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.

Verbal vs. written contracts for conveyancing

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.

Recommended for you

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

Buying and selling property – the implications for married foreign nationals[post_view before=""]

In a recent article, we looked at the question of whether foreign nationals are permitted to own property in South Africa. A related question is what happens when a foreign national, who has entered into a marriage outside of South Africa, wishes to buy or sell property. Let’s take a look.

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

Foreign property ownership in South Africa[post_view before=""]

Can foreign nationals own property in South Africa? The short answer is yes. But before we explore this topic in any detail, let’s first define what we mean by foreign national – someone who is a non-resident, meaning that they are neither ordinarily resident nor meet the requirements of the physical presence test.

Read More
My name has changed - what happens to my property’s title deed?
Contractual Matters

Power of Attorney: Can it lapse?[post_view before=""]

A power of attorney is a useful tool that can be used in many situations. For example, an elderly parent who, due to their age, finds it difficult to attend to their affairs may decide to grant power of attorney to their adult child.

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

Why identifying the ultimate beneficial owner matters[post_view before=""]

In the past, detecting funds from unlawful activities as they entered the financial system was relatively straightforward. However, with the dishonest among us increasingly making use of juristic or corporate entities to hide their true identities and introduce illicit proceeds into the system, it’s becoming more and more difficult for the relevant authorities to identify these funds. And it’s not only South African officials who find themselves in this position – the challenge cuts across international borders.

Read More
Minors and immovable property
Contractual Matters

How does divorce affect transfers in the case of joint ownership?[post_view before=""]

The end of a marriage can result in several administrative challenges, not least of which is tackling the joint ownership of immovable property. And while divorce can be a traumatic and emotional experience, with the proper legal advice, the transfer of ownership doesn’t need to be.

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.

Verbal vs. written contracts for conveyancing

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.