Page 570 - SAIT Compendium 2016 Volume2

IN 65 (2) Income Tax acT: InTeRPReTaTIon noTes IN 65 (2)
Example 1 – Private or domestic use or consumption of trading stock
Facts:
X, a sole trader, owns a bottle store. During the current year of assessment X withdrew 20 cases of wine from stock for use at X’s daughter’s wedding at which the wine was served free of charge to the guests. The market value of the wine in question was substantially in excess of its cost price. X had accounted for the wine in opening and closing stock in previous years of assessment.
Result:
The bottles withdrawn from trading stock by X have been applied for X’s private or domestic use or consumption. Under section 22(8)(a) read with section 22(8)(a) X is deemed to have recouped the cost price of each bottle so applied and not its market value.
4.3 Deemed inclusion in income at market value [section 22(8)(b)]
The market value of trading stock, and not its cost price or written-down value, will be deemed to be recouped by the taxpayer under section 22(8)(b) read with section 22(8)(b) in the ve situations discussed below.
4.3.1 Trading stock donated otherwise than under section 18A [section 22(8)(b)(i)]
A donation of trading stock other than a donation made under section 18A results in the inclusion in income of the market value of that trading stock. See 4.4 for donations made under section 18A. Section 22(8)(b)(i) does not de ne the word ‘donation’ and it must therefore bear its common-law meaning.* In Estate Welch v C: SARS it was con rmed by Marais JA that the common-law test for a donation was as follows:†
‘[T]he disposition [must] be motivated by pure liberality or disinterested benevolence and not by self-interest or the expectation of a quid pro quo of some kind from whatever source it may come.’
This means that unlike a deemed donation for donations tax purposes, if the donee gives any consideration the disposal will not be a donation.‡ The distribution by a taxpayer of free samples of trading stock for promotional purposes is not a donation since it is not motivated by pure liberality or disinterested benevolence. There is an expectation that customers will purchase the taxpayer’s products after sampling them.
4.3.2 Trading stock disposed of otherwise than in the ordinary course of trade for a consideration less than its market value [section 22(8)(b)(ii)]
A taxpayer must include in income the market value of trading stock which has been disposed of
• otherwise than in the ordinary course of trade and
• for a consideration less than its market value. The circumstances surrounding the disposal must be considered in
determining whether the trading stock has been disposed of otherwise than in the ordinary course of trade. It is not uncommon for traders to sell trading stock at less than market value in order to promote their businesses, for example, as a loss leader or during a price war. Disposals of this nature will not give rise to an inclusion in income at market value under section 22(8)(b) read with section 22(8)(b)(ii) since they are undertaken in the ordinary course of trade.
In T v COT§ the court had to determine whether debentures had been acquired by a subsidiary from its holding company in the ordinary course of trade so as to constitute trading stock. Goldin J stated the following:¶
‘It has been repeatedly held that the test is an objective one. One test suggested is whether the disposition would cause an ordinary businessman surprise. If so, it would be otherwise than in the ordinary course of business. (See Michalow NO v Premier Milling Co Ltd 1960(2) SA 59(w) at 65.) In Downs Distributing Co (Pty) Ltd v Associated Blue Star Stores (Pty) Ltd (1948) 76 CLR 463 Rich J said at 476:
‘It means that the transaction must fall into place as part of the undistinguished common ow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation.’ ‘
In De Beers Holdings(Pty) Ltd v CIR Corbett JA (as he then was) stated the following on whether a non-pro table transaction formed part of a taxpayer’s trade:**
‘Of course, the attainment of a pro t is not necessarily the hallmark of a trading transaction. A trader may for commercial reasons be compelled to resell goods at a loss. Conceivably also he may elect to resell goods at a loss in order to gain some other commercial advantage for his business. The practice of putting on sale the so-called ‘loss leaders’ by some merchants would fall into this category; and there seems little doubt that merchandise so sold would constitute stock-in-trade and the proceeds thereof gross income.’
He continued:††
‘It is true, as I have already indicated, that the absence of a pro t does not necessarily exclude a transaction from being part of the taxpayer’s trade; and correspondingly moneys laid out in a non-pro table transaction may nevertheless be wholly or exclusively expended for the purposes of trade within the terms of s 23(g). Such moneys may well be disbursed on grounds of commercial expediency or in order indirectly to facilitate the carrying on of the taxpayer’s trade (see in this regard the remarks of Jenkins LJ in Morgan v Tate & Lyle Ltd 1953 Ch 601 at 637-8 and Boarland v Kramat Pulai Ltd [1953] 2 All ER 1122). Where, however, a trader normally carries on business by buying goods and selling them at
* The Master v Thompson’s Estate 1961 (2) SA 20 (FC), 24 SATC 157 † 2005 (4) SA 173 (SCA), 66 SATC 303 at 314.
‡ The Master v Thompson’s Estate 1961 (2) SA 20 (FC), 24 SATC 157 § 1978 (4) SA 665 (r), 40 SATC 179.
¶ At SATC 184.
** 1986 (1) SA 8 (a), 47 SATC 229 at 254 †† At SATC 260.
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