Page 446 - Juta's Indirect Tax

IN 57 VaLue-added tax act: InterPretatIOn nOtes IN 57
4.13 Going concern acquired wholly or partly for purposes other than making taxable supplies 4.13.1 Section 18A
A principle of VAT is that a vendor is only entitled to deduct input tax to the extent that goods or services acquired are to be used, consumed or supplied by the vendor in the course of making taxable supplies. A vendor acquiring an enterprise as a going concern at the zero rate is effectively allowed a deduction of input tax in full as the assumption is that the acquisition is to be used, consumed or supplied wholly in the course of making taxable supplies. However, if the acquisition of an enterprise as a going concern at the zero rate is partly used, consumed or supplied in the course or furtherance of making taxable supplies, the vendor is effectively obtaining an undue input tax deduction.
Section 18A therefore creates a consistent VAT treatment on the aforementioned transaction in that the purchasing vendor is, subsequent to the acquisition of the enterprise as a going concern, required to account for output tax on the portion of the purchase price of a zero-rated supply. This output tax adjustment is equivalent to the amount of VAT which would not have quali ed as input tax had the standard rate been applied.
Example 5 — Going concern acquired wholly or partly for purposes other than making taxable supplies
Facts:
Property Company XYZ is a registered vendor which sells a commercial building to a pension fund. The building is 70% tenanted. The pension fund is only a registered vendor for its property rental activities. The written contract between the parties complies with the requirements of section 11 (1) (e) and the supply is treated as a zero-rated supply in terms of section 11 (1) (e). The consideration payable for the building was R5 000 000. The time of sup- ply occurred on 25 March 2009. Property Company XYZ declared this amount as a zero-rated sale in eld 2 of its March 2009 VAT return.
The pension fund, however, acquires the property with the intention of using the vacant space for purposes of conducting its pension fund activities, which is an exempt activity. The pension fund accounts for VAT on a monthly basis under category C.
Question:
What are the VAT implications for the pension fund when it acquires the building?
Result:
As the pension fund does not intend to use the entire building wholly for purposes of making taxable supplies, the provisions of section 18A are applicable. The pension fund must, therefore, account for VAT on 30% of the purchase price.
In view of this, the pension fund is required to account for R210 000 which is calculated below in eld 12 of its March 2009 VAT return:
R Purchase Price 5 000 000
Percentage used for other than taxable purposes 30% Section 18A value [R5 000 000 × 30%] 1 500 000 VAT @ 14% [R1 500 000 × 14/100] 210 000
The adjustment places the pension fund in the same position as it would have been, had it acquired the building as a standard-rated supply.
4.14 The 95 per cent/5 per cent rule
In instances where the intended use of such enterprise in the course of making taxable supplies is not less than 95% (calculated on the value) of the total intended use thereof, the enterprise may be regarded as having been acquired wholly for the purpose of making taxable supplies [refer to the proviso to section 18A (1)].
In such a case the purchasing vendor acquiring the enterprise is not required to make the adjustment contemplated in section 18A.
4.15 Suspensive conditions
A supply of an enterprise as a going concern which is conditional upon certain suspensive conditions being ful lled, does not constitute a taxable supply for VAT purposes until such time that the suspensive conditions have been ful lled. This is largely due to SARS interpreting a ‘suspensive condition’ 4 as follows:
‘... to suspend the full operation of the obligation and renders it dependent on the uncertain future event. A contract which is subject to a suspensive condition is a valid contract from the moment of its conclusion and neither party can unilaterally resile from it. . . . Once the condition is ful lled the enforceability and all other consequences of the contract come into full operation. A suspensive condition must be ful lled in its entirety unless the parties intended that ful lment of part of the condition should lead to the enforceability of a part of the contract. A condition intended to be for the bene t of one party only may be waived by such party before the time for ful lment of the condition has expired. Non-ful lment of a condition precedent annuls the contract retrospectively and each party must give restitution unless the contract provides otherwise, and subject to any rights acquired in good faith by third parties.’
438
Juta’s IndIrect tax 2016