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IN 11 (3) Income Tax acT: InTeRPReTaTIon noTes IN 11 (3)
Interpretation Note: No. 11 (Issue 3)
Trading Stock: Assets not used as Trading Stock
DATE: ACT: SECTION: SUBJECT:
Preamble
11 February 2015
Income Tax Act 58 of 1962
Paragraph (jA) of the de nition of ‘gross income’ in section 1(1) Trading stock: assets not used as trading stock
In this Note unless the context indicates otherwise –
• ’paragraph (jA)’ means paragraph (jA) of the de nition of ‘gross income’ in section 1(1); • ‘paragraph (jA) asset’ means an asset contemplated in paragraph (jA);
• ‘section’ means a section of the Act;
• ‘the Act’ means the Income Tax Act 58 of 1962; and
• any other word or expression bears the meaning ascribed to it in the Act.
1. Purpose
This Note provides guidance on the application and interpretation of paragraph (jA) and its interaction with other provisions of the Act.
2. Background
Taxpayers sometimes manufacture capital assets for use in their businesses which are similar to the trading stock which they manufacture for resale. The treatment of the amount received or accrued on disposal of such manufactured capital assets was the subject of a dispute between SARS and the taxpayer in C: SARS v Volkswagen of South Africa (Pty) Ltd.* The taxpayer in that case manufactured motor vehicles for sale to the public but also manufactured vehicles for its own use which it used for some time and then sold. SARS argued that the proceeds on disposal of the latter vehicles was of a revenue nature. However, the court disagreed, holding that the amount derived from the disposal of these vehicles was of a capital nature.
As a result of the decision in the Volkswagen case paragraph (jA) was inserted into the de nition of ‘gross income’ in section 1(1).† The effect of this deemed inclusion in gross income means that despite the amounts derived from the disposal of such assets being of a capital nature, they are deemed to be gross income and the assets remain trading stock until disposed of.
3. The law
The relevant sections of the Act are reproduced in the Annexure. 4. Application of the law
4.1 Paragraph (jA)
Paragraph (jA) came into operation on 12 December 2001. It includes in the gross income of any person any amount received by or accrued to that person in respect of the disposal of any asset manufactured, produced, constructed or assembled by that person, which is similar to any other asset manufactured, produced, constructed or assembled by that person for purposes of manufacture, sale or exchange by that person or on that person’s behalf.
The effect of this provision is that amounts received or accrued from the disposal of paragraph (jA) assets will be included in the gross income of the taxpayer, even if those assets are used as capital assets.
The range of activities covered by paragraph (jA) is the same as the activities covered by paragraph (a)(i) of the de nition of trading stock in section 1(1) with the following exception: Paragraph (jA) does not refer to anything ‘purchased or in any other manner acquired by a taxpayer’. Thus a person that acquires assets by purchase purely for the purposes of resale and subsequently uses some of those assets as capital assets will not fall within paragraph (jA). If such assets were acquired as capital assets at the outset any expenditure incurred on their acquisition will be of a capital nature from the outset. On the other hand if the assets were initially acquired as trading stock and subsequently used as capital assets, then the taxpayer must include the market value of the assets in income under section 22(8)(b)(v) while the base cost of the assets will be equal to the amount so included in income under paragraph 12(3) of the Eighth Schedule.
Not all assets that are purchased will, however, fall outside paragraph (jA). Whether a purchased asset falls outside paragraph (jA) will depend on the facts and circumstances of the particular case. For example, a second-hand Asset purchased, which is similar to other assets manufactured, produced, constructed or assembled by the taxpayer, may fall within the ambit of paragraph (jA) if it is refurbished to such an extent that it no longer resembles, or has a utility substantially different from, the asset originally acquired as a result of undergoing a process of manufacture, production, construction or assembly.
* 2001 (2) SA 42 (SCA), 63 SATC 109
† Paragraph (jA) was inserted by section 17(1)(c) of the Second Revenue Laws Amendment Act 60 of 2001. It was amended by section 7(1)(t) of the Taxation Laws Amendment Act No. 24 of 2011 with effect from 1 April 2012.
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