Page 662 - SAIT Compendium 2016 Volume2

IN 77 Income Tax acT: InTeRPReTaTIon noTes IN 78
Reimbursements of expenditure, which was incurred on the instruction of the employer and where the employee is required to provide the employer with proof of the expenditure, are excluded from taxable income. ‘Predetermined reimbursements’ based on expected business usage are treated as allowances and not as reimbursements. ‘Reimbursements’ are taxable to the extent they exceed the cost incurred by the employee for business purposes.
In context, ‘advances’ are not used as frequently as allowances or reimbursements. Depending on the detail, the treatment may be the same as that for reimbursements.
INTERPRETATION NOTE: NO. 78
29 July 2014
INCOME TAX ACT 58 OF 1962
SECTION 24C
ALLOWANCE FOR FUTURE EXPENDITURE ON CONTRACTS
DATE: ACT: SECTION: SUBJECT:
CONTENTS
Preamble
1. Purpose
2. Background
3. The law
4. Application of the law
4.1 Income
4.1.1 A contract
4.2 Future expenditure
4.2.1 Expenditure which the Commissioner is satis ed will be incurred in a subsequent year of assessment
(in performing the taxpayer’s obligations under the contract)
(a) Expenditure
(b) Will be incurred in a subsequent year of assessment
(c) In performing the taxpayer’s obligations under the contract in terms of which the income was
received
4.2.2 Expenditure is incurred in such a manner that the expenditure will be allowed as a deduction in a
subsequent year
4.2.3 Expenditure on the acquisition of an asset
4.2.4 Application of section 24C to ceded contracts
4.2.5 Application of section 24C to warranty claims
4.2.6 Application of section 24C to maintenance contracts
5. Determination of the amount of the section 24C allowance
5.1 The amount of future expenditure which in the Commissioner’s opinion relates to the amount of advance
income
5.2 Which does not exceed the amount of such income received or accrued in the particular year of assessment
6. Reversal of the prior year’s section 24C allowance 7. Other
7.1 Analysis on a contract-by-contract basis 8. Conclusion
Preamble
In this Note unless the context indicates otherwise –
• ’advance income’ means income, received by or accrued to a taxpayer under a contract, that will be used to nance
the expenditure still to be incurred in ful lling the taxpayer’s obligations under that contract;
• ‘section’ means a section of the Act;
• ‘section 24C allowance’ means an allowance under section 24C of the Act;
• ‘the Act’ means the Income Tax Act 58 of 1962; and
• any word or expression bears the meaning ascribed to it in the Act.
1. Purpose
This Note provides guidance on the interpretation and application of section 24C when income is received in advance while the expenditure under the contract will only be incurred in a subsequent year of assessment.
2. Background
The nature of a taxpayer’s business may be such that the taxpayer receives amounts under a contract that will be used to nance expenditure to be incurred in the future in performing under that contract. An anomaly arises when the income is received in one year and the expenditure is incurred in a subsequent year of assessment.
In the absence of section 24C the income would be fully taxable in the year received without any deduction for future expenditure. The non-deductibility of the expenditure is attributable to most sections requiring that the expenditure be actually incurred before a deduction can be allowed [for example, section 11(a)] and, in addition, section 23(e) which speci cally prohibits the deduction of income carried to any reserve fund or capitalised in any way.
654 saIT comPendIum oF Tax LegIsLaTIon VoLume 2