Page 677 - SAIT Compendium 2016 Volume2

IN 78
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Income Tax acT: InTeRPReTaTIon noTes IN 79
all or part of the advance income will be used to nance future expenditure which will be incurred by the taxpayer in performing the taxpayer’s obligations under that contract; and
the future expenditure when incurred will qualify for a deduction or, in the case of the acquisition of an asset, will qualify for any deduction under the Act.
• The contract may be a written contract or a verbal contract; however, in the latter case it may be more dif cult to prove the existence of a contract and the rights and obligations owing from it.
• The words ‘will be incurred’ indicate that the Commissioner must be satis ed that there is a high degree of probability and inevitability that the expenditure will be incurred by the taxpayer. A taxpayer must therefore be able to demonstrate that, although the expenditure is contingent at the end of the year of assessment in question, there is a high degree of certainty that the expense will in fact be incurred in a subsequent year. The facts of each case are critical. The degree of certainty required is unlikely to be met if performance under the contract is not contractually obligatory but is only potentially contractually obligatory because of an act or event other than just the taxpayer’s client or customer taking action.
• Assets already acquired do not represent future expenditure.
• Assets falling within the ambit of section 24C are those assets which will be acquired in order to perform under the
speci c contract giving rise to the advance income. The replacement of assets generally used in the taxpayer’s trade
fall outside the ambit of section 24C.
• The amount of the section 24C allowance is equal to the amount of advance income which the Commissioner is
satis ed will be used to nance future expenditure.
• The section 24C allowance may not exceed the amount of income received or accrued under the contract in a particular
year of assessment. The amount of income received or accrued in a current year includes the reversal of the previous
year’s section 24C allowance. This aspect is discussed in 5.2.
• The section 24C allowance is based on how much of the advance income will be used to nance future expenditure and
may, therefore, never exceed the amount of income even if the contract is running at a commercial loss.
• It is not possible to be prescriptive on the methods used to calculate the amount of the section 24C allowance. However,
in a number of cases the ‘gross cost method’ will be appropriate.
• Generally, the calculation of the section 24C allowance must be performed on a detailed contract-by-contract basis.
However, there are limited circumstances in which it may be appropriate to perform the analysis at a higher level by
taking a number of contracts into consideration.
• An assessment of whether section 24C is applicable must be performed annually taking into account up-to-date
information.
• 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.*
INTERPRETATION NOTE: NO. 79
DATE: ACT: SECTION:
SUBJECT:
Preamble
22 September 2014
INCOME TAX ACT 58 OF 1962
SECTIONS 25, 25C AND 26 AND PARAGRAPHS 2, 3, 4 AND 9 OF THE FIRST SCHEDULE AND PARAGRAPH 40 OF THE EIGHTH SCHEDULE
PRODUCE HELD BY NURSERY OPERATORS
In this Note unless the context indicates otherwise –
• ‘First Schedule’ means the First Schedule to the Act;
• ’nursery’ means a place where young trees or plants are grown for the purpose of sale;
• ‘nursery operator’ means a person who grows young trees or plants for the purposes of sale at a nursery; • ‘paragraph’ means a paragraph of the First Schedule;
• ‘section’ means a section of the Act;
• ‘the Act’ means the Income Tax Act 58 of 1962; and
• any word or expression bears the meaning ascribed to it in the Act.
1. Purpose
This Note provides guidance on the valuation of produce held and not disposed of by nursery operators at the beginning and at the end of each year of assessment. It also examines the capital gains tax consequences of the disposal of produce. It replaces Practice Note No. 32 dated 7 October 1994.
2. Background
Section 26(1) stipulates that the taxable income of any person carrying on pastoral, agricultural or other farming operations shall, in so far as the income is derived from such operations, be determined in accordance with the Act but subject to the First Schedule. The First Schedule deals with the computation of taxable income derived from pastoral, agricultural or other farming operations.The taxable income from farming operations is combined with the taxable income from other sources to arrive at the taxpayer’s taxable income for the year of assessment.
* Sections 104 and 107 respectively.
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