Tax implications in relation to the assumption of contingent
liabilities in part settlement of the purchase price of assets
acquired as part of a going concern.
The South African Revenue Service (SARS) released a detailed
discussion paper, on 4 December 2013, presenting SARS' initial
views regarding the tax implications for the seller and purchaser
in relation to the assumption of contingent liabilities
(specifically "free-standing contingent liabilities") in
part settlement of the purchase price of assets acquired as part of
a going concern. Such liabilities would include, for example,
provisions for bonuses, leave pay, warranties etc.
SARS indicates that the discussion paper sets out SARS'
preliminary views in this regard, and invites taxpayers and
practitioners to provide comments by 31 March 2014.
The transactions SARS is referring to, are sale of business
transactions in which the seller and purchaser agree to the
settlement of the purchase price, for the business assets, using a
combination of cash and the assumption of the business liabilities,
which generally includes free-standing contingent liabilities.
In summary the discussion paper concludes that that SARS'
preliminary views are:
Implications for the seller:
- The seller should include the value of the free-standing
contingent liability assumed by the purchaser in gross income or
proceeds when calculating the tax implications associated with the
disposal of the business assets (dependent on the nature of the
assets disposed of); and
- the seller will not incur expenditure in relation to the
assumption of the free-standing contingent liability by the
purchaser and, as such, will not be entitled to a tax deduction in
respect of the free-standing contingent liabilities
Regarding the purchaser:
- the purchaser will only incur expenditure if and when the
free-standing contingent liability becomes unconditional; and
- the assumption of the free-standing contingent liability
relates to the assets acquired, and any tax deduction should be
determined with reference to the tax deduction/allowance provisions
which apply to the specific assets, which purchase price was
settled or partly settled by the assumption of the free-standing
contingent liability. Thus, the deduction, e.g. wear and tear, will
only be claimable once the liability becomes unconditional.
In addition, SARS' view is that one has to look at the
specific facts that apply to the particular case and determine the
tax consequences of those specific facts. Accordingly, should the
sale agreement be constructed in a tax-efficient manner, and the
facts support a tax deduction, different tax consequences can be
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The expansion of the West African regional market to foreign investors, and the search for emerging markets has led to a continuous increase in business mobility and cross border investments with Nigeria.
Effective collaboration amongst government agencies, automation of processes and capacity building by tax authorities have always been identified by stakeholders as strategies for achieving an efficient tax system.
The major objective of the waiver is to promote voluntary compliance and consequently generate revenue for government which otherwise, could have been lost.
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