I recently received an email asking me what should be put into contracts, for tax purposes. A broad, but interesting question because what needs to be included will depend largely on what the contract is trying to achieve.
I'll attempt to touch the tip of the iceberg in this article, and to demonstrate that if you enter into a contract, you should probably run it past your tax consultant to make sure there is nothing in it that might expose you to an unnecessary tax liability.
Firstly, I will look at a contract for the sale of your business out of your company, close corporation, or your own name.
If the business is being sold as a going concern, it is important to make sure there are certain VAT related clauses in the contract. To be a sale of a going concern the business must be sold lock stock and barrel in a manner that enables the purchaser to continue to operate it in the way it is currently operated. For example, if you sell a commercial property leased to third parties, the building must be sold with the letting business intact. If you are selling a manufacturing concern, you would expect the purchaser to continue manufacturing the goods and to sell the existing stock on hand.
To ensure there is no doubt as to the treatment of the purchase for VAT purposes, you need to ensure that the sale agreement records that:
* The sale is of a going concern;
* Both the purchaser and seller are registered for VAT purposes (the VAT registration numbers might be a good idea); and
* The business will be an income earning entity on the date of sale.
Provided these clauses are in the sale agreement, and the facts support the clauses, the sale will be zero-rated you need not add VAT to the selling price and pay it to the South African Revenue Services (SARS).
If the sale is not of a going concern, and you are selling the assets individually so that the business cannot continue to operate, you need to ensure that the price reflected in the agreement will include an amount equivalent to what you will have to pay in VAT to SARS.
If you fail to do this you may find yourself with an amount in your bank which is less than you expected, because you are having to pay the VAT to SARS.
A further aspect to remember, in relation to sales and purchases of groups of assets, is to reflect the value of each of the assets within the purchase agreement. If this is not done SARS may attribute what it considers to be a reasonable amount to each of the assets. If this is done and you are the seller, you may find yourself with taxable recoupments relating to fixed assets you are selling which you are not expecting.
If you are the purchaser, you may find yourself with the selling price distributed amongst the assets in a way you did not expect which may affect your ability to claim capital allowances.
It is also important, if the sale is between two parties who are not connected, to ensure that if you are buying a trademark or tradename, this is made clear in the agreement, and what amount you are paying for that trademark or tradename as this amount may be tax deductible.
Secondly, it is important that you make it clear in an employment contract exactly what you are paying to the employee a cash salary or a package, which is made up of both cash and non-cash benefits. If you simply state a cash amount, it may be difficult to prove to SARS that you are also giving your employee non-cash benefits.
I am touching on a few general examples of things that need to be done in all contracts. The message is, really, that you need to be careful when entering into a contract that it is worded properly, to assist you from a tax perspective, so that it is not to your detriment.