The South African Revenue Service (“SARS”), is empowered to scrutinize and make a finding on any transactional agreement concluded between parties in respect of a taxing position taken in terms of a provision of Tax Act.
One such a provision is contained in Section 11(1)(e) of the Value-Added Tax Act 89 of 1991 (the “Act”) that provides for the sale of an enterprise as a going concern (“Enterprise Sale”) between two VAT vendors on a VAT-neutral basis. Consequently, VAT on the Enterprise Sale is levied at a rate of 0% (zero percent) in lieu of the current standard rate of 15% (fifteen percent).
In giving effect to the Enterprise Sale, parties will conclude a sale of business agreement (“Agreement”) noting the terms and conditions of the Enterprise Sale. The parties to the Agreement, is inter alia, required to agree that the provisions of Section 11(1)(e) of the Act is applicable to the Enterprise Sale. SARS is in turn empowered to scrutinize the Enterprise Sale and request the taxpayer to provide SARS with the underlying Agreement.
Should the Agreement not sufficiently embody the provisions and averments as required in terms of Section 11(1)(e) of the Act, SARS may require the parties to account for VAT on the Enterprise Sale at the standard rate of 15%(fifteen percent) as the parties did not discharge their burden of proof in terms of Section 102 of the Tax Administration Act No 28 of 2011 (“TAA”). Section 102 of the TAA, places a burden on taxpayers to prove that a transaction (in this case the Enterprise Sale) should be taxed at a different VAT-rate i.e. 0% (zero percent).
In the matter of Milner Street Properties (Pty) Ltd v Eckstein Properties (Pty) Ltd 2001 (4) SA 1315 (SCA), the Supreme Court of Appeal confirmed the reasoning of the High Court judge that noted:
“I would think that the requirement that these matters be stated in writing was inserted in the section largely for the benefit of the Commissioner to enable him to determine whether what was supplied…” (own emphasis)
In considering the above judgment, parties to an Enterprise Sale should prepare and conclude the Agreement in a manner which enables SARS to exactly determine the nature of the Enterprise Sale leaving no room for ambiguity, which often originates from drafting the transactional agreements in a careless manner. Should the Agreement be ambiguous, SARS as the ‘silent partner’ to the transaction may alter the taxing position materially for both parties and cause undue hardship which could’ve been avoided if care and diligence was exercised in drafting the Agreement.
SARS will always consider the transactional agreements to determine the taxing position. Therefore, the parties to an Enterprise Sale must ensure that all contemporaneous agreements are available to support the tax position taken and that such agreements were drafted meticulously to fall within the ambit of the taxing provision relied on to discharge their burden of proof in terms of the TAA.