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[FAQ] Shares held as trading stock
- 01 December 2020
- Corporate Tax
- Peter Surtees
Background
A company trades in shares. On the purchase date the share price was R1 and at year-end the value of the share was R2.
How will the share value gain be accounted for tax purposes? Would the shares be treated as stock?
Answer
Income Tax Act
According to the facts in your enquiry, the shares are trading stock in the hands of the company. They are therefore subject to the provisions of section 22 of the Income tax Act.
Relevant tax law
“Amounts to be taken into account in respect of values of trading stocks
(1)The amount which shall, in the determination of the taxable income derived by any person during any year of assessment from carrying on any trade (other than farming) be taken into account in respect of the value of any trading stock held and not disposed of by him at the end of such year of assessment, shall be- (a) in the case of trading stock other than trading stock contemplated in paragraph (b) [refers to interest bearing instruments covered by section 24J], the cost price to such person of such trading stock, less such amount as the Commissioner may think just and reasonable as representing the amount by which the value of such trading stock, not being any financial instrument, has been diminished by reason of damage, deterioration, change of fashion, decrease in market value or for any other reason satisfactory to the Commissioner”.
Application of the principles
In other words, shares held as trading stock must be reflected at cost. You can’t reflect a reduced value if their market value has fallen, and in all instances, you never take into account increases in value above cost.
Webinar Commentary
Further webinar commentary on Taxing a distribution of capital can be accessed here.