PROPOSED EXPANSION OF THE VAT CORPORATE REORGANISATION RULES
03 Oct 2019
The corporate reorganisation rules of the Income Tax Act No. 58 of 1962 (“the ITA”) provide for a “rollover” mechanism when, for example, assets are transferred from one group company to another. Provided the various requirements of the applicable provisions are adhered to, no capital gains tax, transfer duty or securities transfer tax (to the extent applicable) is triggered at the time of such transactions – rather the transferee is regarded as “stepping into the shoes” of the transferor in relation to the assets transferred.
In terms of current law, in order for a similar “rollover” to apply in respect of the transfer of assets from a VAT perspective, section 8(25) of the Value-Added Tax Act No. 89 of 1991 (“the VAT Act”) provides that it is necessary for the transfer to relate to an enterprise or a part of an enterprise capable of separate operation as a going concern.
The above-mentioned gives rise to the anomaly that, where, for example, a section 45 intra-group transaction is entered into in respect of the disposal of immovable property which will be leased back to the transferor after the conclusion of the transaction, the tax effect will be the following:
- there will be a capital gains tax “roll-over” in respect of the transfer of the property – as a result of which no capital gains tax will be triggered on such transaction;
- on the basis that the disposal of the property will not constitute the supply of an enterprise as a “going concern” for purposes of the VAT Act, the transaction may be subject to VAT at the standard rate.
The Draft Taxation Laws Amendment Bill, 2019 (“DTLAB”) released by National Treasury on 21 July 2019 proposes to address this anomaly so as to provide VAT relief to in instances where:
- fixed property is transferred in terms of an asset-for-share transaction as contemplated in section 42 of the ITA or an intra-group transaction as contemplated in section 45 of the ITA; and
- the supplier and recipient agree in writing that immediately after the transaction the supplier (i.e. the transferor) will lease the fixed property from the recipient (i.e. transferee).
The proposed amendments are proposed to come into operation on 1 April 2020.