Page 663 - SAIT Compendium 2016 Volume2

IN 78 Income Tax acT: InTeRPReTaTIon noTes IN 78
Section 24C was inserted in the Act* as a relief measure to taxpayers that, because of the nature and special circumstances of the taxpayers’ businesses, receive advance income during a year of assessment but only incur related expenditure in a subsequent year of assessment. The explanatory memorandum explains the reason for the insertion of section 24C as follows:†
‘The new section caters for the situation which often arises in the construction industry and sometimes in manufacturing concerns, where a large advance payment is made to a contractor before the commencement of the contract work, to enable the contractor to purchase materials, equipment etc. In a number of instances such advance payments are not matched by deductible expenditure, resulting in the full amounts of the advance payments being subject to tax.’
Although Section 24C was originally intended for taxpayers entering into building and manufacturing contracts, it does not mean that the section cannot be applied to taxpayers entering into other types of contracts. In ITC 1697‡ Galgut J stated the following:
‘The fact that the allowance might have been intended for building contractors does not mean, however, that it is not available to others. On the contrary, by the particular wording of s 24C the types of trades that the individual taxpayer might carry on, and the types of contracts concerned, are in no way limited. The sole question is whether the provisions of s 24C otherwise apply. . . .’
Section 24C has been and can be applied to businesses in industries other than building and manufacturing provided the detailed requirements of the section are met. For example, the section has been applied to the motor industry, the nancial services industry, publishers and share block schemes. An assessment of whether section 24C applies must be performed annually taking up-to-date information into account. A decision made by the Commissioner under section 24C is subject to objection and appeal in accordance with Chapter 9 of the Tax Administration Act, 2011.§
3. The law
Section 24C
24C. Allowance in respect of future expenditure on contracts.—(1) For the purposes of this section, ‘future expenditure’ in relation to any year of assessment means an amount of expenditure which the Commissioner is satis ed will be incurred after the end of such year—
(a) in such manner that such amount will be allowed as a deduction from income in a subsequent year of assessment; or
(b) in respect of the acquisition of any asset in respect of which any deduction will be admissible under the provisions of this Act.
(2) If the income of any taxpayer in any year of assessment includes or consists of an amount received by or accrued to him in terms of any contract and the Commissioner is satis ed that such amount will be utilized in whole or in part to nance future expenditure which will be incurred by the taxpayer in the performance of his obligations under such contract, there shall be deducted in the determination of the taxpayer’s taxable income for such year such allowance (not exceeding the said amount) as the Commissioner may determine, in respect of so much of such future expenditure as in his opinion relates to the said amount.
(3) The amount of any allowance deducted under subsection (2) in any year of assessment shall be deemed to be income received by or accrued to the taxpayer in the following year of assessment.
4. Application of the law
The deduction of an allowance is permitted under section 24C if all of the following requirements are met:
• Income for the particular year of assessment includes or consists of an amount which is received or accrued under a
contract.
• TheCommissionerissatis edthatallorpartofthatamountwillbeusedto nanceexpenditurewhichwillbeincurred
by the taxpayer in a subsequent year of assessment in performing the obligations under the contract.
• That expenditure must either be expenditure which will be allowed as a deduction from income when incurred in a subsequent year of assessment or is expenditure which will be incurred in a subsequent year of assessment on the acquisition of an asset (see 4.2.3 for further detail) for which any deduction will be allowed under the Act (‘future
expenditure’).
Section 24C(3) stipulates that an allowance deducted in any year of assessment is deemed to be income in the succeeding year of assessment. The requirements and the calculation of the amount of the allowance are discussed in the paragraphs that follow.
4.1 Income
A prerequisite for any allowance under section 24C is that the taxpayer concerned must have included an amount, which was received or accrued under a contract, in income in the year of assessment in which the allowance is claimed. It is considered likely that in most circumstances advance income will arise when an amount has been received in advance and not when the amount has accrued to the taxpayer before being received. Accordingly, for ease of reference throughout this Note reference is made to the receipt of an amount and not to the accrual of an amount. However, if circumstances arise in which an amount of advance income accrues before being received, the principles discussed in this Note will apply. The term ‘income’ is de ned in section 1(1) of the Act as –
* Section 18(1) of the Income Tax Act No. 104 of 1980.
† Explanatory memorandum on the Income Tax Bill, 1980. ‡ (1999) 63 SATC 146 (N) at 155.
§ Sections 104 and 107 respectively.
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