Summary
Summary TRADING STOCK
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TRADING STOCK TAXATION 388/399
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TRADING STOCKNB! Definition in s 1
For purposes of manufacture, sale or exchange
Proceeds on sale which forms part of the taxpayer’s gross income (income in nature
(scheme of profit making) or par (jA))
o Trading stock is sold as quickly as possible at a profit
Including consumable stores and spare parts that will be used in the course of his
trade.
Excluding foreign currency option and forward exchange contracts (s24I (1))
Expenses incurred to acquire trading stock will be allowed as a deduction under s11
(a), provided that all the requirements of the provision are met. Proceeds from the sale
of trading stock are included in gross income
Income X
Cost of sales
(X)
(Opening stock + Purchases – Closing stock)
Write off to net realisable value (IAS 2) (X)
Profit before tax (SCI) X
Income -
Purchases (s 11(a)) -
Closing stock adjustment if not recognised in terms of s 22(1) (X) / X
Opening stock adjustment if not recognised in terms of s 22(2) (X) / X
Trading stock acquired at no consideration (s 22(4)) (X)
Amounts deemed recovered or recouped (s 22(8)) X
Deductions prohibited or limited (s 23F) X
Taxable income XX
Normal tax at 28% X
Cost of sales only recognises purchases to the extent that goods are sold.
Closing stock (s 22(1)) – INCREASES taxable income
Closing inventory is included in taxable income
o If we start with profit before tax, no adjustments have to be made to closing
inventory because the closing inventory is already reducing cost of sales
which increases taxable income
o If closing stock is accounted for at market value, an adjustment must be made
because it should be included at cost price for tax purposes.
The purpose of s22 (1) is to ‘match’ income and relating expenditure in same year
o S22 (1) requires that any person must take the value of trading stock held and
not disposed by him at the end of the YOA into account in the calculation of
his taxable income. The value of the closing stock is added to taxable income
to balance the tax calculation.
The value of the closing stock is the cost price*
MINUS amount according to SARS (Commissioner) by which value diminished**
, due to damage, deterioration, change in fashion, decrease in market value
*Exception: Closing stock is not included at cost price if:
o The Company holds an ‘instrument’ (does not include shares) or option
contract as trading stock (on which s 24J is not applied) in which case it may
be carried at market value (s 22(1)(b))
** Except ‘financial instrument’ (includes shares) held as trading stock. ‘Financial
instrument’ therefore always carried at cost (Not that NB for 3rd year- just know of
the exception)
Example:
Assume the taxpayer purchased trading stock of R11 000 for cash and has not sold
that stock at year end. The effect of his taxable income for that year will be:
Deduction in terms of s11 (a) for trading stock purchased (11 000)
Add: closing stock (s22 (1)) 11 000
Effect on taxable income R nil
Note:
The value of the closing stock is added to taxable income to ‘balance’ the tax
calculation.
For years of assessment commencing on or after 1 January 2011 all financial
instruments included in closing stock are valued at cost.
Opening stock (s 22(2)) – DECREASES taxable income
The value of trading stock held and not disposed at the beginning of the YOA, must
be deducted from taxable income:
o Opening inventory reduces taxable income because it increases cost of sales,
which decreases taxable income
o Change in use (s22 must be revised after CGT (Chapter 28) has been dealt
with).
Is that trading stock included in closing stock (s 22(1)) in the previous YOA?
YES The value of the opening stock is the same amount that was taken into account
as closing stock in the previous YOA (Therefore, the deduction of opening stock
in Year 2 = addition of closing stock in Year 1).
NO The value of the opening stock will be the initial cost of asset OR
Market value if deemed disposal for CGT
Example:
A taxpayer, who is a motor vehicle dealer, acquired a Ferrari for marketing purposes
for R2 500 000. Due to the number of speeding fines he received, he decided to sell
the Ferrari at his dealership. The Ferrari was still on hand at the end of the tax year in
which the decision was made. The effect on his taxable income for that year will be
(assuming that market value of the vehicle is R2 500 000):
Deduction in terms of opening stock for trading stock not included in closing stock at
the end of the previous year (2 500 000)
Add: closing stock (s22 (1)) 2 500 000
Effect on taxable income R nil
Class notes:
Marketing purposes = capital in nature
NB!! Ernst Bester Trust v C:SARS (Expect short discussion question)
o A farmer granted the right to a contractor to exploit sand on farm
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