So, your VAT registered company is planning to buy a mixed use (commercial and residential) property from another VAT registered company. This would typically be shops on the ground floor and flats on the first floor.

How does the zero rating for a going concern work in this case?

I had a lot of trouble answering this one, but eventually found an excellent opinion by the Tax Faculty, of which I am a member. The article was written by Cliffe Dekker Hofmeyr.

s11(1)(e)(ii) Value Added Tax Act … where the enterprise or part, as the case may be, disposed of as a going concern has been carried on in, on or in relation to goods or services applied mainly for purposes of such enterprise or part, as the case may be, and partly for other purposes, such goods or services shall, where disposed of to such recipient, for the purposes of this paragraph and section 18A be deemed to form part of such enterprise or part, as the case may be, notwithstanding the provisions of paragraph (v) of the proviso to the definition of “enterprise” in section 1.

OK, so it’s a bit of confusing use of the English language, but what it is saying is that if the building is used mainly for commercial purposed, then it is deemed to be used entirely for commercial purposes.

So far, so good. The problem is that although the word mainly has been clarified in the courts to mean more than 50%, does that mean 50% by floor area or by rental income? And the VAT Act does not answer this critical question.

SARS’ Interpretation Note 57 states that the 50% apples to floor area and although this is only SARS’ view and not law, one might be well advised to follow their practice rather than fighting the issue in the Tax court.

Now, it could well be the case that the floor area of the shops marginally exceeds the floor area of the flats, if you exclude the stairs and passages, so you might still pull it off.

But, if you decide to go with IN57, then it does allow you to apportion the selling price partly to a commercial transaction (zero rated for VAT) and partly to a residential transaction (subject to VAT at the standard rate).