Page 467 - SAIT Compendium 2016 Volume2

IN 48 (2) Income Tax acT: InTeRPReTaTIon noTes IN 48 (2)
Result:
Year 1
GP% = R10 000 / R100 000 × 100 = 10%
Year 2
GP% = R10 000/R100 000 x 100 = 10%
Gross
Pro t Year 1 10 000 Year 2 15 000
25 000
Sales
100 000 200 000
300 000
Weight Weighted Gross pro t
2 20 000 3 45 000
65 000
Weighted Sales 200 000 600 000
800 000
Note: Year 1’s gures have been multiplied by 2 (and not 3) to account for the fact that year 1’s debtors should have repaid 1/3 of their instalments. (NB: This is of course not strictly true because sales would take place throughout the year and debtors would begin paying their instalments during the year in which sales are made. Nevertheless, as long as the method is applied consistently, a fair result should be achieved.)
Year 3
Year 1 Year 2 Year 3
Gross pro t Sales Weight Weighted Weighted sales gross pro t
RR RR
10 000 15 000 5 000
30 000
100 000 1 200 000 2 40 000 3
340 000
10 000 30 000 15 000
55 000
100 000 400 000 120 000
620 000
GP% = R55 000 / R620 000 × 100 = 8,87%.
Note: Year 1’s gures only receive a weighting of 1 because 1/3 of year 1’s debtors should still be outstanding at the end of year 3. Year 2’s gures are weighted by 2 because 2/3 of that year’s debtors should still be outstanding at the end of year 3. Year 3’s debtors receive a weighting of 3 because it is assumed that no payments have been received from year 3’s debtors by the end of year 3 (see note under year 2 on the assumption regarding the receipt of instalments).
It would not be acceptable to use a simple average of percentages, since it results in an in ated percentage, namely (10 + 7,5 + 12,5)/3 = 30/3 = 10%. The gure of 10% is unduly in ated by year 3 in which a low level of sales took place at a relatively high mark up.
Year 4
Year 2 Year 3 Year 4
Gross Pro t Sales Weight Weighted Weighted sales gross pro t
RR RR
15 000 5 000 20 000
40 000
200 000 1 40 000 2 200 000 3
440 000
15 000 10 000 60 000
85 000
200 000 80 000 600 000
880 000
GP% = R85 000 / R880 000 × 100 = 9,66%
Note: In year 4 the gross pro t and sales for year 1 are omitted and the gures for year 4 inserted. This treatment is applied because year 1’s debtors should, if they pay according to plan, have settled their debts by the end of year 4.
4.8.4 Use of the current year’s gross pro t percentage
If the taxpayer’s gross pro t remains constant from year to year it will be acceptable for the taxpayer to use the current year’s gross pro t percentage provided that the level of variation over the previous year of assessment does not exceed 2%. The 2% variation is not the simple difference between the previous year’s percentage and the current year’s percentage, but rather the percentage variation over the previous year’s percentage.
Example 5 – Calculation of gross pro t percentage (GP%) on a globular basis using the current year’s gross pro t percentage
Facts:
A company’s instalment sales last year yielded a gross pro t percentage of 10%. The current year’s percentage is 9,9%.
Result:
The company may use the current year’s gross pro t percentage of 9,9%, since it falls within the range 9,8% and 10,2%. In other words, the acceptable level of variation is 10% × 2% = 0,2%.
Note: The acceptable range is not 8% and 12% as that involves a 20% variation.
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