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PN 24/1994 Income Tax acT: PracTIce noTes PN 37/1995
1. One of the deductions permitted by the Act in the determination of the net value of a deceased estate is provided for in section 4 (q), the introductory wording of which is as follows:
‘(q) so much of the value of any property included in the estate which has not been allowed as a deduction under
the foregoing provisions of this section, as accrues to the surviving spouse of the deceased: Provided that...’.
2. In Income Tax Case 1520 (54 SATC 168) which served before the Income Tax Special Court, the Court had to decide whether a deduction was permissable in terms of the afore-mentioned section (as it read in 1986) where the testator had directed that the income of a trust created in terms of his will was to be available to the administrators of the trust: ‘... for the maintenance and welfare of my wife, to be utilized by them for these purposes as they in their entire discretion shall deem t, any surplus income being retained as income or being reinvested as capital at the discretion of my Administrators.’. The trust would terminate upon the death of the testator’s wife when the assets would devolve upon his three sons or their issue.
3. The testator died in 1986 at which stage section 4 (q) did not contain the proviso’s currently in the Act. The crips [sic] point for decision was, however, whether it could be said that the trust income had accrued to the surviving
spouse given the administrators’ discretion to utilise the trust income as they deemed t.
The Court concluded that as it was clearly the deceased’s intention that the administrators of his estate should use the entire income from the trust for the bene t of his wife and that a bene cial interest, which fell within the de nition of property, had accrued to her. The Court accordingly held that the Commissioner for Inland Revenue
was incorrect in not allowing a deduction under section 4 (q).
4. The Commissioner lodged an appeal against the Court’s decision whereupon the respondent abandoned the
judgment. The deduction was, therefore, not allowed.
5. As the case and the Court’s ndings have been reported and commented on in various journals this practice note
is being issued to draw attention to the abandonment of the judgment by the executors of the estate and to reaf rm the Commissioner for Inland Revenue’s policy and practice that in the case of a discretionary trust no vesting is regarded as having taken place where the surviving spouse’s right to income from the trust can be defeated or diminished by the exercise of the trustees’ discretion. Under such circumstances a deduction in terms of section 4 (q) of the Act will not be allowed.
PRACTICE NOTE 36 OF 1995 – VALUATION OF TRADING STOCK
issued by
OFFICE OF THE COMMISSIONER FOR INLAND REVENUE General Notice 32 published in Government Gazette 16211 of 13 January 1995
It is evident that a variety of questionable methods are used by taxpayers to write-off slow-moving and obsolete stock,
without reference to its actual net realisable value. It has, therefore, become necessary to explain Inland Revenue’s standpoint in this regard.
Amounts written off, for instance on a xed percentage basis, which cannot reasonably be justi ed will not be allowed to be deducted from the cost price of such stock held and not disposed of at the end of the year of assessment in terms of section 22 (1) of the Income Tax Act (the Act).
In Income Tax Case 1489 (53 SATC 99) it was held, inter alia:
(a) That if a method of reducing the cost of stock by a percentage is adopted, the percentage reduction should not only
be supported by trading history and, where appropriate, post-balance sheet experience, but the Receiver of Revenue
should be told how that percentage is arrived at.
(b) That the Commissioner for Inland Revenue has to exercise a discretion with regard to the amount by which the value
of trading stock had been diminished and cannot exercise that discretion if he is not told on what basis the accounts
submitted to him have been prepared; hence the Act, by implication, requires such a disclosure.
Taxpayers are, therefore, required to disclose the basis on which stock is valued, which disclosure must be made in the
annual return of income.
Where stock has not been valued at cost, but at a lower value, the taxpayer is also required to reveal this to the Receiver
of Revenue, submit reasons therefor and indicate how the lower value was arrived at. If stock has been written off on a xed, variable or any other basis, not representing the actual value by which it has been diminished, the write-off will not be accepted without reasonable justi cation for such basis.
Where it is found that a taxpayer has undervalued his stock and has not revealed this fact to the Receiver of Revenue, such concealment will be viewed in a serious light and the imposition of additional tax in terms of section 76 of the Act will be considered.
PRACTICE NOTE 37 OF 1995 – DEDUCTION OF FEES PAID TO ACCOUNTANTS, BOOKKEEPERS AND TAX CONSULTANTS FOR THE COMPLETION OF INCOME TAX RETURNS
issued by
OFFICE OF THE COMMISSIONER FOR INLAND REVENUE General Notice 33 published in Government Gazette 16211 of 13 January 1995
Taxpayers whose income consists solely of remuneration and/or interest and dividends will be entitled to a tax deduction in respect of fees paid to accountants, bookkeepers, tax consultants and other professional persons or institutions for the completion of their tax returns subject to the following quali cations:
1. No deduction will be allowed against remuneration in the form of salary or wages, but if some or all of the taxpayer’s
remuneration consists of income, such as commission, in respect of which he has incurred expenditure which is allowable under section 11 (a) or (e) of the Income Tax Act, the expenditure will qualify for deduction against such income.
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SAIT CompendIum oF TAx LegISLATIon VoLume 2