Page 573 - SAIT Compendium 2016 Volume2

IN 65 (2) Income Tax acT: InTeRPReTaTIon noTes IN 65 (2)
Example 3 – Deemed expenditure
Facts:
Company X is a paint manufacturer. It withdraws a tin of paint from its trading stock and uses it to paint its factory building.
Result:
Company X must include the market value of the tin of paint in its income under section 22(8)(b) read with section 22(8)(b)(iv) – see 4.3.4. Under paragraph (a) of the proviso to section 22(8) the amount so included in Company X’s income is deemed to be expenditure incurred on the acquisition of the tin of paint. The deemed expense will qualify as a deduction under section 11(d) since it comprises expenditure actually incurred during the year of assessment on repairs to property occupied for the purpose of trade.
4.6 Reduction of deemed inclusion in income by actual consideration [paragraph (d) of the proviso to section 22(8)]
The disposal of trading stock otherwise than in the course of the taxpayer’s trade for an amount less than its market value results in the inclusion in the taxpayer’s income of the full market value of that trading stock – see 4.3.2. At the same time the receipt or accrual of the actual consideration will be included in the taxpayer’s gross income thus creating the potential for double taxation. Paragraph (b) of the proviso to section 22(8) prevents this potential double taxation by reducing the market value included in the taxpayer’s income under section 22(8)(b) by the actual consideration received from the disposal.
4.7 Exclusion of livestock and produce [paragraph (c) of the proviso to section 22(8)]
Section 22(8) does not apply to trading stock consisting of livestock or produce to which paragraph 11 of the First Schedule to the Act applies [paragraph (c) of the proviso to section 22(8)]. This exclusion prevents double taxation because paragraph 11 of the First Schedule contains income inclusion provisions which mirror those of section 22(8).
4.8 Exclusion of assets referred to in paragraph (jA) of the de nition of ‘gross income’ [paragraph (d) of the proviso to section 22(8)]
References in this paragraph to paragraph (jA) are to paragraph (jA) of the de nition of the term ‘gross income’ in section 1(1). Section 22(8)(b)(iv) provides for a market value inclusion in income when trading stock is applied for a purpose other than its disposal in the ordinary course of trade and under circumstances other than those in section 22(8) (a), (b)(i), (ii) or (iii). One such situation arises when an asset contemplated in paragraph (jA) is applied as a capital asset. Paragraph (jA) includes in gross income –
‘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;’.
Paragraph (jA) therefore ensures that any amount received or accrued on disposal of such assets is included in gross income, even if they are used as capital assets. Such assets remain within the de nition of the term ‘trading stock’ in section 1(1) despite any change in usage.*
Paragraph (d) of the proviso to section 22(8) prevents double taxation by excluding from section 22(8)(b)(iv) any trading stock consisting of assets for which any amount received or accrued from their disposal is or will be included in the gross income of the taxpayer under paragraph (jA). For more on paragraph (jA) see Interpretation Note No. 11 ‘Trading Stock: Assets not used as Trading Stock’ dated 5 February 2014.
Example 4 – Trading stock applied for a purpose other than for disposal in the ordinary course of trade
Facts:
A company imports computer parts and assembles them into desktop computers which it sells. The parts and assembled computers comprise trading stock. Some of the computers assembled by the company are used by its sales personnel for demonstration purposes. These computers are used as capital assets and not for disposal in the ordinary course of trade. After two years the demonstration computers are sold to the company’s employees at their then prevailing market values.
Result:
The demonstration computers comprise trading stock under paragraph (a)(ii) of the de nition of the term ‘trading stock’ in section 1(1) because any proceeds on their disposal will form part of the company’s gross income under paragraph (jA).
Upon application of the demonstration computers as capital assets
Section 22(8)(b)(iv) deems the market value of the computers to be included in the company’s income when they are used as capital assets. However, paragraph (d) of the proviso to section 22(8) prevents this deemed inclusion for paragraph (jA) assets. Under the de nition of the term ‘trading stock’ the demonstration computers remain trading stock despite their deployment as capital assets. Therefore there will also be no deemed inclusion in the company’s income under section 22(8)(b)(v) (assets held as trading stock which cease to be held as trading stock).
* Paragraph (ii) of the de nition of the term ‘trading stock’ in section 1(1) includes in that de nition (with some exceptions) ‘anything the proceeds from the disposal of which forms or will form part of the taxpayer’s gross income’.
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