Page 676 - SAIT Compendium 2016 Volume2

IN 78 Income Tax acT: InTeRPReTaTIon noTes IN 78
Expense item
Fuel
Salaries – drivers
Tracking and monitoring services
Insurance (see note 3)
Total estimated costs
Notes:
1) Safe Ride did not include any depreciation because it represents past expenditure and Safe Ride does not anticipate purchasing any new vehicles in the next 18 months.
2) The repairs and maintenance expense relates primarily to the costs incurred when vehicles break down. Although Safe Ride knows from past experience that vehicles will break down, costs relating to repairing the vehicles have not been included in estimated future expenditure because as at the end of the year of assessment no break down has occurred and accordingly there is insuf cient certainty regarding the expense. Safe Ride considers the portion of the expense relating to the regular standard service which each bus undergoes to be immaterial and has not separately analysed it.
3) The cost of insuring the buses is expenditure that is directly linked to the provision of the future service. Safe Ride insures other assets, for example, buildings, equipment and other vehicles, which are not directly related to the provision of the bus transportation services. The insurance premium is determined on the total value of the insured assets and is not broken down into a premium per asset type. The insured value of each category of asset is as follows:
Estimated Total Future Expenditure R
2 554 000 1 489 000 920 000 242 500 5 205 500
Buildings
Equipment
Buses
Other vehicles
Total insured value of assets
R
3 000 000 1 500 000 5 000 000
500 000
10 000 000
The insurance premium is apportioned based on the value of the insured assets to determine the portion of the premium
that applies to the buses. __i_n_su_r_e_d_v_al_u_e_o_f_b_us_e_s__
Portion of insurance premium = insured value of total assets × annual insurance premium × fractions
= _R_5_0_0_0_0_0_0_ × R485 000 R10 000 000
= R242 500
The reasonability of the apportionment will be subject to the discretion of the Commissioner. A taxpayer will be required to substantiate the basis of apportionment of expenditure, if applicable, so that the Commissioner’s discretion may be applied.
Step 2: Determine the total amount of income which will be received under the contract. This amount is equal to R13 250 000 – Safe Ride has estimated that its income and expenses for year 2 will be the same as it was in the current year. (Note: Assume for the purposes of this example that this is a reasonable assumption, in practice Safe Ride would need to be able to substantiate that this is a reasonable assumption and estimation.)
Step 3: Determine the total amount of advance income received or accrued under the contract. This amount will be the R300 000 advance ticket sales.
Step 4: Determine what amount of future expenditure relates to the amount of income in the particular year of assessment by applying the following formula:
Section 24C allowance = [(Total costs / Total revenue)* × Income received or accrued to date**] – Actual expenses incurred to date relating to that income
= [(R5 205 500 / R13 250 000) × R300 000] – nil
= R117 860
* Limited to 1
** Excluding the reversal of prior year’s section 24C allowances
Step 5: Limit the amount of the section 24C allowance calculated in terms of the formula to the amount of advance income received in the particular year of assessment. The amount of advance income is R300 000 and the amount of the section 24C allowance is R117 860. The full amount of the allowance calculated therefore quali es.
The taxpayer’s section 24C allowance in year 1 is thus R117 860.
8. Conclusion
In summary:
• Section 24C provides temporary relief, in the form of an allowance which reverses in the following year of assessment,
to taxpayers that receive income in advance of incurring the expenditure related to the earning of that income. • The Commissioner must be satis ed that –
– the taxpayer’s income in a particular year of assessment includes an amount of income received or accrued under a contract;
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saIT comPendIum oF Tax LegIsLaTIon VoLume 2