VAT and corporate transactions : the dragons slumber : part 2

• Pages: 19-31
• Author: Des Kruger
• Published date: 01 June 2020
• DOI: 10.10520/EJC-1ea63369bc
• Date: 01 June 2020

19

© SIBER INK

VAT and Corporate

Transactions:

THE DRAGONS SLUMBER: PART 2

DES KRUGER*

ABSTRACT

In the previous issue of this journal the provisions of section 11(1)(e) of the

Value-Added Tax Act 89 of 1991 (the VAT Act), which applies where a vendor

disposes of an enterprise or part thereof that is capable of separate operation

as a going concern, were considered. This article continues with the same

theme and discusses the application of section 8(25) of the VAT Act, which

applies where a corporate transaction is carried out under one or other of the

so-called corporate rules provided for in Part III of the Income Tax Act 58 of

1962 (IT Act).

Section 8(25) of the VAT Act essentially provides for the value-added tax

(VAT) neutral treatment of corporate transactions falling within the ambit of

sections 42 (asset-for-shares transactions), 44 (amalgamation transactions),

45 (intra-group transactions) and 47 (liquidation, winding-up and deregistra-

tion transactions) of the corporate rules. The other corporate rules, namely

sections 43 (substitutive share-for-share transactions) and 47 (unbundling

transactions) of the IT Act are not catered for as the transactions effected

under those sections involve the exempt supply of shares.

If section 8(25) of the VAT Act is applicable to the relevant corporate trans-

action by virtue of the application of either section 42, 44, 45 or 47, the seller

and purchaser are deemed to be one and the same person for the purposes

of ‘that supply or subsequent supplies’, meaning that no supply (taxable or

otherwise) arises on disposal of goods and services under the relevant corpo-

rate rule. However, it is noted that while the disposal of the goods and services

under the specif‌ied corporate rules does not trigger any VAT in respect of such

disposal in the hands of the seller, the purchaser may nevertheless be required

to make a change of use adjustment under section 18 of the VAT Act should

its taxable use of the goods and services acquired differ from that of the seller.

Section 8(25) was amended in 2009 so that the provisions of section

8(25) will apply to corporate transactions effected under sections 42 (asset-

for-share) and 45 (intra-group transactions) only if the supply is of an enter-

prise or part thereof that is capable of separate operation and the parties

have agreed in writing that the enterprise or part thereof is disposed of as a

going concern. Whilst the requirements for a going concern as provided for

in section 11(1)(e) of the VAT Act are not incorporated in section 8(25), such

as that the enterprise must be income-earning on date of transfer and all the

assets necessary to carry on the enterprise must be disposed of, it is still neces-

sary to be able to demonstrate that what is being disposed of under section

42 or 45 of the IT Act is a going concern. Central to that concept is that the

purchaser must be placed in possession of a business that can be operated in

the same form, without any further action on the part of the purchaser.