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The South African Revenue Service has issued an interpretation note that sets out the income tax implications for the seller and purchaser when the purchase price of assets in the acquisition of a going concern is settled, or partly settled, by the assumption of free-standing contingent liabilities.
A contingent liability means an obligation whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events and, if confirmed, will result in expenditure being incurred to settle the confirmed obligation.
Once the purchaser has assumed the contingent liability (for example, leave pay, bonus, post-retirement medical aid, and warranty provisions), the purchaser, not the seller, is responsible for incurring the relevant expenditure and settling any related third debt directly, if the contingent liability crystallizes in the future.
In summary, the note states that the seller must include the agreed value of the free-standing contingent liability assumed by the purchaser in gross income and proceeds (as appropriate). The seller does not incur expenditure in relation to the assumption of the contingent liability by the purchaser, and is therefore not entitled to a deduction.
On the other hand, the purchaser will incur expenditure only when the free-standing contingent liability materializes and the purchaser is required to settle the liability at that time. The assumption of the contingent liability by the purchaser relates to the assets acquired, and any deduction must be determined with reference to the deduction and allowance provisions which apply to the particular assets whose purchase price was settled, or partly settled, by the assumption of the contingent liability.
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