Page 445 - Juta's Indirect Tax

IN 57 VaLue-added tax act: InterPretatIOn nOtes IN 57 The supplying vendor (Farmer B) is therefore entitled to a deduction envisaged in section 16 (3) (h) on the portion of
input tax previously denied (i.e. the portion that was used other than for purposes of making taxable supplies).
However, the purchasing vendor (Farmer Z) is required to make an adjustment in terms of section 18A (the applica- tion of section 18A is discussed in detail below).
4.12.3 Goods or services not used mainly for purposes of a going concern
Goods or services used partly for purposes of an enterprise, but not mainly for such purposes, when supplied, is in terms of section 8(16) deemed to be made wholly in the course or furtherance of the enterprise. As such goods or services are not used mainly for purposes of an enterprise, the supply cannot be a going concern as contemplated in section 11 (1)(e) and will be subject to VAT at the standard rate. In instances where the vendor can suf ciently distinguish between the parts of the supply to make it reasonable to sever them and apportion accordingly, the portion of the selling price which relates to the going concern may be zero-rated. The remainder of the portion which is not a going concern must be charged with VAT at the standard rate [section 8 (15)].
In instances where the apportionment contemplated above cannot be made, the supply of the enterprise will be subject to VAT at the standard rate.
Example 4 — Goods or services used mainly for purposes of a going concern
Facts:
B, a registered vendor used his land for taxable purposes (farming), exempt purposes (provision of dwellings to private individuals) and private purposes (the personal residential house). B sells the land together with the farming enterprise to Farmer Z. The farming enterprise entails egg production. However, B’s business was largely attribut- able to making exempt supplies and for private purposes (i.e. the land area space used constituted 60%). The parties agree that the egg production enterprise will be transferred as an income-earning activity at the zero rate.
The sale agreement stipulated the following values of the supply:
Land
Buildings
Egg production assets
Total
Question:
R
1 000 000 1 500 000 1 500 000 4 000 000
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 land was not used mainly for purposes of the going concern, the total selling price may not be zero-rated.
However, the consideration which is attributable to the egg production assets (i.e. the farming activity) may be zero-rated in terms of section 11 (1) (e). However, all the requirements of section 11 (1) (e) must be complied with in order for the zero rate to apply. In view of this, the consideration of R1 500 000 attributable to the farming activity may be zero-rated.
With regard to the land and buildings, the entire consideration attributable thereto will be subject to VAT at the stan- dard rate. Therefore, B must levy VAT of R350 000 on the value of R2 500 000 [(R1 000 000 + R1 500 000) × 14%].
The supplying vendor (B) is therefore entitled to a deduction envisaged in section 16 (3) (h) on the portion of input tax previously denied (i.e. the portion that was used other than for purposes of making taxable supplies).
The purchasing vendor (Farmer Z) is entitled to deduct input tax on the acquisition of the land and buildings to the extent that the land and buildings are used in the course of the farming activity.
In view of this, the consideration for the supply by B will be R4 350 000, which is made up as follows: R
Farming activity — zero-rated
Land & buildings — standard-rated
VAT @ 14%
Total
As the land and buildings are subject to VAT, the sale will not be subject to transfer duty.
1 500 000 2 500 000 350 000
4 350 000
Juta’s IndIrect tax 2016 437