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 transferred.
- 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 achieved.