South Africa: VAT issues to consider - KPMG Global
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South Africa: VAT issues to consider on selling a business

South Africa: VAT issues to consider

In South Africa, there are many instances when an enterprise is sold or transferred as a “going concern,” and a 0% rate of value added tax (VAT) applies. However, the transfer may be in terms of section 8(25)—the so-called VAT group relief provisions—and the transfer is not subject to VAT.


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If the transfer does not give rise to a VAT liability, not much regard is given to the value of the transfer for VAT purposes. However, what if the transfer is subject to the standard rate of VAT? In such instances, a taxpayer would be interested in the sales price. Can a taxpayer rely on the agreement, since it would stipulate the price? The agreement will have a pricing clause, but the question is whether or not that clause is as straightforward as it seems. The following example illustrates this point.


The price clause in the agreement provides as follows:

  • The selling price for the assets is R1 million plus the Included liabilities of R500,000.

How much is being paid for the assets? R1 million? R1.5 million? or R500,000? Would it make a difference if the price clause stipulated the following:

  • The selling price for the assets and liabilities is R1 million.

Is the transfer for assets only, and the liabilities are used to calculate the value thereof, or is this a transfer of the obligations (liabilities) separately? The seller that transfers the obligations separately is making a separate supply of a financial service, being the transfer of a debt security. Since this is a supply that is exempt from VAT, the seller would have to consider whether it would be denied any input tax on goods or services acquired (legal costs) for purposes of making this exempt supply or does this result in the seller having to apply apportionment. 

What if the liability is inherent/entrenched in the assets and has a direct influence on the net asset value (e.g., mining rights and rehabilitation obligation)? Can it then be argued that the liability of R500,000 had a direct impact on determining the value of the assets at R1 million. Or, can it be said that the value of the assets is the R1 million and because the seller will also have to settle the inherent / entrenched liability in the future, this must be added to the R1 million?

Example of pricing option in mining sector

Another pricing option frequently seen in the mining industry is when the selling price includes a part payment in future commodity supplies. For instance, assume the mining assets are sold for R10 million and 20% of the future production five years. How is the VAT to be accounted for? If it is a percentage of future production, how would the taxpayer know how much that will be? Even if is a fixed tonnage, what price is used—the current price of the commodity, an estimated future value, or an agreed upon commodity price?  

When a price for the commodity is agreed, this price is usually substantially lower than the current prevailing price, and this highlights another issue, namely: Is there an argument to be made that there is a barter transaction? If the transaction is a barter, then the deemed value of a supply is calculated at the open market value of that which is received as payment. Does this deemed value then override the agreed value per tonnage?

KPMG observation

It is evident from this discussion that something as simple as the price to be attached to a supply can be a potential minefield. Prudent taxpayers would keep this in mind and think carefully before signing the next contract. 


Read a 2017 report [PDF 63 KB] prepared by the KPMG member firm in South Africa

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