Supply Of A Going Concern "Down Under"
09 October 2013
Posted by: Author: Carmen Holdstock
Author: Carmen Holdstock (CliffeDekkerHofmeyr)
In general, under South African VAT law, the disposal of properties by a property developer is a taxable supply subject to VAT at the standard rate of 14%. The property developer will likely be entitled to a deduction of input tax in respect of VAT paid on the acquisition of goods and services in the course of supplying the properties.
In a recent Australian federal court case dealing with Goods and Services Tax (GST) the Administrative Appeals Tribunal of Australia (AAT) dealt with the taxpayer's liability to "increase its adjustments" pertaining to the sale of certain units in a serviced apartment complex subject to leases under a management company and the purchase had been treated as a going concern.
The relevant facts stated in the AAT judgment were:
- On 8 December 2000, South Steyne Hotel Pty Ltd (South Steyne) purchased the Sebel Manly Beach Hotel.
- On 10 August 2006, each of the 83 individual apartments in the hotel, together with the 'management lot' (consisting of the reception area, offices and car parking spaces), became separate lots of a strata plan (the Strata Plan).
- On 29 September 2006, South Steyne transferred to Mirvac Hotels Pty Ltd (Mirvac Hotels) the management lot of the Strata Plan. On the same day, South Steyne granted to Mirvac Management Pty Ltd (Mirvac Management) a separate lease in respect of each of the 83 apartment lots of the Strata Plan. Each lease was in identical terms. Under each lease Mirvac Management was obliged to operate a scheme whereby each apartment was, together with all other apartments, to be operated as part of a serviced apartment business.
- Pursuant to a separate Serviced Apartment Management Agreement entered into by Mirvac Hotels and Mirvac Management on 11 January 2006, Mirvac Hotels assumed exclusive control of the operation of the serviced apartment business. Also pursuant to the terms of the agreement Mirvac Management conferred upon Mirvac Hotels the benefit of its rights under the leases entered into on 29 September 2006.
- By Contract for the Sale of Land dated 1 September 2006, South Steyne sold one of the 83 apartments (the First Apartment) to the Applicant for $508,000. The First Apartment was sold subject to the applicable lease that had been granted to Mirvac Management. The contract of sale permitted the Applicant to participate in a 'Management Rights Scheme' (the Scheme) which mirrored the scheme provided for under the leases granted to Mirvac Management.
- A Product Disclosure Statement (PDS) dated 16 March 2006 – which marketed the Scheme under the heading "The Sebel Manly Beach" – identified the following characteristics of the Scheme:
- Owners of apartments that were the subject of a lease to Mirvac Management could elect to participate in the Scheme by allowing Mirvac Management to use the apartment for "letting purposes in a Serviced Apartment Business'.
- Owners who elected to participate in the Scheme would receive a 'Fixed Owner's Return Amount' for a period up to two years from 1 July 2006 until 30 June 2008, calculated by reference to a 'percentage of the Purchase Price'.
- After the Fixed Return Period owners would receive income from the 'Gross Pooled Apartment Revenue generated by the Serviced Apartment Business'.
- The Applicant elected to participate in the Scheme.
- By Contract for the Sale of Land dated 18 January 2008, South Steyne sold a second apartment (the Second Apartment) to the Applicant, also for $508,000. Like the First Apartment, the Second Apartment was sold subject to the applicable lease that had been granted to Mirvac Management. As with the First Apartment, the Applicant elected to participate in the Scheme.
- Each contract of sale provided that the parties agreed that the Property comprised a supply of a going concern for the purposes of s 38-325 of the GST Act.
The issues arising were:
- Whether there had been an increasing adjustment which is where you are the recipient of a supply of a going concern or where the supply is GST free and if so, whether the supplier had carried on a relevant enterprise until the day of the supply of each of the apartments to the applicant.
- What the nature of the enterprise was.
- Whether the supply to the applicant was sufficient to carry on the continued operation of the enterprise.
- Whether the parties had agreed in writing that the supply was that of a going concern.
The AAT in reaching its conclusion followed similar principles enunciated in our law, namely, that the parties had agreed in writing that the sale was of a going concern and that therefore the parties could not, by virtue of including special conditions in their agreement, seek to make a supply that is essentially a zero–rated supply, into a taxable supply
The recipient of the developed or undeveloped properties would be able to claim the VAT charged by the seller, but only to the extent that those properties will be used in the course or furtherance of making taxable supplies. The disposal to a person not registered as a vendor does not alter the fact that VAT must still be levied where a taxable supply is made by a vendor in the course or furtherance of his enterprise.
Based on the provisions of s11(1)(e) of the VAT Act, No 89 of 1991 (VAT Act) in order to dispose of a going concern at the zero rate of VAT, the following requirements must be met:
The requirements above essentially connotes what a 'going concern' entails for section 11(1)(e) of the VAT Act. In other words, where the requirements above are not met, one is not dealing with a 'going concern' and s11(1)(e) of the VAT does not apply. Where s11(1)(e) of the VAT Act does not apply, the zero rate cannot not be used, meaning the standard rate of 14% becomes applicable.
- The parties must agree in writing that the enterprise is disposed of as a going concern.
- The supplier and the purchaser must be registered VAT vendors.
- The supply must consist of an enterprise or part of an enterprise that is capable of separate operation.
- The supplier and the purchaser must, at the time of the conclusion of the agreement, agree in writing that the enterprise will be an income earning activity on the date of transfer thereof.
- The assets necessary for the carrying on of the enterprise must be disposed of by the supplier to the purchaser.
- The supplier and the purchaser must agree in writing that the consideration for the supply of the enterprise or part of the enterprise is inclusive of tax at the rate of 0%.
Apart from the requirement that the parties agree in writing that the enterprise or part thereof shall be disposed of as a going concern, the parties must also specifically agree that the enterprise will constitute an income-earning activity at the date of transfer. Once again, in order for the agreement to have any force and/or effect, it must be reduced to writing. Essentially what this requirement entails is that the supplier must ensure that the purchaser is placed in possession of a business that is in the same form as it was prior to its disposal as a going-concern, and thus giving an assurance that the business has the capacity to continue.
As such, the supplier must ensure that the purchaser is placed in possession of a business that can continue its previous operations without any further or minimal effort on the part of the purchaser. Therefore, the parties must agree and have the intention that the enterprise will remain active and operating until its transfer to new ownership. However, it is not a requirement for the parties to agree that the activity should be earning profits at the date of transfer.
The general requirement that the enterprise or part must constitute a going concern, has come under consideration under the New Zealand courts (on which South Africa’s VAT system is partially based) which have consistently confirmed that while the purchaser must be able to carry on the particular activity, it is not necessary that he actually carry on the enterprise subsequent to acquisition. Therefore, if the recipient merely receives developed and/or undeveloped properties and is not put in a position to seamlessly carry on the business without much intervention, it is unlikely that the zero rate will apply. This situation is to be contrasted with the position in the United Kingdom, where, unless the particular activity is actually carried on in the same form after transfer, the supply will not qualify for 'going concern' status.
This article was first published on cliffdekkehofmeyr.co.za