Date: 19 March 1991

it will impact on the income tax position of an affected taxpayer. In order to provide some measure of relief, while not extending this benefit to the full term of many transactions which have been structured to obtain substantial tax benefits, the following phasing-out provisions will be applied to the various types of transactions.

The affected agreements will be classified into two categories, namely A and B.

Qualifying individual agreements of sale in terms ofwhich the original loan capital does nor exceed R 500 000

The difference between the calculation using the previous practice and the new practice at 28 February 1991 or, at the option of the taxpayer, the said difference at the end of the immediately preceding year of assessment, must be determined.

In both instances the amount subject to phasing-out must be limited to the taxable income for the year in which the option was exercised after the add back of the previous year's section 24 allowance and the deduction of the unearned finance charge element for that year.

The amount determined in (a) above should be phased-out over a period of forty eight months, commencing on 1 March 1991 on a straight line basis. Thus, for example, where the period from 1 March to the end of the year of assessment is 7 months, the amount to be subject to tax in that year would be

An example is contained in Annexure A.

Contracts, the full term of which, at 28 February 1991, is five years or less

The allowance will continue to be determined on the basis of the previous practice for a further four years provided that—

Where a contract has not reached finality by 1 March 1995, the difference between the allowance determined on this basis and allowance determined in accordance with Practice Note  No. dated 27 February 1991 will immediately be taxed in full.

Contracts, the full term of which, at 28 February 1991, is longer than five years

The allowance will continue to be determined on the basis of d previous practice for a further period of four years but subject the following limitations

The difference between the allowance granted on the of the previous practice and the above basis must be determined on 30 June 1991.

The amount determined in (a) above will be phased out eve; a period of 44 months or the remaining duration of the contract, whichever is the lesser, commencing on 1 July, 1991 on a straight line basis.

Where a contract has not reached finality by I March 1995, the full difference between the allowance determined on this basis and the allowance determined in accordance with Practice Note No. 12 dated 27 February 1991 will immediately be taxed in full.

An example is contained in Annexure B.

The following information must be submitted in respect of contracts falling in Category B2 in addition to that required in Category B1—

Where this information is not made available in respect of each individual contract, the phase-in provisions of Category A will be applied.

In view of the change in practice in the recognition of finance charges, taxpayers who also qualify for the hire purchase debtors allowance on the gross profit element as a result of their normal trade, will enjoy a considerable tax benefit. In order to remedy this position it has been necessary to amend the determination of the gross profit element of the allowance.

With effect from the first year of assessment ended or ending on or after 1 March 1991, the gross profit element of the allowance will be determined on a new basis which excludes finance charges from the determination of the gross profit percentage and the qualifying outstanding debtors.

The formula which will be applied is as follows—

The percentage determined above will be applied to qualifying outstanding debtors, excluding finance charges.

As a result of the change in practice, certain taxpayers may be detrimentally affected. In order to provide some measure of relief the following phase-out provisions will be applied—

The difference between the calculation using the previous practice and the new practice at 28 February 1991 or, at the option of the taxpayer, the said difference at the end of the immediately preceding year of assessment, must be determined.

In both instances the amount subject to phasing-out must be limited to the taxable income for the year in which the option was exercised after the add back of the previous year's section 24 allowance and the deduction of the unearned finance charge element for that year.

The amount determined in (a) above should be phased-out over period of forty eight months, commencing on 1 March 1991 on straight line basis. Thus, for example, where the period from 1 to the end of the year of assessment is 7 months, the amount to subject to tax in that year would be

An example is contained in Annexure C.

Annexure A

Category A

Qualifying individual agreements of sale in terms ofwhich the original loan capital does not exceed R 500 000.

Assumptions

Determination of maximum phase-out amount

This amount will be limited to taxable income after add back of previous year's allowance and deduction of allowance on new basis.

Determination of taxable income for the 1991 tax year

*Determination actual phase-out allowance

Annexure B

Category B2

Assumption

Calculation of taxable income for the 1991 the year

Determination of actual phase-out amount at 30/6/1991

*Vide paragraph 3.2.2

Calculation of taxable income for the 1992 tax year

*Note:

As this amount does not exceed the unearned finance charges, the unearned finance charges will be the minimum allowance granted.

Annexure C

Other transactions

Assumption

The option in respect of the difference between the calculation using the previous practice and the new practice at 28 February 1991 is exercised.

Determination of taxable income for the 1991 tax year

Determination of maximum phase-out amount