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Rental Property, Going Concern, and VAT

Friday, 29 October 2010   (0 Comments)
Posted by: Author: Steven Jones
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Rental Property, Going Concern, and VAT

In commercial property transactions, these three ingredients result in more ‘flops’ than fanfares

When it comes to tax, fact is often stranger than fiction, and none as strange as in the murky world of the sale of a business—especially when it comes to VAT and the sale of a business as a going concern.For those readers who are unfamiliar with the concept, when a business entity or operation is sold as a going concern (i.e. one that is capable of being run as a separate business in its own right), and both parties are registered as VAT vendors, the transaction may be structured so that VAT is charged at zero rate.

Effectively what this means is that the purchaser obtains valuable cash flow relief when the business is purchased. In the normal course of a VAT vendor's business, where supplies are made to it at the standard rate of VAT (14%), the worse if the purchaser was taking over the legal entity, since the risk is that the purchaser ends up assuming a whole lot of hidden liabilities (of which amounts owing to SARS is only one amongst many).This is the reason why most purchasers prefer to purchase the business out of the legal entity,rather than the shares or members' interest in the legal entity itself.

So what would be the lesson for purchasers of businesses who may find themselves in a similar position? One recommendation would be that the parties insert a clause in their agreement whereby the seller obtains a tax clearance certificate from SARS within (say)30 days of signing the agreement, and that the obtaining of such clearance be a suspensive condition of sale.Such clearance should cover all taxes (i.e. income tax,VAT, employees' tax, etc).An added benefit would be that if SARS is prepared to issue a clearance, chances are that there will be no nasty surprises when it comes to taking transfer of the property.

Source: By  Steven Jones (Tax breaks)




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