purchase price of the farm may be zero- rated, even though the farm was used partly for non- enterprise purposes.
436 Juta’s IndIrect tax 2016