Page 672 - SAIT Compendium 2016 Volume2

IN 78 Income Tax acT: InTeRPReTaTIon noTes IN 78
Result:
Gross income – Construction (see working 1) Gross income - Quality bonus
Less: Deductible expenditure [section 11(a)]
R
108 000
10 000 (100 000)
18 000 (8 000)
10 000
120 000 (12 000)
110 000 (10 000) 100 000
108 000
Less: Section 24 allowance (see working 2)
Taxable income
Under section 22(2A) and 22(3A) trading stock deemed to be held and not disposed is nil. 1) Working 1 – gross income (greater of receipt or accrual)
Accrued
Work certi ed
Less: retention (10%)
108 000
Received
Cash received
Quality bonus
Therefore, gross income (greater of receipt and accrual)
2) Working 2 – section 24 C allowance
Section 24C allowance (minimum is Rnil) = [(Total costs / Total revenue)* × Income received or accrued to date] –
Actual expenses incurred to date relating to that income Total costs = Costs to date + costs to complete
Total revenue
Total income received or accrued to date (working 1) Actual expenses incurred to date relating to that income
300 000 275 000 108 000 100 000
Section 24C allowance = [(R300 000 / R275 000)* × R108 000] – R100 000
= R8 000 *
= limited to 1
The section 24C allowance is less than the income accrued or received in the current year, therefore there is no need to further limit the allowance, see 5.2.
5.2 Which does not exceed the amount of such income received or accrued in the particular year of assessment
The amount of the section 24C allowance is limited to the amount of income received or accrued under the contract in a particular year of assessment* and not to the taxpayer’s taxable income before determining and deducting a section 24C allowance.
The limiting factor is the amount of income received or accrued under the contract in a particular year of assessment (see 4.1) and not the taxpayer’s taxable income before the allowance being granted.†
Example 6 – Limitation of the amount of the section 24C allowance
Facts:
DEF, a prominent builder, is incurring a loss on one of its building contracts. The contract was supposed to be completed in year 1 but it is estimated that it will only be completed in year 2. The contract was concluded at a sales price of R5 000 000 (which the client paid in advance), actual costs to date are R4 000 000 and expected future costs are R1 200 000.
Result:
Section 24C allowance = [(Total costs / Total revenue)* × Income received or accrued to date] – Actual expenses incurred to date relating to that income
= [(R5 200 000 / R5 000 000)* × R5 000 000] – R4 000 000
= R1 000 000
The amount of the section 24C allowance available in year 1 is equal to R1 000 000. * = limited to 1
* This is both implicit and expressly stated in section 24C(2).
† See ITC 1697 (1999) 63 SATC 146 at 154 – 155 which con rms this interpretation.
664 saIT comPendIum oF Tax LegIsLaTIon VoLume 2