Discussion Paper on Contingent Liabilities

The South African Revenue Service (SARS) invites you to comment on the Discussion Paper on Contingent Liabilities

Explanatory Note:

This discussion paper sets out SARS's views on the income tax implications for the seller and purchaser when the transaction is structured so that the purchase price of assets acquired as part of a going concern is settled or partly settled by the assumption of free-standing contingent liabilities

The outcome will be the same regardless of whether the sale agreement reflects the purchase price as comprising a lump sum net amount or as an itemised list of assets less liabilities and contingent liabilities

This discussion paper does not consider the effect, if any, of the application of the corporate rules contained in sections 41-47

The views set out in this document are not final and once comments have been received, SARS will consider publishing Interpretation Notes on appropriate aspects of the discussion paper

Comments can be emailed to [email protected] by no later than Monday, 31 March 2014

Background
The expression "sale of a business as a going concern" is generally used to refer to the circumstances in which a person sells all or a part of a business which is capable of separate operation and constitutes an income-earning activity in its own right at the date of sale. The nature of the particular business will dictate the assets which need to be transferred in order to ensure that the business (or part of it) is capable of operating in its own right.

A business, generally speaking, does not need to be transferred with any liabilities in order to be able to operate as an income-earning operation in its own right. Liabilities may, however, need to be transferred for legal reasons (for example, a requirement under environmental laws) or commercial reasons (negotiated between the parties). The nature of the liabilities transferred or taken over could be absolute and unconditional (for example, trade creditors or loan obligations) or conditional (for example, leave pay provisions, bonus provisions, post-retirement medical aid provisions and warranty provisions).

The sale of a business as a going concern can be structured in a variety of ways. The purchase price is often settled by the purchaser through a combination of a cash payment to the seller, the undertaking to settle specified debts on behalf of the seller, the assumption of specified contingent liabilities (that is, the undertaking to settle a seller's contingent liabilities if and when they materialise), a loan account and the issue of shares (when the purchaser is a company). This discussion paper considers the income tax implications for the seller and purchaser when a portion of the purchase price is settled by the purchaser assuming the seller's free-standing contingent liabilities.