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VAT implications for the transfer of leased commercial property to an only tenant

by Molisa Cheda

Often an only tenant enters into an agreement for the purchase of commercial property from its present owner. In terms of the Value-Added Tax Act (‘VAT Act’) such a transaction would constitute a ‘supply’ and thus tax considerations would have to be taken into account.

As a point of departure, zero-rated supplies are taxable supplies that are subject to Value-Added Tax (‘VAT’) at zero per cent, while standard rated supplies are taxed at the rate of 14 per cent.

Exempt supplies, in contrast, are not taxable for VAT purposes and therefore do not form part of a business VAT-related enterprise. The distinction between zero-rated and exempt supplies becomes pertinent when considering that a business may only recover from the South African Revenue Service (‘SARS’) input tax on expenses incurred in the course of making taxable supplies.

Thus, no input tax deductions may be claimed on goods or services acquired for the purposes of making exempt supplies.

In terms of section 11(1)(e) of the VAT Act the supply to a registered vendor of an enterprise, or part thereof, which is capable of separate operation is subject to VAT at the zero rate where:

  • The supplier and the recipient have agreed in writing that such enterprise or part thereof is disposed of as a going concern, that is, with the necessary resources to continue to operate in the foreseeable future;
  • The assets necessary for the carrying on of the enterprise are in fact disposed of to the recipient;
  • The written agreement stipulates that the supply includes tax at the rate of zero per cent;
  • The parties agree in writing that the enterprise will be an income-earning activity on the date that the ownership of the enterprise is transferred.

In addition, VAT Guide 409 for Fixed Property and Construction states that in the case of a seller who is conducting a leasing activity in respect of fixed property, the contract must provide for the leasing activity to be disposed of together with the fixed property in order to amount to the supply of a going concern.

Therefore, where the agreement does not cater for a tenanted property to be transferred together with all the applicable lease agreements as part of the sale of the enterprise, the asset is merely sold at the standard rate.

It follows therefore that an agreement to sell a commercial property to an only tenant would not amount to the disposal of a going concern since the purchaser cannot maintain the income-earning activity (the lease). This results from the fact that the sale of the property would extinguish the lease as the purchaser cannot also be the lessee simultaneously. The same also applies in respect of a sale-and-leaseback arrangement where the seller of the fixed property is the only tenant.

Therefore, as only part of the assets necessary for the conducting of that business would have been transferred as part of the enterprise disposal the rate applicable is the standard rate of 14 per cent.

Parties intending to enter into an agreement for the purchase of commercial property from its current owner would thus be well advised to familiarize themselves with the VAT implications of such disposals, especially where an only tenant is involved.

Written by Molisa Cheda.

18 February, 2013

**Please note that these comments are summarised, may not be applicable to your particular situation and do not constitute legal advice. Please consult your legal professional should you wish to obtain a formal legal opinion.**