The sale of a property as a going concern

Given certain conditions being met, a property can be transferred as a ‘going concern’ which can be beneficial to the transacting parties.

Property Blog Articles | Advice | Contractual Matters | Market News

The definition of a ‘going concern’

A ‘going concern’ has been defined by the South African Revenue Service (SARS) as a “supply of an income-earning activity” and that “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.”

Requirements for the sale of a going concern

In order for a property to be sold as a going concern, the following five factors have to be present and included in the agreement of sale:

  • The seller must be a registered VAT vendor
  • The purchaser must be a registered VAT vendor
  • The property must be an income earning activity and the parties must agree in writing that the property will constitute an income earning activity on the date of registration of transfer
  • The sale of the property must include all the assets which are necessary for carrying on the income earning activity
  • The seller and purchaser must agree in writing that the transaction is a zero-rated VAT transaction and therefore the purchase price is inclusive of VAT at the rate of 0%.

A typical example would be the sale of a property subject to an existing lease, provided that the seller leases properties as part of his or her business (lease enterprise). The term ‘going concern’ is mainly used in the commercial real estate environment, and will not apply if the buyer and/or seller is not in the business of renting out properties they own.

Benefits of transferring a property as a going concern

The Value-Added Tax Act, 89 of 1991 stipulates that VAT is payable on the supply of goods by a VAT vendor in the course and furtherance of any enterprise carried out by the vendor. This means that if the seller is a VAT vendor and the sale relates to the course and/or furtherance of his or her enterprise, VAT will be payable at the rate of 15% on a transaction.

However, if the property is sold as a going concern, the transaction will be zero-rated and VAT will be payable at the rate of 0% subject to all the other criteria being met.

Due diligence requirements

The parties should ensure that they keep all relevant documents should it become necessary for them to prove their entitlement to zero-rated VAT on the transaction. For example, in the case of the sale of a lease enterprise, SARS may require proof of the lease agreement entered into with a third party.

The parties should also make provision in the agreement on how payment of VAT will be made should SARS decline the zero-rated transaction and levy VAT at the normal 15% rate.   

Follow Snymans on Facebook for more legal information, tips and news about property.

11654

Recommended for you

Property Blog Articles | Advice | Contractual Matters | Market News
Contractual Matters

Appointing multiple executors of a deceased estate

6880

The decision of who should be appointed as the executor of an estate can be made by the testator. While it is common for a single person to be appointed, it is also possible for a testator to appoint more than one person to share this role which can bring with it certain added complications.

Read More
Property Transfers | Bond Registrations | Snymans Attorneys
Contractual Matters

Buying a property with an existing tenant

7224

When purchasing a property with a tenant already in place, certain aspects should always be considered before the offer to purchase is signed.

Read More
Property Blog Articles | Advice | Contractual Matters | Market News
Contractual Matters

The long lease

12397

There has been a great deal of talk about 99-year leases which seems to have many, including Parliament, in a frenzy. What does a 99-lease entail? What happens at the end of the lease? Can your children inherit this piece of land? Below we answer some of the key concerns when it comes to a long lease.

Read More
Property Blog Articles | Advice | Contractual Matters | Market News
Contractual Matters

Compliance Certificates and Home Inspections

12387

Before a property is sold and registered in the buyer’s name, it’s important that it is compliant with relevant regulations and that all parties are aware of the condition of the property and what maintenance or repairs might be needed. The buyer and seller each have responsibilities in this regard and it is important that both parties fulfil these obligations.

Read More
Property Transfers | Bond Registrations | Snymans Attorneys
Contractual Matters

4 common mistakes when selling your home

13057

Whether you’re selling your home for the first time or you’ve done it all before, it’s easy to get caught out by a few common pitfalls. That’s why we’ve put together this guide on four common mistakes and how you can avoid them.

Read More

Need more Snymans content?

Sign up for our monthly newsletter.

The sale of a property as a going concern

Given certain conditions being met, a property can be transferred as a ‘going concern’ which can be beneficial to the transacting parties.

Property Blog Articles | Advice | Contractual Matters | Market News

The definition of a ‘going concern’

A ‘going concern’ has been defined by the South African Revenue Service (SARS) as a “supply of an income-earning activity” and that “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.”

Requirements for the sale of a going concern

In order for a property to be sold as a going concern, the following five factors have to be present and included in the agreement of sale:

  • The seller must be a registered VAT vendor
  • The purchaser must be a registered VAT vendor
  • The property must be an income earning activity and the parties must agree in writing that the property will constitute an income earning activity on the date of registration of transfer
  • The sale of the property must include all the assets which are necessary for carrying on the income earning activity
  • The seller and purchaser must agree in writing that the transaction is a zero-rated VAT transaction and therefore the purchase price is inclusive of VAT at the rate of 0%.

A typical example would be the sale of a property subject to an existing lease, provided that the seller leases properties as part of his or her business (lease enterprise). The term ‘going concern’ is mainly used in the commercial real estate environment, and will not apply if the buyer and/or seller is not in the business of renting out properties they own.

Benefits of transferring a property as a going concern

The Value-Added Tax Act, 89 of 1991 stipulates that VAT is payable on the supply of goods by a VAT vendor in the course and furtherance of any enterprise carried out by the vendor. This means that if the seller is a VAT vendor and the sale relates to the course and/or furtherance of his or her enterprise, VAT will be payable at the rate of 15% on a transaction.

However, if the property is sold as a going concern, the transaction will be zero-rated and VAT will be payable at the rate of 0% subject to all the other criteria being met.

Due diligence requirements

The parties should ensure that they keep all relevant documents should it become necessary for them to prove their entitlement to zero-rated VAT on the transaction. For example, in the case of the sale of a lease enterprise, SARS may require proof of the lease agreement entered into with a third party.

The parties should also make provision in the agreement on how payment of VAT will be made should SARS decline the zero-rated transaction and levy VAT at the normal 15% rate.   

Follow Snymans on Facebook for more legal information, tips and news about property.

11654