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IN 11 (3) Income Tax acT: InTeRPReTaTIon noTes IN 11 (3)
4.5.2 Disposal at less than market value [section 22(8)(b)(ii)]
Assets that are disposed of otherwise than in the ordinary course of trade and for less than their market value, will result in the market value of the amount being included in the taxpayer’s income. When assets contemplated in paragraph (jA) are sold for less than their market value, the actual consideration will be subject to tax under paragraph (jA) of the de nition of ‘gross income’ while the difference between market value and the actual consideration will be included in the income of the taxpayer under section 22(8)(b)(ii).
4.6 Deductions
4.6.1 Cost of manufacture [sections 11, 22 and 23(g)]
A deduction for the expenditure incurred in manufacturing a paragraph (jA) asset must be considered under section 11(a) read with section 23(g). Its cost would normally be capitalised for tax and accounting purposes because it constitutes expenditure incurred with the intention of creating a capital asset. However, since the amount received or accrued on disposal of such an asset constitutes gross income and the asset constitutes trading stock, it will be accepted that the cost, determined on the same basis as for other similar trading stock items, allocated to the asset concerned will not constitute expenditure of a capital nature for purposes of section 11(a). This treatment is subject to the condition that the general requirements of the relevant sections have been met and that the transactions would not constitute an impermissible tax avoidance arrangement under section 80A to 80L.
The manufacturing costs of paragraph (jA) assets manufactured and disposed of –
• in the same year of assessment, will be deductible in full under section 11(a); and
• in different years of assessment, will be subject to section 22.
Having regard to the purpose of the legislation and taking the provisions of the Act as a whole into account it is clear that once an asset has been classi ed as trading stock it will be regarded as being intrinsically of a revenue nature and will fall within the con nes of section 11(a) and section 22. It follows that since sections 11(a) and 22 are applicable to paragraph (jA) assets, no allowance may be claimed under other sections for example section 11(e) (wear-and-tear or depreciation allowance), 11(o) (allowance on alienation, loss or destruction of an asset), or 12C (the 40/20/20/20 allowance).
5 Conclusion
Any Amount received by or accrued to a taxpayer from the disposal of a paragraph (jA) asset used as a capital asset on or after 12 December 2001 must be included in the taxpayer’s gross income. This inclusion in gross income means that a paragraph (jA) asset constitutes trading stock as de ned in section 1(1) and section 22 will therefore apply.
In order to avoid double taxation, amounts included in paragraph (jA) are speci cally excluded from inclusion in income under section 8(4)(a) and 22(8)(b)(iv).
The deductibility of costs associated with paragraph (jA) assets will be considered under section 11(a) read with section 23(g). No capital allowances can therefore be claimed for these assets
Legal and Policy Division
SOUTH AFRICAN REVENUE SERVICE Date of 1st issue: 25 March 2003
Date of 2nd issue 5 February 2014
Annexure – The law
Section 1 (1) – De nition of ‘gross income’ [Paragraph (jA)]
Section 1 (1)– De nition of ‘trading stock’
(jA) any amount received by or accrued to any person during the year of assessment 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;
‘trading stock’— (a) includes—
(i) anything produced, manufactured, constructed, assembled, purchased or in any other manner acquired by a taxpayer for the purposes of manufacture, sale or exchange by the taxpayer or on behalf of the taxpayer;
(ii) anything the proceeds from the disposal of which forms or will form part of the taxpayer’s gross income, otherwise than—
(aa) in terms of paragraph (j) or (m) of the de nition of ‘gross income’;
(bb) in terms of paragraph 14 (1) of the First Schedule; or
(cc) as a recovery or recoupment contemplated in section 8 (4) which is included in gross income in terms
of paragraph (n) of the de nition of ‘gross income’; or .. .
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