Four individual natural persons, who operate in partnership, approached Prime Properties Ltd to

acquire one of its residential blocks of flats. Their intention is to upgrade and modernise the

interior of these flats as well as the common areas (including the garden and pool) over the next

five years. Once completed, so they believe, these sought-after flats will generate substantially

higher amounts of rental.

Prime Properties Ltd, after initially turning down the offer, has indicated its willingness to sell the

block of flats and transfer the related existing lease agreements (95% of flats currently occupied)

to the partnership. Pressure on its own cash flow will deprive it from entertaining similar upgrading

activities for an increase in potential rental. In turn, the selling thereof will provide much needed

cash to efficiently service its remaining rental activities. The company has accepted the following

offer for the transfer of this portion of its rental assets (acquired fifteen years ago at a cost of R6

million land R1,5 million; building R4,5 million) and related trading activities:

R

Land 5 000 000

Building (flats) 15 000 000

Goodwill in respect of existing lease agreements 1 000 000

Total consideration 21 000 000

REQUIRED:

1. Discuss the normal tax (including capital gains tax) implications that will arise for Prime

Properties Ltd in respect of the abovementioned transaction. Motivate your answer with

reference to relevant legislation and case law.

2. Discuss the normal tax (including capital gains tax) implications that will arise for the

partnership in respect of the abovementioned transaction as well as the costs to be

incurred in respect of the intended upgrade of the property. Motivate your answer with

reference to relevant legislation and case law.

3. Indicate whether your answers in 1 and 2, respectively, will be different in any way if the

parties agreed that, instead of the sum specified above, Prime Properties Ltd will either

be entitled to a 20% share of the partnerships profits generated over the next ten years,

or an annuity of R4,2 million per annum, payable over the next five years. Motivate your

answer with reference to relevant legislation and case law.

4. Indicate whether the initially concluded transaction will be subject to value-added tax

and, if so, whether the transaction may be zero-rated as representing the sale of a going

concern. Motivate your answer with reference to relevant legislation