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Getting to know one's SARS from one's elbow
by Andrew Duncan
A tax practitioner's life is nothing if not fascinating. Consider just one of our privileges, the recurring opportunity to test our wits against a SARS Interpretation Note.
Section 11(1)(e) of the VAT Act allows for the sale of an enterprise as a going concern to be subject to VAT, but at a zero rate. Thus for instance a property owning company selling off township stands could dispose of the whole development to another developer at a zero VAT rate. Likewise an office block rented out as offices could be disposed of as a rental earning enterprise. Often a developer purchasing such an enterprise structures the transaction through a shelf company which, at the time of the transaction, may not be registered for VAT.
Under Section 11, the time of supply, which determines whether Purchaser and Seller are registered for VAT, is at the conclusion of the sale. But in respect of immovable property, Section 9(3)(d) makes an exception. Here, the critical moment is the date of registration of transfer. Thus, if at the conclusion of the sale the Purchaser was not registered, it could still register for VAT up until the date of registration of transfer of the property.
A new Interpretation Note 57 has now been issued, replacing the previous Note 24.
In one happy sentence, Note 57 tells us that “In the event that the Purchaser is not yet registered as a vendor at the time of concluding of the Agreement, it is advisable that the agreement provide for the application of the zero rate, subject to the Purchaser being a registered vendor with effect from the date the Agreement is concluded…” Perhaps, dear reader, we tax persons lack imagination. But our heads spin when we try to work this out.
Note 57 goes on to say that “In the event that the Purchaser has not applied for registration before concluding the Agreement, the supply cannot be zero-rated and must therefore be subject to VAT at the rate of 14%.”
After further surprises, from which I for the moment protect you, we receive the cherry on the top of this ice-cream cake of mystification. Where the Act says that there must be an “income earning activity on the date the ownership of the enterprise is transferred”, Note 57 obligingly informs us that this means that “the parties agree to keep the enterprise active and operating until its transfer”. A wondrous thing is the English language, we see.
Somewhere, no doubt, trustful tax advisers labour to complete this impossible jigsaw of conflicting instructions. For our part, we at Walkers have respectfully suggested to SARS that a return to the withdrawn Note 24 might more correctly reflect the legal position. We await their reply with eagerness.
SARS is also auditing taxpayers who have entered into zero rated sales of fixed property, apparently in an attempt to increase collections through penalties and interest. For instance, upon selling a rental earning enterprise, the seller had better ensure that the sale includes the leasing activities, i.e. office administration. Otherwise VAT will apply at the standard rate, often attracting penalties and interest from the date of sale. Indeed I was recently informed by a highly placed official at SARS that SARS was not prepared to allow the zero rating VAT provisions to be used as an ATM by unscrupulous VAT Vendors! |
