This will normally lead to an unfavorable situation for the other party in the Purchase and Sale Agreement. This again really tests the skills of the planner in terms of the tax planning involved in drawing up the purchase and sale agreement.
The Intention of This Study
Some of the most important clauses to examine in the agreement are the clauses relating to the purchase price of the business and the prices paid for various assets in the business. Combined with this, an examination is made of the basic sections of the Income Tax Act, which will affect the trading of these entities.
DIFFERENT TYPES OF ENTERPRISES
Parties in an agreement
Sole Traders
In the case of the Extraordinary Partnerships there are two types, Anonymous and En Commandite. This property will be held in the name of the partnership jointly and in undivided shares.
Companies
- Tax Disadvantages Of A Company
- Share Dealing
- The Stigma of Businesses
- Assessed Losses
- Not Recognising Groups of Companies
- Tax Advantages of Companies
- Roll Over Relief
- Assessed Losses
- Pre-incorporation Contracts
If the assets themselves are distributed, this distribution will be subject to CGT in the hands of the company. Some of the tax advantages of companies can be seen in the relief of repatriation, estimated losses and pre-incorporation contracts.
Trusts
- Capital Gains Retained in the Trust
- Capital Gains Distributed by the Trust
- Capital Gains Attributed to the Beneficiaries
The advantage of this is that the grantor/occupant is a natural person, and the recognition rate for the capital gain will therefore be 25% versus 50% in the hands of the trust. If a capital gain is made to a beneficiary and the settlor of the trust has the right to revoke the beneficiary's right to the capital distribution, then the capital gain is taxed in the hands of the settlor. If the trust distributes an asset to a beneficiary resident in South Africa, the profit made by the trust will be taxed in the hands of the beneficiary.
South African residents, then the capital gain will be taxed in the hands of the beneficiaries at an inclusion rate of 25%. Where a non-resident trust makes a capital gain and distributes that gain to South African beneficiaries, the gain will be taxed in the hands of the South African beneficiaries.
Conclusion
Should the capital gain be distributed by the trust to a non-resident and the gain is attributed to the gift of a South African resident, the South African resident will be taxed on the capital gain. This would obviously be subject to anti-abuse provisions where the beneficiary may be a spouse or minor child. If the trust sells an asset and makes a capital gain and then distributes the profits to the beneficiaries in the same financial year and, provided the beneficiaries are.
Should a South African trust make a capital gain and distribute it to a non-resident, the trust will be taxed on the gain. The next chapter provides an overview of a basic purchase and sale agreement and goes into more detail about such an agreement.
Introduction
The buyer acquires shares or loan accounts and becomes the owner of the trading entity. The structure of the trading entity will not change, only the ownership of the trading entity has changed. The shareholders do not want to sell the trading entity or, conversely, the buyer, for whatever reason, does not want to buy the trading entity, but rather some or all of the company's assets.
On this basis, the company's liabilities are the liabilities of any entity selling the company. When buying a company, one of the most important decisions is whether to buy the shares of the trading entity of the company itself as a going concern or whether to buy the assets of the company.
The Purchase and Sale Agreement
METHODS OF DETERMINING THE SUBJECT MATTER OF THE CONTRACT
A BRIEF OVERVIEW OF THE PURCHASE AND SALE AGREEMENT The purchase and sale presented here is loosely based upon the model of a
- MEMORANDUM Of AGREEMENT
- INTERPRETATION
- THE PURCHASE AND SALE
34;Audited Financial Statements", which is interpreted as signed financial statements or audited financial statements, depending on the business unit of the "Seller". 34; Auditors I Accountant', which is interpreted as either auditors or an accountant responsible for the company's financial reporting, depending on the business entity of the company. 34;Business" is defined as the business conducted by the "Seller" as a going concern until the effective date of the sale and must include business assets and liabilities.
The best approach is to take an objective view of the situation and consider all the influencing factors. 34 "The buyer" naturally wants the sale to be treated as a lease, and the reason for this is that he will then be able to claim a tax deduction for the entire cost of the business he has bought.
CONSIDERATIONS TO BE EXAMINED
Depending on whether the entity is a sole proprietorship, a company or a trust, different percentages of the capital gain will be included in the taxpayer's income. The contract was a sale of a right, it was drawn up in the form of a lease, giving the company, the Northern Rhodesian Company, the use of the right. The effect this had was that the "Buyer" was now able to deduct all payments for exercising the right of deduction against income where as the "Seller" now had to declare all payments as taxable income.
The most important factor in this case was the court's decision on the wording of the contract. In retrospect, if the architect of the sale agreement had made this an outright sale of the right to use the patent in Northern Rhodesia by the company from which the seller would have benefited.
Conclusion
GOING CONCERN VERSUS ASSETS VERSUS SHARES
Introduction
An In-depth analysis of whether to Purchase the Assets of the Business or the Shares of the Business
- The Seller's Position
The taxpayer resisted on the basis that no part of the purchase price could be. The buyer should consider whether to buy the stock sale or the asset sale. The best option for the buyer would be to buy shares of the business.
When buying the shares in a company, you must pay attention to the company's background and make a thorough investigation of CGr. When buying shares in a company, the base cost for the company's shares is determined.
Tax Implications Hidden in the Purchase and Sale Agreement Gone are the days where all that was required was that the business was
- Fixed Assets
- Goodwill
- Stock
- Accounts Receivable
Based on the above example, one would set the company's assets in the purchase and sale agreement at the tax value or what is also called book value from the point of view of the seller. Goodwill is the amount paid in excess of the tax value (book value) of the tangible assets. This section has been successfully relied upon by the Commissioner to tax the seller of the business on his goodwill in the past.
It can be said that the seller has sold the right to the buyer to use the premises and taxes the seller accordingly. Should the original owner of the business either own the premises or sublet the premises to the new owner.
Other Tax Considerations
- Capital Gains Tax
In relation to the sale of a business one should ideally aim to comply with section 11(1)(e) of the VAT Act. If the buyer buys an asset or a going concern and produces products that are zero-rated, the buyer is not entitled to apply section 11(1)(e) of the VAT Act. Only then would the buyer be able to claim the VAT input on seventy-five percent of the purchase price of the asset/going concern.
Conversely, if a buyer buys an asset/operating business from a non-VAT registered dealer and the buyer is a VAT registered dealer, they can still claim input VAT on the purchase of the asset/operating business. This means that if a person sells an asset/going concern to a related party as defined in Article 1 of the Income Tax Act, the purchase price will be considered the market value and not the consideration value, assuming that the asset/ operating company sold below market value.
PAYMENT OF PURCHASE
Introduction
Different Types of Payments
- Payments in Kind
- Payment in the Issuing of Shares
The shareholder was no better off, as he still owned 100% of the shares in the company. This payment method can work if the person selling an asset to a company is a director of the company. In this case, the director would have the company issue redeemable preference shares, worth the same value of the asset he sells to the company at a nominal rate per share.
The biggest disadvantage of the company is that it is not able to deduct from its income the issuance of shares and the payment of dividends. The agreement is quite clear that on the death of the appellant, the payments from the buyer will cease completely.
CONCLUSION
- Drafting the Purchase and Sale Agreement
- The Financial Statements
- The Balance Sheet
- The Income Statement
- Cash Flow Statement
- Warranties and Indemnities
- A Basic Purchase and Sale Agreement
The balance sheet can be compared to a photograph that depicts a snapshot of the business at a particular point in time. Goodwill can be described as the difference between the selling price and the net value of the current asset being purchased. Warranties should form an important part of a sale and purchase agreement, because the buyer relies on the seller's presentation of the financial statements and all other matters related to the business.
These are just some of the key points to look at when building an indemnity into a purchase and sale agreement. The purpose of this example is to give an idea of how to set up the purchase and sale agreement and how to structure the purchase price of the sale of the going concern.
ABC PRODUCT DISTRIBUTION CC
MEMORANDUM OF AGREEMENT
The vendor is currently trading at 22 Waterford Crescent, Mayville as the sole distributor for Dixie Products under the name Quality Care Products. The seller has exclusive distribution rights in South Africa and across the border. The seller does not have any inventory, when the orders come in, the seller submits these orders to the manufacturer and within a few days the order is fulfilled and delivered accordingly.
The seller operates a fleet of trucks that traverse the length and breadth of South Africa.
WHEREBY IT IS AGREED AS FOLLOWS
34;business" means (Quality Care Products) business carried on by the Seller as a going concern as at the effective date, and includes the business assets. 34;business assets" means all the assets of the Seller used in or in connection with the business consisting of. 34;business name" means the name (Quality Care Products) and any business or trade name in connection with or normally.
34; contract" means all agreements of any nature related to the business, excluding all finance leases, credit agreements, franchises and any orders and offers partially executed;. by the Seller in or in connection with the business on the date of entry in effect, which all assets are listed in the annex.
NOW THEREFORE IT IS HEREBY AGREED AS FOLLOWS
ANNEXURE 1 SCHEDULE OF ASSETS
BIBLIOGRAPHY
CASES
