[FAQ] VAT and PAYE registration of a sole proprietor after divorce

[FAQ] VAT and PAYE registration of a sole proprietor after divorce

• 23 July 2021
• Tax Administration
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2021.

Background

A taxpayer owns a supermarket as a sole proprietor – he and his wife are married in community of property (so each person declares 50% of the profit in their personal tax returns). The taxpayer is registered for PAYE and VAT under his own ID based on the supermarket trade.

Last year, he and his wife got divorced and the wife got the store as part of the divorce proceedings. The lawyers advised them that nothing changes in terms of registrations and that the wife must just carry on with the current VAT and PAYE registration details issued to the taxpayer.

When the wife asked about changing the representative with SARS, she was told that new PAYE and VAT registrations should have applied for and that there is a deemed sale which should have been accounted for?

What should have been the correct process? Is it possible to just carry on as before with the original registrations?

Answer

The VAT Act

It is not possible to “just carry on with the current VAT and PAYE registration details”.

The roll-over provisions, for Income Tax purposes, don’t apply for Value-Added Tax. As far as Value-Added Tax is concerned, spouses that are married in community of property are treated as an unincorporated body of persons, akin to a partnership. Section 51(1), of the Value-Added Tax Act, states that where any body of persons, whether corporate or unincorporated (other than a company), carries on or is to carry on any enterprise –

(a) such body shall be deemed to carry on such enterprise as a person separate from the members of such body;

(b) registration of that body as a vendor shall be effected separately from any registration of any of its members in respect of any other enterprise;

(c) …

Under section 51(2), where any such body is a partnership or other unincorporated body and is dissolved in consequence of the retirement or withdrawal of one or more (but not all) of its members … and a new partnership or unincorporated body comes into being consisting of the remaining members of the dissolved partnership or body, as the case may be, … and the new partnership or body continues to carry on the enterprise of the dissolved partnership or body as a going concern, the dissolved partnership or body and the new partnership or body, as the case may be, shall (unless the Commissioner, having regard to the circumstances of the case, otherwise directs) for the purposes of this Act be deemed to be one and the same partnership or body, as the case may be. This does not apply here as, after the divorce there no longer is a partnership (only the spouse, or a single person). The partnership therefore ceased being a vendor and the remaining person must register as a vendor in his or her own name.

The Income Tax Act

Judge Cloete, in Chipkin (Natal) (Pty) Ltd v CSARS, confirmed that the “definition of ‘person’ in section 1 does not include a partnership and a partnership is not a person at common law.” “S 1” refers to section 1(1) of the Income Tax Act. For employees’ tax purposes, the SARS practice is to register the partnership as an employer. The Income Tax reference number of the most senior partner is used by SARS for this purpose (effectively linking the employer registration number to a person (or taxpayer). But again, we submit that, because the partnership ceased, a new registration as employer, in the name of the other spouse will be required.

Webinar Commentary

Refer to the following webinar: Current Tax Issues for Individual Taxpayers 2021 here.

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