In our Tax Alert on 18 September 2010, we highlighted the fact that the sale of prospecting rights carried many tax consequences and in the case of Value-Added Tax (VAT) would generally constitute a taxable supply at 14% where the holder of the right is a registered vendor. We emphasised that a further more difficult question is whether the sale of a prospecting right could be regarded as that of a going concern and therefore falls to be zero-rated for VAT purposes.

This question has been answered to an extent, as we are aware of a recent VAT ruling issued by the South African Revenue Service (SARS) to the effect that the supply of a prospecting right is the supply of a right and nothing more, concluding that it is not the supply of an enterprise or part of an enterprise. This means that the supplier is not entitled to zero rate the transaction under section 11(1)(e) of the VAT Act. Obviously every case needs to be looked at on its own merits, but it does place into question the application of the zero rating provisions for the holder of a prospecting right. The ruling further highlights the importance of building sufficient protection into a contract the event that the zero rating does not apply, by way of making the purchaser liable for the additional VAT. On the basis that the purchaser is conducting an enterprise and acquired the prospecting rights in the course of making taxable supplies, an input tax deduction would be available.

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