Page 664 - SAIT Compendium 2016 Volume2

IN 78 Income Tax acT: InTeRPReTaTIon noTes IN 78
the amount remaining of the gross income of any person for any year or period of assessment after deducting therefrom any amounts exempt from normal tax under Part I of Chapter II;
This Note does not examine the requirements for an amount to constitute gross income and whether a particular amount constitutes gross income or exempt income. However, two amounts require consideration, namely –
• actual amounts which are received or have accrued under the contract; and
• the reversal of the prior year’s section 24C allowance.*
The reversal of the prior year’s section 24C allowance and deemed inclusion in income is income received under the contract. A further deduction of the section 24C allowance may therefore be allowed against the reversal in the succeeding year of assessment if, after the end of that succeeding year of assessment, there is still future expenditure which will be incurred.
Therefore, in assessing whether an amount of income received or accrued in a particular year of assessment will be used to nance future expenditure, the amount of income will include actual amounts under the contract which are included as income in the particular year of assessment as well as the reversal of the prior year’s section 24C allowance.
Example 1 – Income
Facts:
In the rst year of assessment (year 1) ABC received income in advance of R1 000 000. The total estimated expenditure was R600 000 and a section 24C allowance of R600 000 was permitted. In the second year of assessment (year 2) no additional amounts were received by or accrued to ABC under the contract. ABC did not incur any expenditure in year 2 but because of unexpected cost escalations total estimated expenditure increased to R800 000.
Result:
Year 1
Gross income
Less: Section 24C allowance allowed in year 1 Taxable income
Year 2
Section 24C allowance allowed in year 1
Less: Section 24C allowance allowed in year 2 Taxable income
R
1 000 000 (600 000)
400 000
600 000 (600 000) NIL
The amount of income in year 2 which is relevant for purposes of section 24C is R600 000. The maximum section 24C allowance which may be granted is therefore limited to R600 000 (see 5.2 for a discussion on this aspect) even though future expenditure is estimated to be R800 000.
Note: In different circumstances, if ABC had received additional amounts under the contract in year 2 these additional amounts would also have been included in the amount of income which was relevant for purposes of section 24C.
4.1.1 A contract
Section 24C requires that the amount of income must be received by or accrued to a taxpayer under a contract. The word ‘contract’ is not de ned in the Act and therefore the ordinary meaning of the word must be applied. A ‘contract’ is de ned in the Law of South Africa† as –
‘[a]n agreement entered into with the intention of creating an obligation or obligations’. In order for a contract to be valid –‡
‘the parties must have the necessary contractual capacity; the performance undertaken under the contract must be possible at the time of contracting; the contract itself, its performance and object must be lawful; and the constitutive formalities (if any) for the contract must have been complied with’.
Although there is no speci c requirement that a contract must be constitutionally valid, public policy requires that the Constitution and its values must be taken into account when considering whether a contract is lawful. § Constitutional validity of a contract is therefore indirectly required. The validity of a contract does not generally depend on compliance with any particular formalities. However, if the parties have agreed on particular constitutive formalities (for example, that the agreement must be reduced to writing and signed by the contracting parties) or if the law requires such formalities (for example, some contracts may need to be in writing or require notarial execution or registration) then those formalities must be met.¶
Oral contracts are valid when a written contract is not required under a particular law or by the parties to the contract. However, it may be dif cult to prove the existence and terms of an oral contract because of the lack of evidentiary proof. A taxpayer wishing to invoke section 24C must be able to prove the existence of a contract, the income received or accrued under that contract, the associated performance obligations and the expenditure related to performing those obligations, to
* Deemed income under section 24C(3) and paragraph (n) of the de nition of the term ‘gross income’. † LAWSA volume 5(1) paragraph 370.
‡ LAWSA volume 5(1) paragraph 403.
§ LAWSA volume 5(1) paragraph 403.
¶ LAWSA volume 5(1) paragraph 415.
656 saIT comPendIum oF Tax LegIsLaTIon VoLume 2