Page 466 - SAIT Compendium 2016 Volume2

IN 48 (2) Income Tax acT: InTeRPReTaTIon noTes IN 48 (2)
Example 3 – Calculation of gross pro t percentage (GP%) on a globular basis using a year-by-year aged- debtors’ method
Facts:
A company’s instalment debtors amount to R50 million at the end of its 2014 year of assessment. The sales that gave rise to the debtors were made during the 2011 to 2014 years of assessment. Set out below is an aged analysis of the debts that arose in each year of assessment together with the applicable gross pro t percentages for those years.
Tax year
2014
2013
2012
2011
Outstanding GP debtors
R%
30 000 000 33,6
11 000 000 41,2 7 000 000 40,1 2 000 000 37,8
Determine the debtors’ allowance for the 2014 year of assessment.
Result:
Tax year
2014
2013
2012
2011
Outstanding GP Gross pro t debtors
R%R
30 000 000 33,6 10 080 000 11 000 000 41,2 4 532 000
7 000 000 40,1 2 807 000 2 000 000 37,8 756 000
50 000 000
The debtors’ allowance for the 2014 year of
18 175 000 assessment is R18 175 000.
4.8.3 The moving-weighted-average method
If aging of the individual debtors is not possible a taxpayer could use the moving-weighted-average method.
The instalment debtors at the end of the year of assessment would invariably have built up over several years, with the actual gross pro t percentage varying from debtor to debtor and from year to year. This could be due, for example, to changes in product line, price wars, general competition and changes in input costs. Another factor that needs to be considered is that debtors arising in earlier years will make up a progressively smaller percentage of the outstanding debtors at the end of a year of assessment because they will have repaid a greater proportion of their instalments. The moving-weighted-average method seeks to take account of these factors. It involves determining a moving-weighted- average percentage based on each year’s sales and gross pro t while also taking into account the average period of the relevant agreements. The average gross pro t percentage is then applied to the total outstanding debtors (excluding bad and doubtful debts, VAT and nance charges). The method is less accurate than the other two methods described above. Its main de ciency is that it assumes that all instalment sale agreements are of equal length. Nevertheless, this method
will also be acceptable to SARS provided it is applied on a consistent basis.
Example 4 – Calculation of gross pro t percentage (GP%) on a globular basis using a moving-weighted- average method
Facts:
ABC (Pty) Ltd commenced business in year 1, selling furniture and household appliances under instalment credit agreements over 36 months. Its gross pro t and turnover from instalment sales (excluding nance charges and VAT) were as follows:
Year 1 Year 2 Year 3 Year 4
10 000 15 000 5 000 20 000
100 000 10 200 000 7,5 40 000 12,5 200 000 10
Gross Sales GP% pro t*
RR
*Gross pro t excludes nance charges and VAT.
Calculate the gross pro t percentage to be applied to qualifying instalment sale debtors (excluding bad, doubtful debts, nance charges and VAT) for years 3 and 4.
458 saIT comPendIum oF Tax LegIsLaTIon VoLume 2