SARS Interpretation Note 137: Recoupment of amounts deducted or set off when an asset commences to be held as trading stock (source: https://www.sars.gov.za/legal-intrr-in-137-recoupment-of-amounts-deducted-or-set-off-when-an-asset-commences-to-be-held-as-trading-stock/)
INTERPRETATION NOTE 137
DATE: 26 March 2025
ACT : INCOME TAX ACT 58 OF 1962
SECTION : SECTIONS 8(4)(a) and 8(4)(k)(iv)
SUBJECT : RECOUPMENT OF AMOUNTS DEDUCTED OR SET OFF WHEN AN
ASSET COMMENCES TO BE HELD AS TRADING STOCK
Contents
Preamble ........................................................................................................................... 2
1. Purpose .................................................................................................................. 2
2. Background............................................................................................................. 2
3. The law................................................................................................................... 3
4. Interpretation and application of the law ................................................................... 4
4.1 Introduction ............................................................................................................. 4
4.2 Meaning of “asset” for the purposes of section 8(4)(k)(iv) ......................................... 4
4.3. “Commenced” ......................................................................................................... 4
4.4 Trading stock .......................................................................................................... 5
4.4.1 Opening stock......................................................................................................... 5
4.4.2 Closing stock .......................................................................................................... 6
4.5 Meaning of recovered or recouped .......................................................................... 6
4.6 Interaction between section 8(4)(k)(iv) and section 8(4)(a) ....................................... 7
4.7 “Market value” ....................................................................................................... 11
5. Exclusions ............................................................................................................ 12
6. Conclusion............................................................................................................ 13
Annexure – The law ............................................................................................................14
Preamble
In this Note unless the context indicates otherwise –
• “CGT” means capital gains tax, being the portion of normal tax attributable to
the inclusion in taxable income of a taxable capital gain;
• “depreciable asset” as defined in section 1(1) which means an asset as
defined in paragraph 1 of the Eighth Schedule (other than any trading stock
and any debt) in respect of which a deduction or allowance determined wholly
or partly with reference to the cost or value of that asset is allowable in terms
of this Act for purposes other than the determination of any capital gain or
capital loss”;
• “Eighth Schedule” means the Eighth Schedule to the Act;
• “gross income” means “gross income” as defined in section 1(1);
• “paragraph” means a paragraph of the Eighth Schedule;
• “section” means a section of the Act;
• “taxpayer” means a “taxpayer” as defined in section 1(1);
• “the Act” means the Income Tax Act 58 of 1962; and
• any other word or expression bears the meaning ascribed to it in the Act.
The guide and interpretation note referred to in this Note are the latest versions, unless
via eFiling at www.sarsefiling.co.za (guides only).
1. Purpose
This Note provides guidance on the interpretation and application of section 8(4)(k)(iv),
which is relevant when a depreciable asset (not previously classified as trading stock)
has had an amount allowed to be deducted or set off under a provision listed in
section 8(4)(a) and subsequently commences to be held as trading stock.1
2. Background
The Act allows for various deductions and allowances that reduce the cost price of an
asset when determining its tax value. Disposing of such an asset for an amount that
exceeds its tax value (but not its cost price) will typically result in a taxable recoupment
of the difference. If the asset is disposed of for a consideration that surpasses its cost
price, a capital gain may arise.
Section 8(4)(a) serves as a general recoupment provision, stipulating that any amount
previously allowed as a deduction or set-off under sections 11 to 20, 24D, 24F, 24G,
24I, 24J, 27(2)(b), and 37B(2) (subject to certain exclusions) must be included in a
taxpayer’s gross income if it has been recovered or recouped during the year of
assessment.2 This means that whenever a taxpayer claims a deduction or allowance
under the specified sections and later recovers or recoups that amount, it must be
added to their gross income.
The Comprehensive Guide to Capital Gains Tax may be referred to for commentary on the capital
gains tax implications when a depreciable asset commences to be held as trading stock.
See section 8(4)(a) f or the sections and provisions excluded f rom inclusion in income.
The application of section 8(4)(a) is limited to amounts recovered or recouped upon
the disposal of an asset or when an expense is otherwise recovered.3 However, there
are situations when a receipt or accrual of an amount equal to market value does not
occur, or when the transaction does not constitute a disposal, leading to no recovery
or recoupment despite a deduction or allowance having been granted for the relevant
asset. Section 8(4)(k) addresses this by providing for a deemed disposal at market
value under four specific circumstances. Before its amendment to include a fourth
circumstance, the deemed disposal at market value under section 8(4)(k) applied only
when, during any year of assessment, any person has –
• donated any asset; 4
• in the case of a company,transferred any assets to another shareholder in
that company in any manner or form;5 or
• disposed of any asset to a person who is a connected person in relation to that
person.6
Notably, section 8(4)(k) did not consider situations when a depreciable asset was
subsequently held as trading stock. Therefore, when a taxpayer ceases to hold a
depreciable asset on capital account and begins to hold it as trading stock, the
allowances or deductions previously granted are not recouped in the year of
assessment in which the change in usage occurs or in any subsequent year of
assessment.
Paragraph 12(2)(c) establishes a deemed disposal for CGT purposes when an asset,
whether depreciable or non-depreciable, that is not held as trading stock commences
to be held as trading stock. To create a similar deemed disposal rule for normal tax
purposes, section 8(4)(k)7 was amended to include subparagraph (iv). This provision
stipulates a deemed disposal at market value when a taxpayer starts to hold any
allowance asset as trading stock (see 4.6 and 4.4).
The Explanatory Memorandum on the Taxation Laws Amendment Bill, 2019 provides
the basis for the insertion of section 8(4)(k)(iv) as follows:8
“Currently, paragraph 12(2)(c) of the Eighth Schedule to the Act triggers a deemed
disposal f or capital gains tax purposes when an asset which was not held as trading
stock commences to be held as trading stock. However, there is no similar deemed
disposal and reacquisition rules in the recoupment provisions in section 8(4)(k) of the
Act f or allowance assets to trigger a recoupment of previous allowances. In order to
address this anomaly, it is proposed that changes be made in the Act by inserting a
new subparagraph (iv) in section 8(v)(k) of the Act.”
3. The law
The relevant sections of the Act and paragraphs of the Eighth Schedule are quoted in
the Annexure.
An example is when a ref und f or expenditure incurred is received or accrued.
Section 8(4)(k)(i).
Section 8(4)(k)(ii).
Section 8(4)(k)(iii).
See Taxation Laws Amendment Act 34 of 2019 and applies to an asset that commenced to be held
as trading stock on or af ter 15 January 2020.
Sub-clause (d) of Clause 6 of the Explanatory Memorandum on the Taxation Laws Amendment Bill,
2019.
4. Interpretation and application of the law
4.1 Introduction
Section 8(4)(a) is limited to amounts that have been recovered or recouped when an
asset is disposed of or when an expense is otherwise recovered. However, there is no
disposal of an asset when a taxpayer commences to hold a depreciable asset as
trading stock. A deemed disposal at market value is triggered under section 8(4)(k)(iv)
when –
• an asset;
• commences to be held as trading stock which was previously not held as
trading stock.
When this provision applies, the asset is deemed to have been disposed of for an
amount equal to its market value at the date of commencement. The purpose of this
deemed disposal is to recover or recoup the allowances or deductions previously
granted on the asset.
The requirements for the application of section 8(4)(k)(iv) are considered below.
4.2 Meaning of “asset” for the purposes of section 8(4)(k)(iv)
The word “asset” is not defined in section 1(1). Legally, an asset can be either movable
or immovable, corporeal or incorporeal, or any right associated with these assets. For
the purposes of section 8(4)(a), an “asset” is specifically limited to a depreciable asset.9
Consequently, section 8(4)(k)(iv) applies only to a depreciable asset that can be held
by the taxpayer as trading stock (see 4.4). Therefore, a non-depreciable asset does
not fall within the scope of section 8(4)(k)(iv).
4.3 “Commenced”
During a year of assessment, a taxpayer may choose for various reasons to cease
holding a depreciable asset as a capital asset and instead commence holding it as
trading stock (see Examples 1 and 2).
Determining whether a change of intention and use occurred during the year of
assessment is a factual question. The word “commence” is not defined in the Act.
Dictionary.com defines it to mean “to begin” or “start”.10
Applying the ordinary meaning of “commence” or “commenced” (in the past tense)
would require the taxpayer to have made a decision during the year of assessment to
hold an asset as trading stock, which was previously not held in that manner. Whether
such a decision has been made is a factual inquiry and must be based on the objective
circumstances related to the asset in question and the taxpayer involved.
Several factors can be considered when determining the exact time the taxpayer
commenced holding an asset as trading stock. These include the nature of the asset,
the nature of the taxpayer’s trade or business, and the internal policies and procedures
of the taxpayer's business. For instance, if the taxpayer is already trading in the same
or similar types of assets, starts a new trade or business, or embarks on a scheme to
See section 1(1).
www.dictionary.com/browse/commence [Accessed 26 March 2025].
sell assets for profit, and the specific asset is then incorporated into or used as trading
stock, this would indicate the commencement of holding that asset as trading stock.11
4.4 Trading stock
The definition of “trading stock” is broad, yet intended to be exhaustive despite the use
of the word “includes”.12 Essentially, it encompasses anything acquired or
manufactured for the purpose of sale or that will be incorporated into another asset
intended for sale. In De Beers Holdings (Pty) Ltd v CIR,13 it was noted that trading
stock is typically acquired with the intent of resale at a profit.
Paragraphs (a)(i) and (ii) of the definition of “trading stock” read as follows:14
“(i) everything produced, manufactured, constructed, assembled, purchased or in any
other manner acquired by a taxpayer f or the purposes of manufacture, sale or
exchange by the taxpayer or on behalf of the taxpayer;
(ii) anything the proceeds f rom the disposal of which f orms or will f orm part of the
taxpayer’s gross income, otherwise than—
(aa) in terms of paragraph (j) or (m) of the def inition of “gross income”;
(bb) in terms of paragraph 14(1) of the Eighth Schedule; or
(cc) as a recovery or recoupment contemplated in section 8(4) which is
included in gross income in terms of paragraph (n) of the def inition of
“gross income;”
The above paragraphs of the definition of trading stock are relevant in determining
whether an asset is held as trading stock for the purposes of section 8(4)(k)(iv). This
is a factual enquiry and will depend on the particular facts of a case.
Section 22 aims to align the timing of the deduction of the cost of trading stock with the
income from its sale. Consequently, it requires that trading stock held and not disposed
of at the end of the year of assessment must be accounted for as closing stock in that
year and opening stock in the immediately succeeding year of assessment.
Once it has been established that the requirements of section 8(4)(k)(iv) are met and
the asset commences to be held as trading stock, its cost price for the purposes of
section 22 must be determined. Section 22(3)(a) specifies how the cost price of trading
stock should be established. The cost price incurred for trading stock that falls under
paragraph (a)(i) of the definition of “trading stock” is determined under
section 22(3)(a)(i). Under section 22(3)(a)(ii), the cost price of any trading stock treated
under paragraph 12(2)(c) as having been acquired at a cost equal to the market value
is that market value (see Example 2).
4.4.1 Opening stock
Section 22(2) determines the amount to be included in opening stock when calculating
the taxable income derived by any person during a year of assessment from carrying
on a trade (other than farming).
See John Bell & Co (Pty) Ltd v SIR 1976 (4) SA 415 (A), 38 SATC 87 at 103.
De Beers Holdings (Pty) Ltd v CIR 1986 (1) SA 8 (A), 47 SATC 229 at 256.
1986 (1) SA 8 (A), 47 SATC 229 at 254.
Def inition of “trading stock” in section 1(1).
The amount to be considered regarding the value of opening stock must be –
• if the trading stock was part of the closing stock held and not disposed of at the
end of the immediately preceding year of assessment, then the value of that
trading stock is determined by its value at the end of that year;15 or
• if the trading stock did not form part of the closing stock at the end of the
immediately preceding year of assessment, its value is based on the cost price
to the person holding it.16 However, if a person commences to hold an asset as
trading stock that was previously not classified as such, section 22(3)(a)(ii)
deems the market value at the date it became trading stock to be its cost.
4.4.2 Closing stock
Section 22(1) allows a person carrying on a trade to include the value of trading stock,
excluding financial instruments held as trading stock, 17 in his or her income, provided
that the stock is held and not disposed of at the end of the year of assessment. The
value of the closing stock to be included in income is –
• the cost price to the taxpayer; less
• any amount by which the value of the trading stock has decreased due to
damage, deterioration, changes in fashion, decreases in market value, or any
other reason deemed satisfactory by the Commissioner.18
The value of closing stock must be included in gross income 19 and may not exceed its
cost price.20 If a taxpayer commences to hold an asset as trading stock that was
previously not classified as such, and that asset is included in closing stock, the value
of that item must be determined in accordance with section 22(1)(a).
4.5 Meaning of recovered or recouped
The words “recovered” and “recouped” are not defined in either the Act or in section 8,
but they have been interpreted in several court cases. In ITC 1634, Wunsh J held as
follows: 21
“To recoup is to recover or get back what has been expended or lost or to compensate.”
In ITC 1678 the court held that – 22
“I am by no means certain, however, that it is either helpful, advisable, or even reliable
to lay down rules to test whether there has been a recoupment. On the contrary, the
question is one of hard fact, to be determined on the circumstances of each case, and
in doing so the court will have regard to each and every relevant f eature .”
Section 22(2)(a).
Section 22(2)(b).
Section 22(1)(b) stipulates that the value of f inancial instruments that are held as trading stock in
respect of which a taxpayer has made an election under section 24J(9) will be equal to its market
value.
Section 22(1)(a).
Paragraph (i) of the proviso to section 22(1)(a).
Paragraph (ii) of the proviso to section 22(1)(a).
ITC 1634 (1997) 60 SATC 235 (T) at 242. See also C: SARS v Pinestone Properties CC 2002 (4)
SA 202 (N), 63 SATC 421.
ITC 1678 (1999) 62 SATC 288 (N) at 292.
Juta Law describes the words “recovered” or “recouped” as follows: 23
“The words ‘recovered or recouped’ are not terms of art, but must take their ordinary
everyday meaning. The Oxford English Dictionary defines the word ‘recover’ as ‘to get
back again into one‘s own hands or possession; to regain possession of (something
lost or taken away)’. The word ‘recoup’ is defined as ‘to make up for, compensate for,
make good’ and the word ‘recoupment’ as ‘the act of recovering or recompensing; the
act of being recouped f or a loss or expense’.”
In Omnia Fertiliser Ltd v C:SARS,24 the court held that to recover or recoup means to
return an amount that had previously been expended to the taxpayer’s pocket.
Having regard to the above principles, it can be concluded that “recovered” or
“recouped” refers to all amounts permitted to be deducted or set off under the
provisions specified in section 8(4)(a) that have been regained, compensated for, or
repossessed, and must be included in a taxpayer’s income. A recoupment under
section 8(4)(a) is a factual matter, not a legal one. Each case must be considered and
decided on its own merits.
Only amounts that were granted as a deduction or set off according to the specific
sections of the Act listed in section 8(4)(a) must be included in the taxpayer's income
as a recoupment. The onus is on SARS to prove the fact that an amount previously
allowed as a deduction has been recovered or recouped by the taxpayer.25 There are
certain exclusions when an amount recovered or recouped is not required be included
in the taxpayer's income (see 5).
4.6 Interaction between section 8(4)(k)(iv) and section 8(4)(a)
Before section 8(4)(k)(iv) came into effect on 15 January 2020, deductions and
allowances granted on an asset were not recouped in the year of assessment when
the asset commenced to be held as trading stock, as no deemed disposal was
triggered for normal tax purposes. Deductions and allowances granted before the
asset commenced to be held as trading stock could not be recouped and simply formed
part of any capital gain determined when the asset became trading stock.
Example 1 – An allowance asset commences to be held as trading stock before
15 January 2020
Facts:
Company A purchased a machine for R100 000 on 1 January 2016 and claimed
capital allowances totalling R60,000 over the next three years of assessment. On
31 December 2018, Company A ceased to hold the machine as a capital asset and
commenced to hold it as trading stock. The market value of the machine on
30 December 2018 was R110 000. Company A’s year of assessment ends on
31 December, and at this date, the machine was classified as trading stock held and
not disposed of. Company A sold the machine on 12 January 2020 for R130 000.
D Davis et al Juta’s Tax Library [online] (Jutastat e-publications: 21 May 2021) in Commentary on
Income Tax – section 8(4)(a).
2003 (4) SA 513 (SCA), 65 SATC 159.
CIR v Butcher Bros (Pty) Ltd 145 AD 301, 13 SATC 21 and C: SARS v Pinestone Properties CC
2002 (4) SA 202 (N), 63 SATC 421.
The tax treatment was as follows:
R
Cost of machine 100 000
Less: Capital allowances claimed [paragraph 20(3)(a)] (60 000)
Tax value/base cost 40 000
CGT
R
Proceeds [paragraph 12(2)(c)] 110 000
Less: Base cost (40 000)
Capital gain 70 000
Paragraph 20(3) addresses the base cost, which should be reduced by any amount
that has been recovered or recouped, provided that such amount is not accounted for
as a recoupment under section 8(4)(a) or paragraph (j) of the definition of “gross
income”, or has not been applied to reduce an expenditure amount incurred in respect
of trading stock as contemplated in section 19(3) or any other asset as contemplated
in paragraph 12A(3). Therefore, to determine the capital gain, the cost price of
R100 000 for the machine must be reduced by the capital allowances claimed of
R60 000 for the purpose of calculating the base cost (R40 000).
Under paragraph 13(1)(g)(i), the deemed disposal under paragraph 12(1), read with
paragraph 12(2)(c), occurs on the date immediately before the day that the event
occurs.
A deemed disposal is triggered under paragraph 12(2)(c) on 30 December 2018, the
day before Company A commenced holding the machine as trading stock. According
to paragraph 12(1), the machine is deemed to be disposed of for an amount received
or accrued equal to the market value of R110 000. The capital gain of R70 000 is taken
into account under paragraph 8 to determine Company A’s net capital gain.
Income tax
R
Opening stock (2018 year of assessment) (110 000)
Closing stock (2018 year of assessment) 110 000
Opening stock (2019 year of assessment) (110 000)
Company A is allowed to claim a deduction of R110 000 under section 22(2)(b), read
with section 22(3)(a)(ii), for the cost of acquiring the machine, which will be included in
opening stock. Since the machine was held and not disposed of at the end of the year
of assessment, it must be included in the valuation of closing stock on 31 December
2018. The value of opening stock on 1 January 2019 will be identical to the closing
stock value of trading stock on 31 December 2018 (see 4.4).
Recoupment of allowances
The allowances of R60 000 granted to Company A before the asset being classified
as trading stock will not be recouped, as they were accounted for as part of the capital
gain of R70 000.
Disposal of machine
R
Proceeds on disposal/gross sales 130 000
Less: Opening stock (110 000)
Profit on sale of machine/taxable income 20 000
Once the machine commences to be held as trading stock, it no longer qualifies as an
“asset” under the definition provided in paragraph 1 for the purposes of the Eighth
Schedule.
Company A has already received a deduction for the machine at a market value of
R110 000 under section 22(2)(b), read with section 22(3)(a)(ii), for its acquisition cost.
The machine is sold in the 2020 year of assessment, and therefore it will not be
included in the closing stock for that year. The allowances granted to Company A
before the asset commenced to be held as trading stock will not be recouped, as they
were accounted for as part of the capital gain of R70 000. The proceeds of R130,000
will be included in gross income, resulting in a taxable income of R20 000.
Section 8(4)(k) deems the asset to be sold at market value but does not regulate the
recoupment or its amount. The latter is regulated under section 8(4)(a).
Paragraph 12 outlines several events that are regarded as disposals for the purposes
of the Eighth Schedule. When an event described in this paragraph occurs, the
individual will be treated as having –
• disposed of the asset for an amount received or accrued equal to the market
value of the asset at the time of the relevant event, and
• immediately reacquired the asset at a cost equal to that market value. 26
Under paragraph 13(1)(g)(i) the time of the events in paragraph 12(2)(a), (b), (c), (d)
or (e), 12(3) or 12(4) is the date immediately before the day that the event occurs. 27
On or after 15 January 2020 both capital gains and income implications arise as a
consequence of the deemed disposal when a taxpayer commences to hold an asset
as trading stock that was previously not held as trading stock. The tax implications are
as follows:
• The disposal is deemed to occur for CGT purposes immediately before the day
the deemed disposal is triggered. 28
• The taxpayer is deemed to have disposed of the asset for an amount received
or accrued equal to the market value of the asset at the time of the event and
to have immediately reacquired it at an expenditure equal to that market value
(see 4.7).29
See Comprehensive Guide to Capital Gains Tax in paragraph 6.2.1.
See Comprehensive Guide to Capital Gains Tax in paragraph 6.2.1.
Paragraph 13(1)(g).
Section 8(4)(k).
• A recoupment of amounts previously granted as a deduction is triggered under
section 8(4)(k)(iv), read with section 8(4)(a), as at the date that the asset
commences to be held as trading stock. It will be observed that the disposal for
CGT purposes occurs on the day before the commencement, meaning that the
disposal event under section 8(4)(k)(iv) does not correspond with the timing of
the disposal under paragraph 13(1)(g)(i). However, this misalignment should
not lead to double taxation because paragraph 35(3)(a) excludes from
proceeds “any amount of the proceeds that must be or was included in the
gross income of that person”. The phrase “must be” indicates futurity, resulting
in any recoupment under section 8(4)(k) reducing the proceeds accounted for
on the day before the change in usage.
Example 2 – Allowance asset commencing to be held as trading stock on or after
15 January 2020
Facts:
Company B acquired a machine for R100 000 on 1 March 2019 for its leasing division
and claimed capital allowances on the machine amounting to R80 000 over the next
four years. On 28 February 2023, Company B transferred the machine to its sales
division, ceasing to hold it as a capital asset and commenced to hold it as trading stock.
The market value of the machine on 27 February 2023 was R110 000. Company B’s
year of assessment ends on 28 February, at which point the machine comprised
trading stock that had not been disposed of.
Result:
R
Cost of machine 100 000
Less: Capital allowances [paragraph 20(3)(a)] (80 000)
Tax value/ base cost 20 000
Recoupment
Deemed proceeds [section 8(4)(k)] 110 000
Less: Tax value (20 000)
Profit on disposal of machine 90 000
The profit on the disposal of the machine, amounting to R90 000, includes a
recoupment of capital allowances totalling R80 000 under section 8(4)(k)(iv) and a
capital gain of R10 000. The recoupment is limited to the capital allowances claimed
as a deduction of R80,000.
CGT 30
R
Deemed consideration [paragraph 12(1)] 110 000
Less: Recoupment under section 8(4)(k)(iv) (paragraph 35(3)(a)) (80 000)
Proceeds under paragraph 35 30 000
Less: Base cost (20 000)
Capital gain 10 000
See the Comprehensive Guide to Capital Gains Tax, f or detail on the application of CGT.
Trading stock
R
Opening stock (1 March 2022) (110 000)
Closing stock (28 February 2023) 110 000
Opening stock (1 March 2023) (110 000)
The machine is deemed to have been disposed of for proceeds equal to its market
value of R110 000 on 27 February 2023 under section 8(4)(k)(iv). After its transfer to
the sales division, the machine was classified as trading stock. Section 22(3)(a)(ii)
considers Company B to have reacquired the machine as trading stock at its market
value of R110 000. Since the machine was not included in trading stock held by the
taxpayer at the end of the immediately preceding year of assessment, it is included in
opening stock as of 1 March 2022 under section 22(2)(b). As the machine constituted
trading stock held and not disposed of on 28 February 2023, it is included in closing
stock for the 2023 year of assessment. Company B must include the allowances
claimed of R80 000 in its income and account for the capital gain of R10 000 in the
2023 year of assessment, during which the machine commenced to be held as trading
stock.31
4.7 “Market value”
For purposes of recovery or recoupment under section 8(4)(a) (see 4.24.2), a taxpayer
is deemed under section 8(4)(k)(iv) to have disposed of the asset for an amount equal
to its market value on the date the asset commenced to be held as trading stock. The
term “market value” is generally understood to be the price that could be obtained
between a willing buyer and a willing seller negotiating at arm’s length in an open
market. The phrase “acting at arm’s length” was considered in Hicklin v SIR, where
Trollip JA stated the following: 32
“For ‘dealing at arms’ length’ is a usef ul and of ten easily determinable premise from
which to start the inquiry. It connotes that each party is independent of the other and,
in so dealing, will strive to get the utmost possible advantage out of the transaction for
himself . … Hence, in an at arms’ length agreement the rights and obligations it creates
are more likely to be regarded as normal than abnormal ….”
The principle to be drawn from this is that for a transaction to be considered to have
been concluded at “market value”, the parties involved must have acted in a manner
aimed at achieving the maximum possible benefit from the transaction. This principle
applies to section 8(4)(k)(iv) when an asset, previously not used as trading stock,
commences to be held as trading stock.
The taxpayer bears the burden of proving the market value of an asset.
Section 8(4)(k)(iv) read with section 8(4)(a).
[1980] 1 All SA 301 (A) at 311-312.
5 Exclusions
Certain amounts that have been recovered or recouped are excluded under
section 8(4)(a) from inclusion in the taxpayer's income. These exclusions arise when
the amount is –
• included in the income of such taxpayer under paragraph (jA) of the definition
of “gross income”; 33
• applied to reduce any cost or expenditure incurred by such taxpayer under
section 19;34 or
• previously taken into account as an amount deemed to have been recovered
or recouped under section 19(4), (5), or (6).35
Only the exclusion of a paragraph (jA) asset is relevant for purposes of
section 8(4)(k)(iv). Such an asset is one that is manufactured, produced, constructed,
or assembled by a person, and is similar to any other asset manufactured, produced,
constructed, or assembled by that person for purposes of manufacture, sale , or
exchange by that person or on that person’s behalf .
Paragraph (jA) treats the asset as trading stock from its creation until its disposal,
thereby preventing the application of section 8(4)(k)(iv) and paragraph 12(2)(c) during
any change in use (see 4.4).
Example 3 – Excluded from recoupment paragraph (jA) assets
Facts:
Company C carries on the trade of manufacturing motor vehicles which it sells to motor
vehicle dealers. Some of the motor vehicles manufactured are used by Company C’s
sales personnel as demo vehicles. Company C has a policy of disposing of these demo
vehicles after one year. In the year of assessment, Company C claimed a deduction
for the costs incurred in manufacturing these vehicles.
Result:
All motor vehicles manufactured by Company C comprise trading stock under
paragraph (a)(ii) of the definition of “trading stock” regardless of the fact that some of
the vehicles were utilised as capital assets by the sales personnel before disposal. The
proceeds from the sale of the demo vehicles will constitute gross income under
paragraph (jA) upon their disposal. Consequently, the expenditure incurred to
manufacture these vehicles, which has been claimed as a deduction, would be
excluded from recoupment under proviso (i) to section 8(4)(a). Furthermore, since the
vehicles remain trading stock from the time of their manufacture until their disposal,
neither paragraph 12(2)(c) nor (3) applies (deemed disposal when an asset
commences or ceases to be trading stock).
Section 8(4)(a)(i).
Section 8(4)(a)(ii).
Section 8(4)(a)(iii).
6 Conclusion
Section 8(4)(a) provides for the recoupment of all amounts allowed to be deducted or
set off under specified sections of the Act when an asset is disposed of or when an
expense is otherwise recovered or recouped.
On or after 15 January 2020, section 8(4)(k)(iv) triggers a deemed disposal for the
purposes of section 8(4)(a) when an allowance asset commences to be held as trading
stock. This does not apply to an asset contemplated in paragraph (jA) of the definition
of “gross income”, as such an asset remains trading stock from inception, regardless
of whether it is subsequently used as a capital asset.
Leveraged Legal Products
SOUTH AFRICAN REVENUE SERVICE
Annexure – The law
Section 1(1) – Definition of “trading stock”
“trading stock”—
(a) includes–
(i) everything produced, manufactured, constructed, assembled, purchased or in any
other manner acquired by a taxpayer f or the purposes of manufacture, sale or
exchange by the taxpayer or on behalf of the taxpayer;
(ii) anything the proceeds from the disposal of which f orms or will f orm part of the
taxpayer’s gross income, otherwise than—
(aa) in terms of paragraph (j) or (m) of the def inition of “gross income”;
(bb) in terms of paragraph 14(1) of the Eighth Schedule; or
(cc) as a recovery or recoupment contemplated in section 8(4) which is included
in gross income in terms of paragraph (n) of the definition of “gross income”;
or
(iii) any consumable stores and spare parts acquired by the taxpayer to be used or
consumed in the course of the taxpayer’s trade; but
(b) does not include—
(i) a f oreign currency option contract; or
(ii) a f orward exchange contract,
as def ined in section 24I(1);
Section 8(4)(a)
(a) There shall be included in the taxpayer’s income all amounts allowed to be deducted or set
of f under the provisions of sections 11 to 20, inclusive, section 24D, section 24F, section 24G,
section 24I, section 24J, section 27 (2) (b) and section 37B (2) of this Act, except section 11 (k), 11 (n),
11 (p) and (q), section 11F, section 12 (2) or section 12 (2) as applied by section 12 (3),
section 12A (3), section 13 (5), or section 13 (5) as applied by section 13 (8), or section 13bis (7),
section 15 (a) or section 15A, or under the corresponding provisions of any previous Income Tax Act,
whether in the current or any previous year of assessment which have been recovered or recouped
during the current year of assessment: Provided that the provisions of this paragraph shall not apply in
respect of any such amount so recovered or recouped which has been—
(i) included in the gross income of such taxpayer in terms of paragraph (jA) of the definition
of “gross income”;
(ii) applied to reduce any cost or expenditure incurred by such taxpayer in terms of
section 19; or
(iii) previously taken into account as an amount that is deemed to have been recovered or
recouped in terms of section 19 (4), (5) or (6).
Section 8(4)(k)
(k) For the purposes of paragraph (a), where during any year of assessment any person has—
(i) ……
(ii) ……
(iii) ……
(iv) commenced to hold any asset as trading stock which was previously not held as trading
stock,
in respect of which a deduction or an allowance has been granted to such person in terms of any of the
provisions referred to in that paragraph, that person shall be deemed to have disposed of that asset for
an amount equal to the market value of that asset as at the date of that donation, transfer or disposal.
Section 22(3)(a)
(3) (a) For the purposes of this section the cost price at any date of any trading stock in relation
to any person shall—
(i) subject to subparagraphs (iA) and (ii), be the cost incurred by such person, whether in
the current or any previous year of assessment in acquiring such trading stock, plus any
f urther costs incurred by such person, in terms of IFRS (in the case of a c ompany), up
to and including the said date in getting such trading stock into its then existing condition
and location, but excluding any exchange difference as defined in section 24I (1) relating
to the acquisition of such trading stock;
(iA) ……
(ii) in the case of any trading stock which is in terms of paragraph 12(2)(c) of the Eighth
Schedule treated as having been acquired at a cost equal to the market value, be that
market value; or
(iii) ……
The Eighth Schedule – Paragraphs 12(1) and 12(2)(c)
12 Events treated as disposals and acquisitions. —(1) Where an event described . Where
an event described in subparagraph (2) occurs, a person must, subject to paragraph 24, be treated for
the purposes of this Schedule as having disposed of an asset described in subparagraph (2) f or an
amount received or accrued equal to the market value of the asset at the time of the event and to have
immediately reacquired the asset at an expenditure equal to that market value, which expenditure must
be treated as an amount of expenditure actually incurred f or the purposes of paragraph 20 (1) (a).
(2) Subparagraph (1) applies, in the case of —
(a) ……
(b) ……
(c) assets that are held by a person otherwise than as trading stock, when they commence
to be held by that person as trading stock;
The Eighth Schedule – Paragraph 20(3)
(3) The expenditure contemplated in subparagraph (1) (a) to (g), incurred by a person in
respect of an asset must be reduced by any amount which—
(a) (i) is or was allowable or is deemed to have been allowed as a deduction in determining
the taxable income of that person; and
(ii) is not included in the taxable income of that person in terms of section 9C (5),
bef ore the inclusion of any taxable capital gain; or
(b) has f or any reason been reduced or recovered or become recoverable f rom or has been
paid by any other person (whether prior to or af ter the incurral of the expense to which
it relates), to the extent that such amount is not—
(i) taken into account as a recoupment in terms of section 8 (4) (a) or paragraph (j) of
the def inition of “gross income”;
(ii) reduced in terms of section 12P; or
(iii) applied to reduce an amount of expenditure incurred in respect of —
(aa) trading stock as contemplated in section 19 (3); or
(bb) any other asset as contemplated in paragraph 12A (3); or
(c) is exempt from tax in terms of section 10 (1) (yA) and is granted or paid for purposes of
the acquisition of that asset.
The Eighth Schedule – Paragraph 35(3)(a)
(3) The proceeds f rom the disposal, during a year of assessment, of an asset by a person, as
contemplated in subparagraph (1) must be reduced by—
(a) any amount of the proceeds that must be or was included in the gross income of that
person or that must be or was taken into account when determining the taxable income
of that person bef ore the inclusion of any taxable capital gain;
Diamond Export Levy Act, 2007
