Masters Degrees (School of Accountancy)

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Browsing Masters Degrees (School of Accountancy) by Author "Calitz, Johanna Eliza"

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    The deductibility of future expenditure on contract in terms of section 24C
    (Stellenbosch : Stellenbosch University, 2015-04) Calitz, Johanna Eliza; Van Schalkwyk, L.; Stellenbosch University. Faculty of Economic and Management Sciences. School of Accounting.
    ENGLISH ABSTRACT: Section 24C of the Income Tax Act No. 58 of 1962 (‘the Act’) provides for a deduction of future expenditure that will be incurred by the taxpayer in the performance of his obligations under a contract from which the taxpayer derived income. Due to uncertainties regarding the meaning of certain words and phrases used in section 24C, the first aim of this assignment was to determine the meaning of the word ‘expenditure’ and the phrase ‘will be incurred’ as used in section 24C. The second aim was to establish how a taxpayer will prove with certainty that he will incur future expenditure in the performance of his obligations under a contract. This was done by discussing the effect of contractual terms and other circumstances and by taking into account certain additional guidelines regarding the interpretation of section 24C provided for in Interpretation Note: No. 78 (‘IN 78’). It was established that the word ‘expenditure’ means the amount of money spent, including the disbursement of other assets with a monetary value. The word ‘expenditure’ also specifically includes the voluntary payments and disbursements of assets. The word ‘expenditure’ can also include a loss if the word ‘loss’ can be equated to the word ‘expenditure’. The phrase ‘will be incurred’ implies that the taxpayer will, in a subsequent year of assessment, have an unconditional obligation to pay for expenditure, which must arise from the taxpayer’s obligations to perform under the contract. Contractual terms and other circumstances can indicate whether there is certainty that future expenditure will be incurred as aforementioned. Conditions and warranties are contractual terms that indicate that there is uncertainty regarding the taxpayer’s obligations to perform under the contract. A time clause in a contract can indicate that there is certainty regarding the taxpayer’s obligations to perform under the contract. Similar contracts with similar conditional obligations to perform cannot be grouped together in order to determine the probability, and thus the certainty, that future expenditure will be incurred in the performance of the taxpayer’s obligations under a contract. The probability that a taxpayer will perform his unconditional obligation under the contract must, however, be proved in order to demonstrate that there is certainty regarding the incurral of the future expenditure. IN 78 does not specify whether a loss which can, in certain circumstances, be equated to the word ‘expenditure’, is deductible under section 24C. This should be clarified. The new undefined phrases (a high degree of probability, inevitability, certainty and potentially contractually obligatory), as used in IN 78, might cause confusion when interpreting section 24C. These phrases should be defined and it should be explained how the high degree will be measured. Lastly, is was shown that an anomaly occurs regarding trading stock at hand at the end of a year of assessment, which will be utilised in a subsequent year of assessment in the performance of the taxpayer’s obligations under a contract. Such trading stock does not represent ‘future expenditure’ and must be excluded from the section 24C allowance. However, due to the interplay between section 24C and section 22(1), the taxpayer does not receive any tax relief for the expenditure actually incurred to acquire the closing trading stock in the year in which such trading stock is acquired. It is, therefore, questioned whether the established interpretation of section 24C is in agreement with the Legislator’s original intention with section 24C namely, to match income received under a contract with the related deductible expenditure.