Page 671 - SAIT Compendium 2016 Volume2

IN 78 Income Tax acT: InTeRPReTaTIon noTes IN 78
The Commissioner does not require the taxpayer to deposit the funds received in advance into a separate bank account and to only use the funds from that account to settle the expenditure incurred in order for the Commissioner to be satis ed that the advance income will be used to nance future expenditure.
Example 4 – Construction contract
Facts:
A contractor entered into an agreement with a client. The details of their agreement are as follows: • The agreement was entered into in the rst year of assessment (year 1).
• The contractor undertook to build of ce buildings for the client.
• The contract price is R1 000 000.
The client paid the contractor R500 000 in advance in year 1 and the balance of the contract price in the third year of assessment (year 3). The contractor’s year of assessment ends on the last day of February each year. In years 1 and 2 the contractor estimated that total expenditure would be R400 000. The contractor actually incurred expenditure of R30 000 during year 1, R130 000 during year 2 and R450 000 during year 3. The total actual expenditure of R610 000 exceeded the contractors initial estimate because of unexpected price increases in year 3.
Result:
Year 1
Section 24C allowance = [(Total costs / Total revenue)* × Income received or accrued to date**] – Actual expenses incurred to date relating to that income
= [(R400 000 / R1 000 000) × R500 000] – R30 000
= R170 000
Gross income
Less:
Actual expenses
Section 24C(2) allowance Taxable income
Year 2
RR 500 000
30 000 170 000
(200 000) 300 000
Section 24C allowance = [(Total costs / Total revenue)* × Income received or accrued to date**] – Actual expenses incurred to date relating to that income
= [(R400 000 / R1 000 000) × R500 000] – R160 000
= R40 000
Gross income
Section 24C allowance allowed in year one
Less:
Actual expenses
Section 24C(2)
Taxable income
* Limited to 1
** Excluding the reversal of prior year’s section 24C allowance
Year 3
Gross income
Section 24C allowance allowed in year 2
Less: Actual expenditure Taxable income
130 000 40 000
Nil
170 000 170 000
(170 000) Nil
500 000 40 000 540 000
(450 000) 90 000
RR
Under section 22(2A) and 22(3A) trading stock deemed to be held and not disposed is nil for each of the relevant years.
Example 5 – Construction contracts
Facts:
During the year Y entered into a construction contract which is expected to be completed in 25 months. The total contract price is R275 000. Invoices may only be raised by Y on work that has been certi ed by the client. A retention of 10% is applicable to all billings. Y initially estimated total expenditure would be R225 000.
Y received payments totalling R110 000 during the year (R100 000 payment of the contract price and R10 000 ad hoc quality bonus awarded by the client). The client awarded the ad hoc quality bonus in year 1 to incentivise Y and encourage consistency in quality throughout the construction process.
At the end of the year work certi ed totalled R120 000 and expenditure incurred totalled R100 000. Y reviewed the project and estimated that the remaining expenditure to complete the project would be R200 000. That is, the estimated total expenditure had increased to R300 000 (R100 000 actual and R200 000 future expenditure).
saIT comPendIum oF Tax LegIsLaTIon VoLume 2 663