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.
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