The draft Taxation Laws Amendment Bill 2019 (draft TLAB) was published on 21 July 2019 for public comment. The draft TLAB proposes to increase the scope of the relief provided by the value-added tax restructuring provisions in section 8(25) of the Value-Added Tax Act No. 89 (1991).
The current provisions
In terms of section 8(25) of the Value-Added Tax Act No. 89 (1991), where a vendor has supplied goods or services to another vendor pursuant to a corporate restructuring transaction concluded in terms of section 42, 44, 45 or 47 of the Income Tax Act No. 58 (1962), those vendors must be regarded as being one and the same person for VAT purposes.
As a VAT supply requires more than one person, the effect of section 8(25) is that the supplying vendor need not impose output tax with respect to the corporate restructuring transaction. This would also mean that the recipient vendor will not pay any VAT and will therefore not be entitled to claim input tax.
However, to qualify for this relief:
- The supply should constitute the supply of an enterprise or part thereof; and
- The supplier and the recipient should agree in writing that such enterprise or part thereof is disposed of as a going concern
Where a fixed property is transferred by a lessor (i.e. “the supplier”) to a lessee (i.e. “the recipient”) pursuant to a corporate restructuring transaction, with the view of subsequently leasing back the property to the supplier, the supply would not constitute the supply of a going concern. This is because, at the time of the supply, the lease agreement will be extinguished as the lessee will become the owner of the fixed property. Therefore, the supply consists only of fixed property and not an income-producing property (i.e. property subject to a lease agreement).
As a result, no VAT relief is available to vendors that transfer fixed property pursuant to a corporate restructuring transaction with the intention to subsequently conclude a sale-and leaseback agreement.
The proposed solution
Effective 1 April 2020, it is proposed that the VAT relief provided for by section 8(25), should also include the transfer of fixed property by a lessor to a lessee pursuant to a corporate restructuring transaction, where such fixed property will subsequently be leased back to the current lessor (i.e. a sale-and leaseback agreement).
However, to qualify for the VAT relief, the supplier and the recipient should agree in writing that, immediately after the fixed property has been supplied, such fixed property will be leased back to the supplier (i.e. the previous lessor).
The proposed amendment is welcomed, as it expands available corporate tax planning opportunities due to its favourable impact on cash flow requirements.