Page 574 - SAIT Compendium 2016 Volume2

IN 65 (2) Income Tax acT: InTeRPReTaTIon noTes IN 65 (2)
Upon sale of the demonstration computers to employees
Any amounts received by or accrued to the company from the disposal of its demonstration computers to its employees on or after 12 December 2001 are included in its gross income under paragraph (jA). It follows that the company must include the market value of the demonstration computers in its gross income under paragraph (jA) only when they are ultimately disposed of to its employees and not when they are used as capital assets.
5. Miscellaneous issues
5.1 Foreign currency contracts
The de nition of the term ‘trading stock’ in section 1(1) speci cally excludes from trading stock – • a ‘foreign currency option contract’; and
• a ‘forward exchange contract’,
as de ned in section 24I(1). Accordingly, section 22 does not apply to such assets.
5.2 Capital gains tax implications
References under this heading to a ‘paragraph’ are to paragraphs of the Eighth Schedule to the Act. Paragraph 12(3) triggers a deemed disposal and reacquisition of an asset which ceases to be held as trading stock otherwise than as a result of a disposal under paragraph 11. In other words, paragraph 12(3) does not deal with an actual disposal of trading stock but a change of usage. For example, it could apply to a taxpayer who commences to use an item of trading stock as a capital asset or as a personal-use asset.* In these circumstances the taxpayer is deemed to have disposed of the asset for a consideration equal to the amount included in income under section 22(8)† and to have immediately reacquired it at the same amount for purposes of determining expenditure actually incurred under paragraph 20(1)(a). The deemed consideration will be excluded from proceeds under paragraph 35(3)(a) because of the income inclusion under section 22(8). The deemed reacquisition expenditure establishes the base cost of the asset for the purposes of any future disposal of that asset.
Paragraph 12(3) does not apply to trading stock manufactured, produced, constructed or assembled by the taxpayer that is used as a capital asset in the circumstances contemplated in paragraph (jA) of the de nition of the term ‘gross income’ in section 1(1). Such assets remain ‘trading stock’ as de ned in section 1(1) because the proceeds from their ultimate disposal are included in ‘gross income’ under paragraph (jA). In other words, they do not cease to be held as trading stock as required by paragraph 12(3).
However, trading stock that is acquired by a taxpayer by purchase or exchange does not fall within paragraph (jA) and will thus trigger a deemed inclusion in income under section 22(8)(b)(v) at market value, and will have a corresponding base cost for capital gains tax purposes equal to the same amount under paragraph 12(3). Thus a motor dealer that removes a purchased delivery vehicle from the showroom oor and uses it as an in-house delivery vehicle will fall outside paragraph (jA) and into section 22(8)(b)(v) and paragraph 12(3). The deemed disposal and reacquisition under paragraph 12(3) is deemed under paragraph 13(1)(g)(i) to occur on the date immediately before the date on which the change of usage occurs. Section 22(8)(b), which triggers an income inclusion at market value, does not contain a timing rule. Logically there should be symmetry between the amount included in income under section 22(8)(b)(v) and the base cost determined under paragraph 12(3). The inclusion in income under section 22(8)(b)(v) should therefore be based on the market value of the asset on the date immediately before the date on which the asset ceases to be held as trading stock. This is only likely to be an issue with traded assets such as listed shares, the prices of which tend to uctuate from day to day. For more information see Chapter 6, paragraph 6.2.3 of the Comprehensive Guide to Capital Gains Tax (Issue 4).
6. Conclusion
Section 22(8) deems an amount to be included in a taxpayer’s income when trading stock is – applied for private or domestic use or consumption;
donated;
disposed of otherwise than in the ordinary course of trade for a consideration less than its market value;
distributed in specie by a company;
used or consumed in the course of trade or disposed of at market value otherwise than in the ordinary course of trade; or no longer held as trading stock.
The amount to be included in income is, in the case of trading stock –
applied for private or domestic use or consumption, its cost price or written-down value, or if the cost price cannot be
determined, the market value;
donated to an approved public bene t organisation or other qualifying entity referred to in section 18A, the value taken
into account under section 22; or
in any other case, the market value.
Consideration received for trading stock which is less than its market value is excluded from section 22(8) because
the amount would already be included in gross income. A taxpayer that uses or consumes trading stock for the purposes of trade is deemed to incur an amount of expenditure equal to the income inclusion under section 22(8) and may qualify
* The term ‘personal use asset’ is de ned in paragraph 53(2).
† This is clearly a reference to section 22(8)(b)(v) which triggers an inclusion in income at market value under section 22(8)(b).
566 saIT comPendIum oF Tax LegIsLaTIon VoLume 2