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Important judgment for taxpayers regarding the valuation of trading stock
- 19 December 2019
- Corporate Tax
- Jerome Brink
Wednesday, 16 January 2019
Important:
This article is based on tax law for the tax year ending 28 February 2019.
Author: Jerome Brink
In C:SARS v Volkswagen SA (Pty) Ltd (1028/2017) [2018] ZASCA 116 (19 September 2018) the Supreme Court of Appeal (SCA) dealt with important principles in the Income Tax Act, No 58 of 1962 (Act), specifically s22 of the Act dealing with amounts to be taken into account in respect of trading stock. The judgment will likely have far-reaching consequences for many taxpayers and this article provides a brief analysis of the key issues and principles underpinning the judgment.
In C:SARS v Volkswagen, the task before the court was to determine whether the Net Realisable Value (NRV) of Volkswagen South Africa’s (Taxpayer) trading stock, calculated in accordance with International Accounting Standard 2 (IAS2) of the International Financial Reporting Standards (IFRS), may and should, where such NRV is lower than the cost price of such trading stock be accepted as representing the value of trading stock held and not disposed of at the end of the respective years of assessment for purposes of s22(1)(a) of the Act.
The Issue
Section 22 of the Act in its simplest form is a timing provision which ensures that the cost of trading stock in the hands of a taxpayer matches the income earned in respect of that trading stock sold, or otherwise disposed of.
In this particular instance, the SCA had to consider s22(1)(a) of the Act which in essence sets out the general rule pertaining to closing stock held and not disposed of which must be included in the income of a taxpayer at the end of the year of assessment. In essence, the closing stock to be included in the income of a taxpayer is the cost price of the 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 has been diminished by reason of damage, deterioration, change of fashion, decrease in market value or for any other reason satisfactory to the Commissioner.
In the Volkswagen case, the Taxpayer contended that it was entitled to reflect the value of its trading stock at less than cost as per s22(1)(a) of the Act. The contention made on behalf of the Taxpayer was that it should be entitled to do this on the basis of its NRV of its trading stock calculated in accordance with IAS2, in that its NRV reflected that the value of its trading stock had diminished.
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This article first appeared on cliffedekkerhofmeyr.com.