Sars focus on auditing taxpayers with zero-rating of VAT on fixed property sales
SARS is increasingly auditing taxpayers who have zero-rated the sale of a fixed property in terms of the zero-rating provision, section 11(1) (e) of the Value Added Tax Act.
“Of particular concern is that Sars is actively seeking arguments to unravel the application of section 11(1) (e) of the act, in what appears to be an attempt to increase collec- tions through the mechanism of penalties and interest,” says Dylan Buttrick, tax specialist at audit, tax and advisory firm Mazars.
“Sars is not attacking the formal procedures required for the application of the section but rather the underlying requirement that there was a sale of a ‘going concern’. The f a c t t h a t t h e s o u r c e d o c u ment s provide for a zero-rating of VAT as a sale of a ‘going concern’ or that the correct documentation was submitted to Sars appears to be irrelevant to the tax man.”
Section 11(1) (e) allows for the sale of a fixed property to be zerorated if its income-earning activity is transferred at the time of the sale. If this is done, the transaction is regarded as a sale of a going concern. Ordinarily this is a question of fact and will depend on the particular circumstances.
I f a bl o c k o f f l a t s i s s o l d , f o r example, the leasing activity – the tenants – must be disposed of together with the property in order to constitute the transfer of an income earning activity. A failure to transfer this income-earning activity will result in a simple sale of an asset which would attract VAT at the standard rate.
“ S a r s i s n o w i nv e s t i g a t i n g whether taxpayers transferred the income-earning activity at the time of the sale,” says Buttrick. “If not, the transaction will attract VAT in addition to penalties and interest from the date of the original sale.
Buttrick says the budget deficit and pressure on Sars to increase revenue suggests it is probable that any incorrect applications of section 11(1) (e) will be discovered.
“It’s important to comply strictly with the procedural and the substantive requirements of section 11(1) (e) when selling a fixed prop- erty as a going concern,” he says.
“Furthermore, we recommend that taxpayers review any historic sales and ensure that an incomeearning activity was actually transferred at the time of the sale. In our experience if a taxpayer has made a genuine error Sars will tend to be l e ni e nt i f f ul l d i s c l o s ure o f a ny incorrect tax treatments is made.”