Selling your business: Make sure you know the tax implications
You decide to sell your business and, as any person would, you hope to receive a worthy price for the value that you have created during the course of your attempt in creating an empire.
Although it is possibly the last thing on your mind, you need to consider the tax consequences on this disposal.
Besides the potential capital gains tax applicable on the sale, you need to consider whether or not you should charge VAT on the disposal, after all it is the supply of goods during the ordinary course of your enterprise.
If you are a registered VAT vendor, you need to consider that the following must be in writing in order for you to zero-rate the sale of the business:
The enterprise is being sold as an income earning activity – the mere intention of this is sufficient, thus it is not essential that the business is running at a profit
All of the assets necessary to continue the operations of the business must be disposed of in the transaction to the buyer
The contract must stipulate that the transaction is taking place at zero-rate of VAT
Both parties, the buyer and the seller, must be registered for VAT purposes
If the buyer is not a registered VAT vendor, not to worry. He/she can register for VAT purposes based on the seller’s history, allowing for the full benefit in terms of the zero rating of the transaction.
Based on the above, it is evident that the documentation and all contractual agreements of the sale need to be carefully and correctly drafted.
Now, the buyer has received a tax benefit of not paying VAT on the transaction. But, unfortunately like many things in life, it can’t always be sunshine and roses.
If the buyer intends on using a part of the business to create exempt supplies, then the buyer will need to pay SARS the VAT over on the purchase price of the business for the percentage of the business that will be used for exempt purposes.
For example, if you, as the buyer, purchase a hotel which qualifies as commercial accommodation (a taxable supply), and you intend to use it 40% for residential accommodation (an exempt supply), then you need to pay over to SARS the VAT on 40% of the purchase price of that building.
This makes sense, right? SARS has granted the buyer the full zero-rating benefit on the purchase. This is to incentivize the sale of businesses, provided that such businesses will produce taxable supplies and in turn generate revenue for SARS upon the sale of such taxable supplies. Thus, if you have received this benefit and don’t intend on using it fully for taxable supplies, then SARS wants the VAT on this portion.
So, before you go forth with your sale agreements, consider whether or not you are viable for this benefit of the zero-rating on the transaction and if you are the buyer, remember to consider whether or not you need to make a subsequent VAT adjustment on the exempt portion of the business.
Jade Els and Willem Oberholzer are Tax advisers for Probity Advisory.