Trading Stock – S22 Chap 11

1. Trading Stock – S22Chap 11 • Definition • Closing stock • Opening stock • Anti Avoidance provision • Construction WIP • Cost for the purpose of S22 • Stock acquired for no consideration • Private & domestic consumption • Securities lending arrangements • Share dealers • Capitalisation shares and options • Share buy backs

2. Trading Stock – S22 • Essentially trading stock is anything acquired or held with a revenue intention. • Covered in s22 ITA • Definition of trading stock – s1 • anything produced, purchased, constructed assembled or in any other manner acquired by a taxpayer for the purpose of manufacture, sale or exchange by him or on his behalf, - the proceeds from disposal of which forms or will form part of his gross income, otherwise than in terms of para (j) and (m) of the definition of gross income or as a recovery or recoupment contemplated in S8(4) which is included in gross income in terms of para (n) of the definition or

3. Trading Stock – S22 - any consumable stores (packaging also) and spare parts to be used/consumed in the course of trade • excl. foreign exchange contracts • Examples of trading stock, • cars – car dealer • shares – share dealer • Consumables ( sugar, cleaning materials) • Spare parts • Raw materials, WIP, finished goods

4. Trading Stock • Trading stock ( excl consumables and spare parts ) by its very nature – • a revenue item • why? • because its sale is the income producing activity of the trader as opposed to the income producing asset. • What about Consumables & Spare parts?

5. Trading Stock • Sale of t/s = gross income (CIR vs George Forrest Timber Co. Ltd) • Purchase of t/s = s11(a) deduction generally SECTION 22 Treated similar to accounting • Example Gross Income 80 000 Add closing stock 15 000 Less s11 (a) purchases (75 000) Taxable income 20 000

6. Closing Stock • s22(1) – closing stock • - any trading stock ‘held and not disposed of’ at the year-end • - to be ‘taken into account’ in determining taxable income • (i.e. added to income) • - value = cost less any diminution in • value, i.e. lower of cost or market value • (not shares held as trading stock by companies or Cc’s included) • - reduction in value determined at discretion of the C:SARS • -ITC1489 and PN36 clarify process for disclosure of write-down

7. Closing Stock – cont. • ITC 1489 • - SARS to be made aware of method of arriving at reduced amt and should be supported by acceptable docs by SARS. • - SARS to exercise discretion, therefore full disclosure • PRACTICE NOTE 36 • Taxpayer should • - reveal to SARS where stock valued at lower of cost • - reasons therefore; • - method of arriving at value of stock; • - disclosure in annual tax return • - GAAP – IAS 2 • Refer pg 243

8. Cost of trading stock • s22(3) – Determination of Cost • - cost of acquisition • - plus further costs incurred in getting such stock into the existing condition and location • * costs in terms of IAS2 /AC108 • - excluding forex gains or losses • Spare parts s(11d) • - Spare parts are not sold or consumed in the ordinary sense. • S11d – sums expended for the repair of machinery, implements, utensils and other articles employed by the taxpayer for the purpose of his trade.

9. Cost of trading stock • Work In Progress Richards bay Iron and Titanium and Another v CIR- held that WIP must be valued ito IAS 2 and included in trading stock at year end. The fact that WIP is not in a saleable condition does not remove it from Trading stock, because the definition includes anything acquired or produced for purpose of manufacture, sale or exchange.

10. Opening Stock • s22(2) – Opening stock • Two scenarios: • The stock was included in closing stock –end of previous year. • Opening stock amount will be that of the prior year closing stock. • 2. The stock is on hand at the beginning of the year but was not included in closing stock at the end of the prior year because it was held as a capital asset. • CHANGE IN INTENTION • Capital asset becomes trading stock • the market value of the asset at the date of change will be included as the deemed opening stock cost. S22 (3) • Eighth Schedule - deemed disposal at m/ v • Examples Page 245

11. Construction WIP • s22(2A) & (3A) – construction WIP • s22(2A) – Construction WIP must be included in closing stock for • - taxpayers carrying on • * construction, • * building, • * engineering, • * other trade involving improvements to fixed property owned by any other person • - such improvements deemed to be trading stock • * including materials delivered to site • - ‘held and not disposed of’ until completion of the contract • Deemed to be completed when • * all obligations carried out & • * entitled to claim all payments due under the contract

12. Construction WIP • s22(3A) – Determining the cost of construction WIP • - all costs of materials used • plus • - all further direct costs, determined in accordance with GAAP (IAS 11) • - all other indirect costs, as allocated in to relevant contact under IAS11 • minus • - contract income received/accrued • - retentions, limited to 15% of amounts due to to taxpayer (work certified) • - excess of costs over contract price • Example Page 247

13. s23F anti-avoidance • Purchaser • - no s11(a) deduction for trading stock purchased, unless : • * such stock was sold by the taxpayer; or • * such stock was included in taxpayers closing stock at year- end • - deducted subsequently when stock is : • * disposed of; or • * included in closing stock; or • * destroyed or for some other reason will not be held nor disposed of by taxpayer • Seller • - deemed recoupment of s11(a) deduction for trading stock disposed of if consideration has not yet accrued • - subsequent deduction when actual proceeds are included in income

14. Miscellaneous provisions • s22(4) – Stock acquired for nothing • - deemed cost = market value • * to be included in closing stock at year end if still held BUT • - Not included in opening stock for that year. • - no S11(a) deduction – no expenditure incurred. • * SARS practice to allow opening stock deduction in the year of acquisition

15. Miscellaneous provisions • s22(8) – Private consumption • deemed recoupment of original cost or most recent closing stock value. • * MV if cost not determinable • This means you will record the income an then the matching expense. • s22(8) – Other non-trade disposals • - e.g. donations, specie dividends, sold for below market value for non-trade purposes, any other non-trade use (excluding private consum) • deemed recoupment up to MV • IF sold for less than MV only diff between SP and MV is recouped. • Public Benefit Organisations • s18A deduction apply then the amount to be recouped = the s11(a) deduction or the amount in opening stock.

16. Security lending arrangements– S22 A security lending arrangement is when one person (lender) lends shares to another person (borrower) and certain terms that must be metsee page 252 S22 deals with following aspect of S/L S22(4A) – securities borrowed deemed not to be acquired by borrower. Same applies when returned to lender ,the lender is not seen to have acquired the security. S22(9) – when a marketable security has been lent and the borrower has not returned the security or a similar security by year end, the security is deemed to be trading stock of the lender and not the borrower.

17. Sharedealers • A taxpayer in whose hands shares comprise trading stock. • Strongest indicator of intention with share dealers ---- frequency • Can hold shares as both stock and investment ; • *must be clear he is dealing with 2 categories of shares and • * must be able to show that the separate categories are being dealt with seperatly. • Example page 252 - 253

18. Closing stock of share dealers • S22 (1) - Closing stock of share dealing companies MAY NOT be written down. • Example page 253

19. Capitalisation issues and options • If share dealer - then shares trading stock • In terms of S 22(4) - stock acquired for no consideration - Special provision deals with Cap issues and options which says: * no value attached to capitalisation shares, share options, similar rights. (excl companies) These shares have a nil value – result in write down of stock, due to nil value of these Shares example pg 253.

20. Share Buy- Backs • S 10(1) k exempts dividends from normal tax BUT specifically excluded from this exemption is: The dividend portion of a Consideration paid by a company to buy back its own shares from a person who holds it as trading stock. • Share buy backs are done i.t.o s 85 of the Companies Act. Example pg 254