Conditional accruals

A recent Tax Court case makes for interesting reading for those dealing with Section 23F(2).

Conditional accruals
- Advertisement -

A mining company’s appeal of a decision by the SARS Commissioner, as well as the judgement handed down by the Tax Court on 4 August 2014, is worth examining for those who deal with conditional accruals. The mining company had entered into a contract with another company to sell processed conglomerates from its mines at prices determined by ruling mineral prices and rates of exchange.

READ:Clover explains reasons behind raw milk supply restructuring

The prices therefore fluctuated and could be properly ascertained only after an interval of four months. The mining company received its money only in the following financial year, after the material had already been delivered. But the expenses associated with the mining and drying of the concentrate were deducted by the appellant the year before.

- Advertisement -

Accrual the following year
Section 24M of the Income Tax Act deals with this situation. It deems that the accrual takes place in the ‘subsequent year’ when it comes to income that cannot be correctly ascertained in any year.But in this matter, SARS used Section 23F(2) to limit and add back tax deductions in terms of the income that was spread over subsequent years. Additional taxes of 50% were levied for the 2007 tax year under Section 76(2).

Expenditure disregarded
Section 23F(2) deals with ‘trading stock’. The definition of trading stock and whether the ore and the concentrate fell within the definition, formed a large part of the dispute between the parties. According to this section, if trading stock is disposed of in a tax year, but the income accrues over a subsequent tax year, the expenditure of acquiring the trading stock must be disregarded in the tax year, to the extent that it exceeds the income during that year.

The appellant contended that the mineral ore was not trading stock and the full costs of mining the ore should thus be excluded from the dispute. The judge agreed with the appellant and also held that the appellant had not sought to avoid paying tax. Instead, the dispute boiled down to a different interpretation of the provisions of Section 23F(2).

Certain expenses, such as drying the mineral concentrate, could not have been taken into account for the acquisition of the trading stock, as these had been incurred after the concentrate was produced. The judge held that these expenses and fees were thus allowable as deductions. Furthermore, the respondent had in the course of its activities prior to the trial persistently made calculation and other errors, which had a negative impact on the appellant. Costs were therefore awarded to the appellant with respect to this aspect of the case.

This case illuminates several valuable principles. Anyone dealing with conditional accruals would be well advised to read the judgement (View ABC (Pty) Ltd v Commissioner of SARS).