Graded Questions Trading Stock Sol20 of 2021

SUGGESTED SOLUTION TO EXERCISE 20.
1
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1. True – section 22(1).
3. True – section 22(2)(a).
4. True – section 22(4). (Yet in Ernst Bester Trust v C:SARS (2008 (5) SA 279 (SCA), 70 SATC 151)) the Supreme Court of
Appeal refused to recognise this practice of the Commissioner.)
5. False – it is the cost price of the trading stock that must be included in his gross income unless it is impossible for that cost price to
be determined (section 22(8)(a) and section 22(8)(A)).
6. False – it is the market value the trading stock that must be included in his gross income (section 22(8)(b)(i) and section 22(8)(B)).
7. False – but he is granted a deemed deduction in the determination of his taxable income equal to his gross income inclusion
(section 22(8) proviso (a)).
8. True – section 22(8)(iii) and section 22(8)(B).
9. True – the provisions of section 22(1) and section 22(2) do not apply to farmers.
11. False – it is included in gross income at market value under section 22(8)(b)(v) and section 22(8)(B).
13. True – section 23F.
14. False.
15. True – section 22(2)(b). But then section 22(3)(a)(ii) deems the asset to have been acquired at a cost equal to its market value.
**2021**
SUGGESTED SOLUTION TO EXERCISE 20.2
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Ace Traders (Pty) Limited
Opening stock – section 22(2)(a) deduction in the determination of its taxable income -120 000
Sales – definition of ‘gross income’ 140 000
Taxable income 20 000
Dinky Traders CC
Cost of stock – section 11(a) deduction in the determination of Dinky Traders CC’s taxable income -400 000
Shipping insurance, warehousing and custom and excise duties – section 11(a) deductions in the
determination of its taxable income -52 000
Closing stock – section 22(1) and (3) included in its gross income 452 000
Taxable income -
The R452 000 will form part of Dinky Traders CC’s 2022 year’s opening stock under section 22(2)(a).
Cliff Dealer
2020 year of assessment
Cost of trading stock – section 11(a) deduction in the determination of his taxable income -4 000
Closing stock – section 22(1) inclusion in his gross income 4 000
Taxable income -
Opening stock – section 22(2) deduction in the determination of his taxable income -4 000
Add deemed deduction for trading stock acquired for no consideration – at market value arising out of section 22(4)
(the Commissioner’s practice). (Yet in Ernst Bester Trust v C:SARS (Supreme Court of Appeal – (2008 (5) SA 279
(SCA), 70 SATC 151) the Supreme Court of Appeal refused to recognise this practice of the Commissioner.)
This means that the deemed deduction in the determination of his taxable income is unavailable to him. -
-4 000
Closing stock – section 22(1) included in Cliff Dealer’s gross income
– Original shares (at cost) 4 000
– Capitalisation shares - 4 000
Loss deductible in the determination of his taxable income -
Bruce Albert
Opening stock – section 22(2) deduction in the determination of his taxable income -20 000
Closing stock – section 22(1) (at cost) inclusion in his gross income 20 000
Loss deductible in the determination of Bruce Albert’s taxable income -
The provisions of section 9C will come into operation only when these shares are sold (or deemed to be disposed of, for example, if
Bruce Albert ceased to be resident).
Beta Dealers (Pty) Limited
Opening stock – section 22(2) deduction in the determination of Beta Dealers (Pty) Limited’s taxable income 20 000
Closing stock – section 22(1) (at cost) inclusion in its gross income 20 000
Taxable income -
The provisions of section 9C will come into operation only when these shares are sold (or deemed to be disposed of, for example, if it
ceased to be resident).
Bert Clever
Opening stock – section 22(2) – 20 000 original shares – deduction in the determination of Bruce Clever’s
taxable income -40 000
Add deemed deduction (the Commissioner’s practice of a deemed deduction at market value has not been
recognised) -
-40 000
Closing stock – section 22(1) inclusion in its gross income
– 20 000 original shares (at cost) 40 000
– 20 000 capitalisation shares - 40 000
Loss deductible in the determination of his taxable income -
Since the Plural Limited’s shares are ‘financial instruments’, no write down of Bruce Clever’s closing stock of them is permitted.
**2021**
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Ray Moon
‘Buffet’ lunches
Normal tax implications
The ‘buffet’ meal is part of Ray Moon’s trading stock. Since he is applying this trading stock to his personal use, there is a deemed
recoupment (section 22(8)(a)). This recoupment is at cost unless its cost cannot be readily determined, then it is at market value
(section 22(8)(A)). Since its cost cannot be readily determined, his deemed recoupment will be determined at its market value of
R150 (exclude value-added tax since he is a vendor). Each time he enjoys a meal off the ‘buffet table’, he should include in his
income R150.
Value-added tax implications
Ray Moon is the owner of a guesthouse that is supplying ‘entertainment’ continuously and regularly (section 17(2) proviso (i)(aa)
(i)). Although the meal he enjoys from the ‘buffet’ is not supplied at a consideration that either
 covers all direct and indirect costs, or
 is equal to its open market value
it comprises ‘left-over food’ being an exception to the relevant provision (as set out above). He may therefore deduct all his input tax
for the ‘buffet’ meals he prepares without being subject to a denial of input tax under section 17(2)(a) proviso (i)(aa)(i).
‘A la carte’ dinners
Once again Ray Moon is applying trading stock to his personal use when he consumes the a la carte meal and drinks the wine, with
the result that there is a recoupment at cost (section 22(8)(a) and section 22(8)(A)). Since the cost of this meal and the wine can be
readily determined, the inclusion in his income each time he enjoys a meal (including the wine) ordered from the ‘a la carte’ menu is
R175 (R115 for the meal and R60 for the wine) (exclude value-added tax since he is a vendor).
Unlike Ray Moon’s ‘buffet’ lunch, this meal that he has selected from the ‘a la carte’ menu does not constitute the supply of ‘left-
over food’ to himself. Since the ‘entertainment’ (the ‘a la carte’ meal) is not supplied at a consideration that either
 covers all direct and indirect costs, or
 is equal to its open market value
he is deemed to have made a taxable supply at its open market value.
At the time the purchases are made the fact that Ray Moon is going to consume these items is unknown. An adjustment must there-
fore be made under the provisions of section 18(1) (change of use adjustments). Under this provision, he is deemed to have made a
taxable supply at its open market value. The open market value of the meal is R207 and of the wine is R138. The tax fraction of
15 / 115 is then applied to the total of R345 (R207 + R138). This results in a deemed output tax of R45 (15 / 115 of R345) that he
must account for.
Gift from curio shop
The gift removed from Ray Moon’s curio shop by himself was his trading stock. By removing the carved wooden elephant from his
curio shop, he is using his trading stock for his personal use (section 22(8)(a) and section 22(8)(A)). A deemed recoupment will
therefore be included in his income at its cost of R150 (R300 / 2).
Ray Moon would have enjoyed an input tax deduction of R22,50 (R150 × 15%) when he purchased the carved wooden elephant for
his curio shop. The subsequent removal of this trading stock for his personal use results in a change of use adjustment (the goods are
supplied for a non-enterprise purpose). The output tax on this change of use is determined on its market value a follows:
R345 × 15 / 115 = R45.
**2021**
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Received Limited
Giver Limited
Opening stock deduction in the determination of its taxable income -100 000
Donation – section 22(8) – included in its gross income at market value 110 000
Received Limited
Stock acquired for no consideration – deemed acquired at its current market value (section 22(4) and section 11(a)).
(Yet in Ernst Bester Trust v C:SARS (2008 (5) SA 279 (SCA), 70 SATC 151) the Supreme Court of Appeal
refused to recognise this practice of the Commissioner.) This means that no deduction is available in the
determination of its taxable income. -
Closing stock – section 22(1) and section 22(4) – at market value 110 000
Received Limited
Opening stock (section 22(2)(a)) deduction in the determination of its taxable income (see above) 110 000
Sales included in its gross income 120 000
Developers Limited
Suggested Solution to Part 1 – Section 22A is inapplicable
Developers Limited
Trading stock distributed by way of a liquidation distribution result in the provisions of section 22(8)(b)(iii) being applied. This trading
stock is then deemed to have been distributed at its market value (section 22(8)(B)).
Distribution included in Development Limited’s gross income at market value 2 200 000
Less opening stock deduction in the determination of its taxable income – at cost 1 000 000
Taxable income 1 200 000
Holder Limited
If trading stock
Sales of trading stock included in Holder Limited’s gross income (definition of ‘gross income’) 2 200 000
Opening stock – acquired for no consideration therefore valued at its market value (section 22(4)). (Yet in Ernst Bester
Trust v C:SARS (2008 (5) SA 279 (SCA), 70 SATC 151) the Supreme Court of Appeal refused to recognise this
practice of the Commissioner.) This means that no deduction is available in the determination of its taxable income. -
If not trading stock
There are no normal tax implications to Holder Limited if the land is not trading stock to it since the amount received or accrued is a
capital receipt or accrual. But a base cost of R2 200 000 for the land arises under paragraph 38(1)(b) of the Eighth Schedule.
Suggested Solution to Part 2 – Section 22A applies
Developers Limited
Section 22(8) applies – inclusion in gross income at market value 2 200 000
Less opening stock – no deductions in the determination of its taxable income under section 22A(1) proviso (ii) -
Holder Limited
Sales of trading stock (deemed to be trading stock under section 22A(1)) included in its gross income 2 200 000
Less opening stock deduction in the determination of its taxable income (deemed to be the cost to Developers Limited
under section 22A(1) proviso (i)) 1 000 000
**2021**
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Rocking-Horse (Pty) Limited
Normal tax
Net income for Rocking-Horse (Pty) Limited’s 2021 year of assessment in its comprehensive statement of income 1 507 000
Less closing stock for accounting purposes (not gross income) 1 267 000
240 000
Add closing stock (section 22(1) and the definition of ‘gross income’)
– Finished goods 600 000
– Work-in-progress 660 000
– ‘Merry-Go-Round’ contract is ‘nil’ (R60 000 – R150 000) -
– Consumable stores (definition of ‘trading stock’) 5 000
– Stationery (‘received by’ it under the definition of ‘trading stock’) 2 000 1 267 000
1 507 000
Add Merry-Go-Round’s contract amount received (definition of ‘gross income’ and the
meaning of the term ‘received by’) 150 000
1 657 000
Less Merry-Go-Round’s contract expenses actually incurred (section 11(a) deduction in the
determination of its taxable income) 60 000
1 597 000
Less section 24C allowance
– Contract income of 200 000 (or 100%)
– Contract expenses of 120 000 (or 60%)
– Contract profit of 80 000 (or 40%)
Thus, 60% of the receipts on its Merry-Go-Round’s contract go to finance expenditure:
Amount received (see above) is R150 000
To finance expenses (60% × R150 000) 90 000
But expenditure actually incurred by it to date (see above) 60 000 30 000
1 567 000
Add section 22(8)(b)(iii) dividend in specie (included in its gross income at market value under section 22(8)(B)) 90 000
Taxable income for its 2021 year of assessment 1 657 000
Dividends tax
Dividends in specie (see above) payable by Rocking-Horse (Pty) Limited 90 000
Dividends tax rate × 20%
Dividends tax liability 18 000
**2021**
Page 1 of 2 pages
Jeanie Orient
Memorandum
To: Him
From: You
Date
‘Normal tax implications relating to Jeanie Orient’
Set out below are the normal tax implications to Jeanie Orient trading as a dealer in Persian carpets for the 2021 year of assessment
arising from her transactions as set out in your memorandum.
Loan
Jeanie Orient’s interest incurred on the loan of R60 000 in the 2021 year of assessment is R4 500 (R60 000 × 9% × 10 / 12). Of this
R4 500 interest incurred,
 R2 700 (R4 500 × R36 000 / R60 000) relates to the R36 000 used to finance her abroad buying trip, and
 R1 800 (R4 500 × R24 000 / R36 000) relates to the purchase of the computer and printer.
The interest incurred by Jeanie Orient of R2 700 used to finance the trip abroad is deductible in the determination of her taxable income
under section 24J(2) to the extent of R2 475. The balance of R225 (R3 000 / R36 000 × R2 700) is not deductible in the determination of
her taxable income since it relates to the R2 475 used to purchase gifts (domestic expenditure), and has therefore not been laid out and or
expended for the purposes of trade (section 23(a), (b) and (g)).
The interest incurred by Jeanie Orient of R1 800 used to finance the purchase of the computer and printer is deductible in the
determination of her taxable income under section 24J(2), since it has been incurred in the production of her income and is expended for
the purposes of trade. Since the computer and printer were brought into use by her with immediate effect on 1 May 2020, there is no
pre-production interest.
Abroad travelling expenses
Jeanie Orient’s travelling expenses of R36 000 are deductible in the determination of her taxable income under section 11(a) to the
extent of R33 000. The R3 000 spent on gifts for herself and her family is not expenditure laid out for the purposes of trade
(section 23(a), (b) and (g)). The R33 000 incurred on airfares, accommodation and meals does not represent expenditure of a capital
nature since the purpose of her trip was to purchase Persian carpets, being her trading stock.
Imported Persian carpets
The ‘cost’ of Jeanie Orient’s imported Persian carpets, being part of her trading stock, for the purposes of the section 11(a) deduction in
the determination of her taxable income is determined as follows:
Cost of Persian carpets (rand equivalent) 90 000
Duties levied under the Customs and Excise Act 19 500
Value-added tax (input tax deduction enjoyed) -
Cost of trading stock 109 500
Jeanie Orient’s realised exchange loss of R7 500 (R97 500 – R90 000) on the settlement of the creditor for the importing of her container
of Persian carpets is deductible in the determination of her taxable income under the provisions of section 24I.
The R93 600 (excluding value-added tax) from the sale by Jeanie Orient of eight Persian carpets are included in her gross income in the
2021 year of assessment. The value-added tax of R14 040 is excluded from her gross income since she is obliged to pay it over to the
Commissioner as output tax.
Jeanie Orient’s closing stock value of the 12 unsold carpets is as follows:
Jeanie Orient’s undamaged carpets (R109 500 × 10 / 20) 54 750
Two damaged carpets (the ‘cost’ of these carpets is R10 950 (R109 500 × 2 / 20) but since the net realisable value is only
R5 000 (R2 500 (excluding value-added tax) × 2) the ‘value’ of the closing stock is reduced to their lower market value
(section 22(1)) 5 000
Closing stock inclusion in her gross income at 28 February 2021 59 750
Computer and printer
The expenditure incurred by Jeanie Orient on the computer and printer is of a capital nature. It therefore cannot be deducted in the
determination of her taxable income under section 11(a). She will, however, qualify for a wear-and-tear or depreciation capital
allowance to be deducted in the determination of her taxable income under section 11(e), determined for the 2021 year of assessment as
follows:
R24 000 × 1 / 3 × 10 / 12 = R6 667
The ‘cost’ of Jeanie Orient’s computer and printer for the purposes of the determination of the wear-and-tear capital allowance is
R24 000 since she enjoyed an input tax deduction of R3 600 on their purchase.
**2021** /continued on page 2

Page 2 of 2 pages
Inherited carpets
When trading stock is acquired for no consideration, being the position with Jeanie Orient’s inheritance, it was the practice of the
Commissioner to grant the taxpayer a deduction in the determination of taxable income equal to the market value of the trading stock at
the time it is acquired. Yet in Ernst Bester Trust v C:SARS (2008 (5) SA 279 (SCA), 70 SATC 151) the Supreme Court of Appeal
refused to recognise this practice of the Commissioner.
Since this practice is no longer valid, Jeanie Orient will be unable to deduct an amount for her inherited carpets in the determination of
her taxable income for the 2021 year of assessment.
Jeanie Orient’s expenses of cleaning (R3 000) and repairing (R1 260) are deductible expenses in the determination of her taxable
income under section 11(a) since they have been incurred in the production of the income. These expenses should, however, be included
in the cost of the Persian carpets for the purposes of the closing stock valuation to be included in her gross income (see below).
The R16 700 from the sale by Jeanie Orient of the one ‘inherited’ Persian carpet sold by her is included in her gross income for the 2021
year of assessment. The value-added tax of R2 505 is not included in her gross income since it is paid over by her as output tax to the
Commissioner.
Jeanie Orient’s closing stock of the four Persian carpets on hand on 28 February 2021 to be included in her 2021 gross income is
determined as follows:
‘Deemed’ cost (section 22(4) (R37 500 × 4 / 5)) 30 000
Cleaning expenses (R3 000 × 4 / 5) 2 400
Repairing expenses (R1 260 × 4 / 5) 1 008
Closing stock inclusion in her gross income at 28 February 2021 33 408
Wedding gift
The Persian carpet given by Jeanie Orient to her sister as a wedding gift results in a recoupment to her in the 2021 year of assessment
under section 22(8)(a). This recoupment arises since she has applied her trading stock for her private or domestic use or consumption.
The recoupment is based on the cost of the Persian carpet to her, being R3 500 (section 22(8)(A)). (The value-added tax is excluded
because she would have enjoyed an input tax deduction on the purchase of the Persian carpet.) The R3 500 is included in her gross
income in the 2021 year of assessment.
Women’s dining club
Jeanie Orient’s kind gift of a Persian carpet to the women’s dining club gives rise to a recoupment under section 22(8)(b)(i) since she
has applied her trading stock for a purpose other than the disposal of it in the ordinary course of her trade. The recoupment is the market
value (section 22(8)(B)) of the carpet of R10 800. Under section 23C(1), the market value to a seller, who is a vendor, excludes value-
added tax since he would be required to pay over the output tax resulting from the trading stock donated had it in fact been sold.
Proviso (a) to section 22(8) does, however, make provision for a deemed expenditure to be deducted in the determination of taxable
income when the trading stock has been applied by the taxpayer in the carrying on of his trade. Jeanie Orient has given the Persian
carpet to the women’s dining club as advertising and marketing for her shop. It has been applied by her in the course of carrying on her
trade as a retailer of Persian carpets and is akin to an advertising or a marketing expense. She will therefore enjoy a deduction in the
determination of her taxable income under section 11(a) of R10 800 (being equal to the recoupment of R10 800 – see above) for the
2021 year of assessment.
**2021**
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Black & White Cows Limited
When a customer pays Black & White Cows Limited for a bottle, the amount received by it forms part of its gross income. The
receipt is not the receipt of trust moneys. It deposits the full amount that it receives from its customer (that is the amount for the dairy
product and for the bottle) into its own bank account. Its actions do not confirm that the amount being received for the bottle is being
received by it on behalf of someone else.
The judgments from Brookes Lemos Ltd v CIR (1947 (2) SA 976 (A), 14 SATC 295), Pyott Ltd v CIR (1945 AD 128, 13 SATC 121)
and Greases (SA) Ltd v CIR (1951 (3) SA 518 (A), 17 SATC 358) confirm that the amounts received for the bottles are gross income.
It follows that the bottles then form part of Black & White Cows Limited’s trading stock:
 The original purchase of 10 000 bottles by it for R20 000 is then a deductible expense in the determination of its taxable income,
being the purchase of its trading stock.
 The debit to its statement of profit or loss and other comprehensive income for 500 replacement bottles has been correctly dealt
with in its financial statements since it is also the purchase of its trading stock.
 The transfer by it from sales to the bottle deposit account is incorrect for normal tax purposes since the R19 500 is a sale to be
included in its gross income.
 The purchase of 1 000 second-hand bottles by it from vendor customers is a deductible expense in the determination of its
taxable income being the purchase of trading stock. The R3 000 is deductible in the determination of its taxable income as
purchases and it has therefore been correctly dealt with in the journal entry.
 The purchase of 230 second-hand bottles from non-vendor customers gives rise to a notional input tax deduction of R90
(15 / 115 × R690). Since it enjoys an input tax deduction for this amount, the deductible purchase price of these second-hand
bottles in the determination of its taxable income needs to be reduced to R600 (R690 – R90).
To determine Black & White Cows Limited’s taxable income, its net income needs to be adjusted as follows:
 It needs to be increased by R19 500 for the sale of bottles.

 It needs to be reduced by R23 400 (R20 000 + R3 000 + R600) for bottles purchased.
 It also needs to be increased for the stock of bottles on hand at the end of its year of assessment. It has on hand
5 230 (10 000 + 500 – 6 500 + 1 000 + 230) bottles at the end of its year of assessment:
– The first 10 500 bottles were purchased at R2 each,
– then 1 000 bottles were purchased at R3 each, and
– then 230 bottles at an effective R2,61 (R600 / 230) each.
On the first-in-first-out basis, Black & White Cows Limited’s bottles on hand had cost it R11 600
((4 000 × R2) + (1 000 × R3) + 230 × R2,61). Its net income must therefore be increased by R11 600.
**2021**
Page 1 of 2 pages
Greenkeeperss (Pty) Limited
Suggested Solution to Part 1
Revised determination of taxable income
Greenkeeperss (Pty) Limited’s trading stock for normal tax purposes for its 2020 and 2021 years of assessment is as follows:
2020 closing stock (opening stock for 2021)
Spare parts and accessories 88 000
Finished goods 152 000
Consumable stores 12 500
252 500
2021 closing stock (opening stock for 2022)
Spare parts and accessories 105 000
Packing materials 30 000
Finished goods 175 000
Consumable stores 15 000
Stationery 6 000
331 000
Taxable income
Taxable profit as determined by Greenkeeperss (Pty) Limited’s accountant 275 000
Less ‘accounting’ closing stock 295 000
-20 000
Add ‘accounting’ opening stock 252 500
232 500
Less ‘tax’ opening stock (section 22(2)) deduction in the determination of its taxable income 252 500
-20 000
Add ‘tax’ closing stock (section 22(1)) inclusion in its gross income 331 000
311 000
Purchase of consumable stores (correctly deducted in the determination of its taxable income) -
Purchase of packing materials (correctly deducted in the determination of its taxable income) -
Purchase of stationery (correctly deducted in the determination of its taxable income) -
311 000
Add deemed recoupment included in its gross income at market value of R1 120 (R800 × 140 / 100) for the electric
lawn-mower that is disposed of other than in the ordinary course of its trade (section 22(8)(b)(ii)(B))
1 120
312 120
The ‘removal’ by Greenkeepers (Pty) Limited of the electric lawn-mower gives rise to a deemed expenditure of
R1 120 since it is applied for a trade purpose (mowing its factory lawn). The expenditure is of a capital nature. The
lawn-mower is now a capital asset to it and therefore the deemed expenditure qualifies for a wear-and-tear or depre-
ciation capital allowance to be deducted in the determination of its taxable income (section 11(e)). The wear-and-tear
or depreciation capital allowance for its 2021 year of assessment is its deemed cost of R1 120 because its cost is less
than R7 000 (Interpretation Note 47 in § 4.3.5). -1 120
311 000
The awarding by Greenkeepers (Pty) Limited of the edge-cutting lawn-mower to its accountant gives rise to a
deemed recoupment to be included in its gross income at market value of R1 500 (R1 000 × 150 / 100) (see above
for the reason (section 22(8)(b)(ii)(B))). 1 500
312 500
A deemed expenditure of R750 is available to Greenkeeperss (Pty) Limited since the lawn-mower is applied for a
trade purpose (cost of employing the accountant). This expenditure if of a revenue nature and is therefore fully de-
ductible in the determination of its taxable income for its 2021 year of assessment (section 11(a)). -1 500
311 000
The acquisition by Greenkeepers (Pty) Limited of the accountant’s ‘old’ lawn-mower represents trading stock ac-
quired for no consideration. The Commissioner’s practice was to allow a deemed expenditure equal to its market
value of R200. But in Ernst Bester Trust v C:SARS (2008 (5) SA 279 (SCA), 70 SATC 151) the Supreme Court of
Appeal refused to recognise this practice of the Commissioner. No amount is then deductible in the determination of
its taxable income. (The inclusion of the spare parts (at their market value) in the closing stock amount of R295 000
is correct.) -
Page 2 of 2 pages
Normal tax implications for Greenkeepers (Pty) Limited’s accountant
The award of the new edge-cutting lawn-mower by Greenkeepers (Pty) Limited to its accountant constitutes a ‘taxable benefit’ to
him under paragraph 5 of the Seventh Schedule being the acquisition of an asset at less than actual value. Since the lawn-mower is
trading stock to his employer, the value of this taxable benefit is the lesser of its
 cost of R1 000, and
 market value of R1 500 (see the determination above).
The R1 000 is then reduced by the consideration given by Greenkeepers (Pty) Limited’s accountant.
The supply of by Greenkeepers (Pty) Limited’s accountant of ‘old’ lawn-mower is the consideration given for the ‘new’ lawn-
mower. The amount of this consideration is the market value of his ‘old’ lawn-mower of R200.
The inclusion in Greenkeepers (Pty) Limited’s accountant’s gross income will therefore be R800 (R1 000 – R200).
**2021**
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Woodbar (Pty) Limited
Date:
To: The Financial Director
Woodbar (Pty) Limited
From: You
Report on the R75 000 cost of moving certain assets:
In certain circumstances, the cost of re-locating fixed assets on which certain capital allowances are enjoyed, may be added to their
cost.
Plant
The capital allowances that may be enjoyed on plant are the
 section 12C capital allowance, and
 so-called wear-and-tear or depreciation capital allowance (section 11(e)).
(Also section 12E(1) for a small business corporation.)
Proviso (v) to section 11(e) specifically includes in the value of the asset for the purpose of the determination of the wear-and-tear or
depreciation capital allowance, expenditure incurred in moving an asset from one location to another.
Section 11(e) provides that the wear-and-tear or depreciation capital allowance may be granted on
‘any machinery, plant, implements, utensils and articles (other than machinery, plant, implements, utensils and articles in respect of
which a deduction may be granted under section 12B or 12C) used . . .’.
Thus, if Woodbar (Pty) Limited’s plant that has been moved had either had qualified for a section 12B or section 12C capital allowance,
then the R60 000 will not qualify for the wear-and-tear or depreciation capital allowance.
The section 12C capital allowance is also based on a defined cost. This ‘definition’ of ‘cost’ is set out in section 12C(2) and no specific
reference to the cost of moving an asset from one location to another is provided for in this ‘definition’. (The cost that is dealt with in this
definition is the cost of the asset at that point in time when it is acquired.)
Section 12C(6), however, specifically covers instances when expenses are incurred in relation to the asset subsequent to its acquisition.
Under this provision, a capital allowance is available on the expenses incurred in moving plant from one location to another. These
moving expenses are deductible over the remainder of the period available for the deduction of the allowance in the determination of
taxable income. If the allowance has been deducted in full (in other words, the plant has a ‘nil’ tax value) then the moving expenses are
fully deductible in the year when they are incurred.
The fact that the plant is not new and unused is not a factor in the determination of the section 12C capital allowance because used plant
also qualifies for this allowance.
Office furniture
Office furniture does not qualify for the section 12C capital allowance. The R5 000 incurred by Woodbar (Pty) Limited on the removal
of its office furniture would therefore qualify for the wear-and-tear or depreciation capital allowance at the rates normally allowed on
office furniture (section 11(e) proviso (v)). (For a small business corporation an allowance is available in section 12E(1A).)
Trading stock
The cost of removal of Woodbar (Pty) Limited’s stocks of both raw materials and finished goods of R10 000 is expenditure of a
non-capital nature. This cost is sufficiently closely related to its income-producing activities, thus permitting the R10 000 to be
deductible in the determination of its taxable income under the provisions of section 11(a).
Section 22(3), in defining the method of arriving at the cost price of trading stock, states that the cost includes
‘further costs incurred . . . in getting such trading stock into its then existing condition or location’.
The R10 000 incurred by Woodbar (Pty) Limited’s on removing its trading stock must then be apportioned over those items that were
moved, and added to their individual costs.
To the extent that those items are still on hand at Woodbar (Pty) Limited’s financial year-end (28 February 2021), a portion of the
R10 000 will be carried forward as part of the value of its closing stock (section 22(1)), to be deducted in the determination of its taxable
income in its subsequent year of assessment. In other words, the expenditure of R10 000 would, in effect, prove to be deductible in the
determination of its taxable income only as and when the moved items of trading stock are sold.
**2021**
1 Page only
Percussion Instruments (Pty) Limited
The provisions that are relevant to Percussion Instruments (Pty) Limited’s transactions that took place in its 2020 year of assessment are
as follows:
 Section 11(a) and section 23(g) (the so-called general deduction formula) for the deduction in the determination of its taxable
income for the cost of manufacturing its trading stock.
 Section 22(8)(b)(v). It applies when its trading stock is now being used by it as a capital asset.
 Section 22(8)(b)(B). It ‘values’ this trading stock resulting in an inclusion in its gross income of this trading stock at its market value.
 Paragraph 12(3) of the Eighth Schedule. It deems it to have acquired its capital asset (ex-trading stock) at its market value.
 Section 11(e) allows the so-called wear-and-tear or depreciation capital allowance on this capital asset.
The provisions that are relevant to Percussion Instruments (Pty) Limited’s transaction that took place in its 2021 year of assessment are
as follows:
 Section 8(4)(a). It applies when the ‘demonstration’ marimba is sold and includes the recoupment of the wear-and-tear or
depreciation capital allowance in its gross income.
 Paragraphs 20, 35 and 3 or 4 of the Eighth Schedule. They apply to determine if there is a capital gain made or capital loss suffered
on the sale of its ‘demonstration’ marimba. But since the capital profit is included in its gross income (see below), no capital gain
made or capital loss suffered will arise.
 Gross income paragraph (jA). It applies to the capital profit.
Amounts
Deduction in the determination of Percussion Instruments (Pty) Limited’s taxable income 6 000
Deemed inclusion in its gross income at market value 9 000
Wear-and-tear or depreciation capital allowance: R9 000 × 1 / 5 × 4 / 12 = R600.
Cost (deemed) 9 000
Less wear-and-tear or depreciation capital allowance 600
Tax value (at 29 February 2020 and 1 March 2020) 8 400
Less wear-and-tear or depreciation capital allowance: R9 000 × 1 / 5 × 8 / 12 1 200
Tax value on 31 October 2020 7 500
Sold for R12 075 × 100 / 115 10 500
Profit 3 300
Analysis
Recoupment of previous capital allowance (R600 + R1 200) included in its gross income 1 800
Capital profit (but included in its gross income under its paragraph (jA)) 1 500
3 300
Capital gains tax
Proceeds (R10 500 – R1 500) 9 000
Base cost (R9 000 – R600 – R1 200 + R1 800) 9 000
Proceeds 9 000
Less base cost 9 000
Capital gain made or capital loss suffered -
**2021**
Page 1 of 2 pages
Domingo Bass
Resonators Limited
On 1 August 2017 trading stock purchased (section 11(a) deduction in the determination of Domingo Bass’s taxable
income) 20 000
Closing stock: 2018 and 2019 years of assessment 20 000
Opening stock (section 22(2)(a)) – see above) 20 000
Closing stock (section 22(1) – at cost) 20 000
Unrealised loss deductible in the determination of Domingo Bass’s taxable income -
Opening stock (see above) 20 000
On 1 August 2020 a Resonators Limited share becomes a ‘qualifying share’. Section 9C then deems this trading
stock to become ‘capital’ in nature
Therefore provided he sell these shares before 1 August 2020 – sales (gross income) 15 000
Loss deductible in the determination of Domingo Bass’s taxable income 2 000
Capital gains tax
Selling price 18 000
Less inclusions in his gross income 18 000
Proceeds -
Original cost 20 000

Less amounts deductible in the determination of his taxable income 20 000
Base cost -
Proceeds (paragraph 35 of the Eighth Schedule) -

Less base cost (paragraph 20 of the Eighth Schedule) -
Flapamba Limited
On 1 November 2017: trading stock purchased (section 11(a) deduction in the determination of Domingo Bass’s taxable
income) 40 000
Closing stock (at cost) 40 000
Unrealised loss deductible in the determination of Domingo Bass’s taxable income -
Opening stock 40 000
Profit or loss -
Profit or loss -
On 1 November 2020 a Flapamba Limited share becomes a ‘qualifying share’. Section 9C then deems this
trading stock to become ‘capital’ in nature.
Receipt or accrual onthe sale of R70 000 is not included in his gross income (since it is capital in nature)
‘Reversal’ of previous deductions (expenditures or losses) under section 9C(5):
– 2018 year of assessment – unrealised deductible loss -
– 2021 year of assessment – opening stock 40 000
40 000
– 2019 year of assessment – unrealised taxable profit – no provision available for set off in section 9C - 40 000
Taxable income inclusion -
Page 2 of 2 pages
Capital gains tax
Selling price 70 000
Less inclusions in his gross income -
Proceeds 70 000
Original cost 40 000

Less amounts deductible in the determination of his taxable income -
Base cost 40 000
Proceeds (paragraph 35 of the Eighth Schedule) 70 000

Less base cost (paragraph 20 of the Eighth Schedule) 40 000
Capital gain 30 000
Conclusion
Domingo Bass must sell his Resonators Limited shares before 1 August 2020. And he must sell his Flapamba Limited shares after
1 November 2020.
**2021**
Page 1 of 4 pages
Burton Mallet
Trading stock sold
Normal tax
Purchases (section 11(a) deduction in the determination of Burton Mallet’s taxable income 1 200 000
Gross income 1 400 000
Taxable profit included in his taxable income 200 000
Capital gains tax
Proceeds (R1 400 000 – R1 400 000) -

Less base cost (R1 200 000 – R1 200 000) -
Donations tax
There are no donations tax consequences.
Value-added tax
Output tax payable by Burton Mallet 210 000
Trading stock converted to a capital asset
Normal tax
Purchases (section 11(a) deduction) 1 200 000
Deemed disposal (section 22(8)(b)(v) and section 22(8)(B) at market value) 1 500 000
Taxable profit 300 000
Capital gains tax
Base cost of this flat (under paragraph 12(3) and paragraph 20(1)(a) of the Eighth Schedule) 1 500 000
Section 13quin annual commercial buildings capital allowance: 5% of R1 500 000 75 000
Donations tax
Value-added tax
There are no value-added tax consequences since the flat is still being used to make a taxable supply. In other words, no change of
use adjustment needs to be made.
Capital asset converted into trading stock
Capital gains tax
Deemed disposal (at market value – paragraph 12(1) and paragraph 12(2)(c) of the Eighth Schedule) 280 000
Less base cost (paragraph 20)
 market value on valuation date of R250 000,

 20% of its proceeds (of R266 000) = R53 200, and
 its time-apportionment base cost under paragraph 30 of R194 000 (determined as follows):
Y = B + [(P – B) × N] / T + N
Y = R170 000 + (R280 000 – R170 000) × 3 / (19 + 3)
Y = R170 000 + (R110 000 × 3 / 22)
Y = R170 000 + R15 000
Y = R185 000
The most favourable base cost to Burton Mallet is its market value 250 000
Capital gain 30 000
Normal tax
Section 11(a) (at original cost under section 22(2)(b) but then its cost is deemed to be its
market value under section 22(3)(a)(ii)) 280 000
Closing stock (section 22(1) – less than market value) 280 000
Taxable profit (or deductible loss) in the determination of Burton Mallet’s taxable income -

Page 2 of 4 pages
Donations tax
Value-added tax
There are no value-added tax consequences since the flat (now an office) is still being used to make a taxable supply. In other words,
no charge of use adjustment needs to be made.
Trading stock acquired for no consideration
Normal tax
Acquired for no consideration -
Closing stock (at market value under section 22(4)) 1 150 000
Taxable profit included in the determination of Burton Mallet’s taxable income 1 150 000
Capital gains tax
There are no capital gains tax consequences.
Donations tax payable by Burton Mallet’s younger sister
Value of donation 1 150 000
Less annual exemption from donations tax (under section 56(2)(b) – assumed not yet
enjoyed) 100 000
1 050 000
Donations tax rate (section 64) × 20%
Donations tax payable by Burton Mallet’s younger sister 210 000
Donations tax payable by Burton Mallet
Under the proviso to section 59(1), if Burton Mallet’s younger sister does not pay the donations tax (of R210 000 (see above)) within
three months from when the donation takes place, then he and her (his younger sister) become jointly and severally liable for this
tax.
Value-added tax
Burton Mallet’s younger sister is not a vendor. When she donates the property to him the transaction is subject to transfer duty and
not value-added tax. Transfer duty is payable by the purchaser (Burton Mallet) and it is payable on the purchase consideration. But
his sister did not sell the property to him, she donated it. Its market value on the date of the donation was R1 150 000. Section 5(b) of
the Transfer Duty Act provides that when no consideration is payable, the value on which the duty is payable is the declared value of
the property. The term ‘declared value’ is defined in section 1 of the Transfer Duty Act and means the value of the property as
declared by the person who acquired it. Burton Mallet must declare R1 150 000 as being the market value of the property. The
transfer duty payable is R4 500 (0% on R1 000 000 plus 3% on R150 000).
Since Burton Mallet is a vendor he may deduct a deemed or noted input tax on the donation of the plot received from his younger
sister. This deemed input tax is determined on the lesser of the consideration paid (Rnil) and the market value of the asset
(R1 150 000). The deemed input tax is then Rnil (Rnil × 15 / 115).
Donation of trading stock
Normal tax
Opening stock (section 22(2) and section 11(a) deduction in the determination of Burton Mallet’s taxable income) 800 000
Gross income – section 22(8)(b)(i) and section 22(8)(C) at the amount taken into account for that trading stock, in
other words, at its opening stock value 800 000
Taxable profit (or deductible loss) in the determination of his taxable income -
Section 18A deduction in the determination of Burton Mallet’s taxable income (limited to 10% of his taxable income) 800 000
Capital gains tax
Burton Mallet’s donated asset is deemed to be disposed of at its market value of R850 000 (paragraph 38(1)). Proceeds will then be
R50 000 (R850 000 – R800 000). Base cost is nil (R800 000 – R800 000). A capital gain of R50 000 arises (R50 000 – 0).
But since this donation by Burton Mallet’s is to a public benefit organization, his capital gain of R50 000 is then disregarded under
paragraph 62(b).
Donations tax
A donation to a public benefit organisation is exempt from donations tax under section 56(1)(h).
Value-added tax
On purchasing the plot, Burton Mallet would have deducted input tax. His donation of the plot results in a change of use adjustment
under section 18(1), since goods have been applied other than for the purpose of making taxable supplies.
An output tax adjustment arises based on the open market value of the flat. In section 3(1)(b) of the Value-Added Tax Act, the term
‘open market value’ includes value-added tax. It is determined as follows:
R977 500 × 15 / 115 = R127 500.
Page 3 of 4 pages
Part disposal
Normal tax
Purchases (section 11(a) deduction in the determination of Burton Mallet’s taxable income) 800 000
Sales (R230 000 × 100 / 115) 200 000
Closing stock (80% of R850 000 = R680 000 – less than its market value of R700 000) 680 000 880 000
Taxable profit to be included in his taxable income 80 000
Capital gains tax
A part disposal arises for capital gains tax purposes (paragraph 33(a)). Proceeds are nil (R200 000 – R200 000). Base cost is also nil
((20% of R800 000) – R160 000). The capital gain (or capital loss) is then ‘nil’.
Donations tax
Value-added tax
Being a vendor, Burton Mallet must raise output tax on the supply of goods and services. He sold the portion to the flat for R200 000.
He must therefore raise output tax of R30 000 (R230 000 at 15 / 115) on that part of the flat that he sold (section 7).
Trading stock used for private purposes
Normal tax
Purchases (section 11(a) deduction in the determination of Burton Mallet’s taxable

income 1 200 000
Gross income – trading stock used for private purposes (at cost under section 22(8)(a) and
section 22(8)(A)) 1 200 000
Taxable profit (or deductible loss) in the determination of his taxable income -
Capital gains tax
Proceeds (R1 300 000 (under paragraph 12(2)(e)) – R1 200 000) 100 000
Less base cost (R1 200 000 – R1 200 000 + R240 000 (donations tax – see below)) 240 000
Capital loss 140 000
The donations tax of R240 000 that is added to base cost (see above) has been determined in accordance with the following formula
as set out in paragraph 22:
Y = (M – A) / M × D
Y = (R1 300 000 – Rnil) / R1 300 000 × R240 000
Y = R240 000
This capital gain made by Burton Mallet is not disregarded under paragraph 53 since immovable property is excluded from the
definition of a ‘personal use asset’ under paragraph 53(3).
Donations tax
Value of property donated (excludes value-added tax) 1 300 000

Less annual exemption from donations tax 100 000
1 200 000
Donations tax rate × 20%
Donations tax payable 240 000
Value-added tax
On purchasing the flat, Burton Mallet would have enjoyed an input tax deduction. The personal use of the flat results in a change of
use adjustment under section 18(1) because goods have been applied other than for the purpose of making taxable supplies. An
output tax adjustment arises that is based on the ‘open market value’ of the flat. It is determined as follows:
R1 495 000 × 15 / 115 = R195 000.
Deteriorated trading stock
Normal tax
Purchases section 11(a) deduction in the determination of Burton Mallet’s taxable income) 800 000
Closing stock (section 22(1) – its market value is less than its cost) 700 000
Unrealised loss deductible in the determination of his taxable income 100 000
*2021** /continued on page 4
Page 4 of 4 pages
Capital gains tax
There are no capital gains tax consequences.
Donations tax
Value-added tax
There are no value-added tax consequences.
Younger sisters’s tax liabilities
Donations tax
She has a donations tax liability of R240 000 (see above).

Capital gains tax
Disposal by a donation to a connected person (at market value under paragraph 38) 1 150 000
Less base cost (includes the donations paid by the donor (paragraph 20(1)(c)(viii)): R1 035 000 + R24 000 (see
below) 1 059 000
Capital gain 91 000
The donations tax of R24 000 (see below) that is added to base cost has been determined in accordance with the following formula as
set out in paragraph 22:
Y = (M – A) / M × D
Y = (R1 150 000 – R1 035 000) / R1 150 000 × R240 000
Y = R115 000 / R1 150 000 × R240 000
Y = R24 000
**2021**
Page 1 of 5 pages
Caroline Reaper
Trading stock used for domestic purposes
The trading stock consumed by Caroline Reaper and her son, Big-Jim Reaper, results in a recoupment to be included in her gross income
in the 2021 year of assessment (under the provisions of section 22(8)(a)). This recoupment arises since she has applied her trading stock
for her private or domestic use or consumption. The recoupment is based on the cost of this trading stock to her, being R3 800.
Proceeds (R3 800 (deemed to be at cost) – R3 800 (inclusion in gross income)) -
Less base cost (R3 800 – R3 800)) -
Peri peri sauce
Section 22(8) deals with various situations when a taxpayer is deemed to have recovered or recouped an amount of trading stock. One of
these situations is when he has applied trading stock for a purpose other than its disposal in the ordinary course of his trade (and under
circumstances other than those mentioned in the other situations). Then, if the cost price of the trading stock has been taken into account
in the determination of his taxable income for a year of assessment, he will be deemed to have recovered or recouped an amount equal to
its market value.
So Caroline Reaper is deemed to have recovered or recouped R6 000 being the market value (see below) of the ‘birdseye’ chillies used
by her to make her peri peri sauce since she applied them other than their disposal in the ordinary course of trade. The ordinary course of
her trade is the sale of fresh fruit and vegetables. (The ordinary course of her ‘peri peri sauce’ trade is that it is made available only to
her ‘selected’ customers.)
Then under section 22(8) proviso (a), when trading stock is used or consumed by a taxpayer in carrying on his trade, the amount
included in his income under section 22(8) is for the purposes of the Income Tax Act deemed to be expenditure incurred for the
acquisition by him of this trading stock.
Under this provision, Caroline Reaper is deemed to have incurred expenditure of R6 000 for the ‘birdseye’ chillies that she used to make
her peri peri sauce that she then makes available only to her ‘selected’ customers. In valuing her closing stock of her peri peri sauce, it is
the R6 000 market value of the ‘birdeye’ chillies that is relevant. Her overall position is as follows:
Actual purchase of the these ‘birdeye’ chillies 4 000
Add deemed purchase (at market value) 6 000
10 000
Less deemed gross income inclusion (at market value) 6 000
Deduction in the determination of her taxable income 4 000
Proceeds (R6 000 – R6 000) -
Less base cost (R4 000 – R4 000) -
Stolen trading stock
When trading stock is acquired for no consideration (as is the position with the green mangoes that were stolen by Big-Jim Reaper,
Caroline Reaper’s son, from their neighbour) it was the practice of the Commissioner to grant the taxpayer a deduction in the
determination of his taxable income equal to the market value of the trading stock at the time it was acquired. (Yet in Ernst Bester Trust
v C:SARS (2008 (5) SA 279 (SCA), 70 SATC 151) the Supreme Court of Appeal refused to recognise this practice.)
Since this practice is now invalid, Caroline Reaper will be unable to deduct an amount in the determination of her taxable income for the
2021 year of assessment for R4 500 (R3 600 + R900) (being the market value of the green mangoes that were stolen by her son from
their neighbour).
The green mangoes’ closing stock value of R900 is then included in Caroline Reaper gross income in the 2021 year of assessment
(section 22(4)). Under section 23C(1), the market value to a seller, who is a vendor, excludes value-added tax since he would be required
to pay over the output tax resulting from the trading stock donated had it in fact been sold.
Proceeds (R3 600 – R3 600) -
Base cost (under paragraph 38(1)(b)) is R3 600 3 600
Capital loss suffered by Caroline Reaper 3 600
Trading stock acquired for no consideration
When trading stock is acquired for no consideration (as is the position with this gift of ‘Tata Ma Chance’ chillies donated to Caroline
Reaper by Jonah Jolokia) it was the practice of the Commissioner to grant the taxpayer a deduction in the determination of his taxable
income equal to the market value of the trading stock at the time it was acquired. (Yet in Ernst Bester Trust v C:SARS (2008 (5) SA 279
(SCA), 70 SATC 151) the Supreme Court of Appeal refused to recognise this practice.)

Page 2 of 5 pages
Since this practice is now invalid, Caroline Reaper will be unable to deducted in the determination of her taxable income in the 2021
year of assessment of R7 500 (R6 750 + R750) (being the market value of this gift).
But then Caroline Reaper’s receipts or accruals of R6 750 from the sale of some of these ‘Tata Ma Chance’ chillies are included in her
gross income in the 2021 year of assessment. Also included in her gross income is R750 being the closing stock value of this trading
stock acquired for no consideration (being its base cost which is deemed to be equal to its market value).
Under paragraph 38(1)(b), she is deemed to have acquired this trading stock for its market value (R7 500). Since no amount has been
deducted in the determination of her taxable income for this donation (see above), its base cost will then be R7 500.
Proceeds (R6 750 – R6 750) -
Less base cost (see above) 7 500
Capital loss suffered by Caroline Reaper 7 500
Donation to public benefit organisation
Vegetables and fruit past their ‘sell-by’ date are part of Caroline Reaper’s trading stock. By donating them to a local public benefit
organisation, a deemed recoupment arises determined at the amount that is taken into account under the provisions of section 18A
(section 22(8)(b)(i)(C)). When trading stock is donated, section 18A(3)(a)(ii) then refers back to section 22(8). In other words, it is this
amount that must be taken into account. But the provisions of section 18A(3)(d) do not apply in these circumstances since the vegetables
and fruit past their ‘sell-by’ date were not specifically purchased by her to be donated to the public benefit organisation. It follows that
the provisions of section 18A(3)(a)(ii) must therefore apply. She must then include in her income R6 000, since R6 000 is the amount
that has been taken into account for these vegetables and fruit past their ‘sell-by’ date in that year of assessment (being its cost).
Proviso (a) to section 22(8) does, however, make provision for a deemed expenditure when trading stock has been applied by the
taxpayer in the carrying on of his trade. Caroline Reaper has given the vegetables and fruit past their ‘sell-by’ date to the public benefit
organisation as advertising and marketing for her business. It has been applied by her in the course of carrying on her trade as a
greengrocer and is akin to an advertising or a marketing expense. She will therefore enjoy a deduction in the determination of her taxable
income under section 11(a) of R6 000 (being equal to the recoupment of R6 000 – see above) in the 2021 year of assessment.
Because a section 18A certificate has been issued to Caroline Reaper for this donation, she may deduct an amount in the determination
of her taxable income based on the recoupment of R6 000. The deduction is, however, limited to 10% of her taxable income.
But then the provisions of section 23B(1) prevent a double deduction of this R6 000 amount. Then under section 23B(3)(a), the
deduction in the determination of her taxable income must be made under section 18A (and not under section 11(a)). It follows that
despite a ‘section 18A’ receipt for R9 000 having been issued by the public benefit organisation, the amount to be considered for
deduction is limited to R6 000 (see above).
Proceeds ((R6 000 – R6 000) -
Donation to the local high school
The vegetables and fruit donated to the high school for the meal served at its ‘matric’ dance are part of Caroline Reaper’s trading stock.
By donating them to the high school, a deemed recoupment arises determined at their market value (of R2 700).
Proviso (a) to section 22(8) does, however, make provision for a deemed expenditure when the trading stock has been applied by the
taxpayer in the carrying on of his trade. Caroline Reaper has given vegetables and fruit to the local high school as advertising and
marketing for her business. It has been applied by her in the course of carrying on her trade as a greengrocer and is akin to an advertising
or a marketing expense. She will therefore enjoy a deduction in the determination of her taxable income under section 11(a) of R2 700
(being equal to the recoupment of R2 700 – see above) in the 2021 year of assessment.
Proceeds ((R2 700 – R2 700) -
Purchase of 10 crates of bananas
Under section 23F(1), when a taxpayer has during a year of assessment incurred expenditure for the acquisition of trading stock that
was
 neither ‘disposed of ’ by him during that year,
 nor ‘held’ by him at the end of that year,
he will not enjoy a deduction in the determination of his taxable income for that expenditure under section 11(a) in that year of
assessment.

Page 3 of 5 pages
The expenditure is then deemed to have been incurred by him for the purposes of section 11(a) in the first subsequent year of
assessment in which
 the trading stock is disposed of by him,
 its value falls to be included in his income under the provisions of section 22(1), that is, as closing stock, or
 he shows that by reason of its loss or destruction or the termination of the agreement under which it was acquired by him or for
another reason, it will neither be disposed of nor held by him. But then he can deduct the expenditure only to the extent that it has
actually been paid.
The R2 400 (R2 200 plus R200) incurred by Caroline Reaper on purchasing this trading stock is deductible in the determination of
her taxable income under the so-called general deduction formula (section 11(a) and section 23(g)). (But then see below.)
The provisions of section 23F(1) will, however, apply since this trading stock has not been ‘disposed of ’ and is also not ‘held’ on
28 February 2021. Under section 23F(1), the R2 400 incurred on purchasing the 10 crates of bananas (trading stock) is then not
deductible in the determination of her taxable income in the 2021 year of assessment.
Since the 10 crates of bananas are not ‘held’ on 28 February 2021, they do not form part of Caroline Reaper’s closing stock value of
trading stock under section 22(1).
The cost of road freighting this trading stock to her trade premises in South Africa forms part of its cost. The cost price at any date of
a person’s trading stock is the cost incurred by him, in the current or a previous year of assessment, in acquiring that trading stock,
plus further expenses incurred by him up to and including the relevant date in getting the trading stock into its then existing condition
and location.
At this stage a sale by Caroline Reaper has not yet occurred since it is unclear as to whether the 10 crates of bananas have actually
been lost.
Conditional sale
The provisions of section 23F(2) apply when a taxpayer has disposed of trading stock during the year of assessment in the ordinary
course of his trade for a consideration that will not accrue to him in full during that year of assessment and provided the expenditure
incurred for its acquisition was deductible in the determination of his taxable income under section 11(a) during that, or a previous,
year of assessment.
Under section 23F(2), the amount of the expenditure that would otherwise be deductible in the determination of his taxable income
that exceeds the amount included in his gross income for the sale of this trading stock, must then be disregarded during that year of
assessment.
The disregarded amount will then be deductible as follows:
 Under section 23F(2A), it may be deducted from the income of that person in a subsequent year of assessment to the extent that
an amount is received by or accrued to him in that subsequent year from a sale that is included in his income.
 Under section 23F(2B), if during a year of assessment a person proves that no further amounts will accrue to him in that year and
a subsequent year, so much of the amount that was disregarded as has not yet been deducted in the determination of his taxable
income in a year, must then be deducted from his income in that year of assessment.
Because the sale of green (non-ripe) avocados by Caroline Reaper to Paprika Pepper Pimento Caterers CC is conditional and on
credit, neither a receipt nor an accrual has occurred. This means that the R1 200 is not included in her gross income in the 2021 year
of assessment.
Since this trading stock was ‘disposed of ’ by Caroline Reaper, it is not ‘held’ by her on 28 February 2021. It therefore does not form
part of her closing stock under section 22(1).
But then the provisions of section 23F(2) will apply. It states that the R800 cost of these avocados is not deductible in the
determination of her taxable income for the 2021 year of assessment.
No sale has yet taken place. And its present base cost is R800 (R800 – nil) since no amount has yet been deducted.
Capital assets into a personal-use asset
A deemed disposal at market value takes place when a capital asset is ‘converted’ into a personal-use asset (paragraph 12(1)
and paragraph 12(2)(e) of the Eighth Schedule).
Original cost 7 200
Less wear-and-tear or depreciation capital allowances 4 320
Tax value on 1 March 2020 2 880
Less wear-and-tear or depreciation capital allowances for the three-month period in the 2021 year of assessment 360
Tax value on 31 May 2020 2 520
Deemed sale (at market value: R3 162,50 × 100 / 115) 2 750
Recoupment of previous wear-and-tear or depreciation capital allowances (to be included in Caroline Reaper’s
gross income) 230
Capital asset
Proceeds (at market value (R2 750 – R230)) 2 520
Less base cost (R7 200 – R4 320 – R360) 2 520
Page 4 of 5 pages
Personal-use asset
Proceeds (not yet sold) -
Less base cost 2 750
Capital gain made or capital loss suffered (not yet sold) -
Change of use – personal-use asset into trading stock (jar of pickled and stuffed jalepeno chillies)
A deemed disposal and reacquisition at market value takes place when an asset held by a person otherwise than as trading stock (for
example, a personal-use asset) is ‘converted’ into trading stock (paragraph 12(1) and paragraph 12(2)(c) of the Eighth Schedule).
Under section 22(2)(b) and section 22(3)(a)(ii), a person is deemed to have acquired this trading stock at a cost equal to its market
value (R50). The following then results when Caroline Reaper sells it:
Cost 50
Sold for 40
Loss deductible in the determination of her taxable income 10
Capital gains tax
Proceeds (R40 – R40) -
Less base cost (R50 – R50) -
Trading stock used for domestic purposes
On Caroline Reaper purchasing the fresh fruit and vegetables that were then consumed by her son and herself, she would have enjoyed
an input tax deduction of R570 (R3 800 × 15%).
Caroline Reaper’s personal use of this trading stock results in a change of use adjustment under section 18(1) because goods have
been applied other than for the purpose of making taxable supplies. An output tax adjustment arises that is based on the open market
value of this trading stock. It is determined as follows:
R5 700 × 115% (× 15 / 115) = R855.
Peri peri sauce
The value-added tax of R600 (R4 000 × 15%) incurred by Caroline Reaper on the purchase of these ‘birdseye’ chillies that were used
by her to make her peri peri sauce qualifies for an input tax deduction. Using these ‘birdseye’ chillies to make her peri peri sauce,
instead of selling them as a fresh vegetable to customers, does not constitute a change of use adjustment under section 18(1). No
output tax adjustment is therefore required for the ‘birdseye’ chillies that she used to make her peri peri sauce.
Donated trading stock received
On Caroline Reaper’s sale of the ‘Tata Ma Chance’ chillies, she will raise output tax of R1 125 (15% of R7 500 (R6 750 + R750)). (It
follows that the fiscus also enjoys a portion of her gain as a result of the ‘Tata Ma Chance’ chillies being ‘donated’ to her.)
Trading stock donated to the local public benefit organisation

On purchasing the fruit and vegetables that were donated to the local public benefit organisation, Caroline Reaper would have
enjoyed an input tax deduction of R900 (R6 000 × 15%).
The donation by Caroline Reaper of these fruit and vegetables that are now past their ‘sell-by’ date does not result in a change of use
adjustment under section 18(1) since these goods are still being used for the purpose of making taxable supplies (in the form of
promoting her business).
Purchase of 10 crates of bananas
Under section 7(1)(b), value-added tax is levied when goods are imported into South Africa. In other words, only when the 10 crates
of bananas arrive in South Africa, will value-added tax be levied. At this stage it is unclear whether the 10 crates of bananas have
arrived in South Africa.
Conditional sale of (non-ripe) avocados to Paprika Pepper Pimento Caterers CC
Under section 9(1)(a), the time of supply is on the earlier of the
 issuing of the invoice either by the supplier or the recipient, or
 receipt of any payment of consideration by the supplier,
for that supply.
So when Caroline Reaper issues the invoice to Paprika Peppers Pimento Caterers CC on 25 February 2021, the time of the supply
occurs. Output value-added tax of R180 (15% of R1 200) must then be raised by her.
Should the conditional sale to Paprika Peppers Pimento Caterers CC not take place because the avocados do not ripen in time,
Caroline Reaper will then have to issue a credit note to it. Under the provisions of section 21(2)(b), a deemed input tax of R180 is
then deductible under the provisions of section 16(3)(a)(v).

Page 5 of 5 pages
Trade asset into a personal-use asset
On purchasing the scale, Caroline Reaper would have enjoyed an input tax deduction of R1 080 (R7 200 × 15%).
Caroline Reaper’s personal use of this scale results in a change of use adjustment under section 18(1) because goods have been
applied other than for the purpose of making taxable supplies. An output tax adjustment arises that is based on the open market value
of this scale (section 10(7)) on the date when the change of use occurs (section 9(6)). It is determined as follows:
R3 162,50 × 15 / 115 = R412,50.

Donations tax
Fresh fruit and vegetables consumed by her son
The value of Caroline Reaper’s donation of fresh fruit and vegetables to her son is R2 700 (50% of R5 400). The maintenance of a
person, although a donation, is exempt from donations tax under section 56(2)(c). In Silke § 23.11 the following example is given:
‘[The section 56(2)(c) exemption] appears also to cover the situation in that, for example, a father maintains a son who, having
completed his medical studies, has proceeded abroad to specialise.’
The gift of fresh fruit and vegetables by Caroline Reaper to her son is part of her maintaining him, and therefore the provisions of
section 56(2)(c) will exempt the value of this donation (R2 700) from donations tax.
Fruit and vegetables past their ‘sell-by’ date to the public benefit organisation
The value of Caroline Reaper’s donation of fruit and vegetables past their ‘sell-by’ date to the public benefit organisation is R2 000. It
is then exempt from donations tax under section 56(1)(h), being a donation to an entity that is exempt from normal tax under the
provisions of section 10(1)(cN).
**2021**
Page 1 of 4 pages
Chocolate Limited
Purchases (section 11(a) deduction in the determination of Richard Donnelly’s taxable income) -15 000
Deemed deduction – donated trading stock received: R17 500 (5 000 × R3,50 (at market value under the
Commissioner’s practice)). (Yet in Ernst Bester Trust v C:SARS (2008 (5) SA 279 SCA, 70 SATC 151)
the Supreme Court of Appeal refused to recognise the Commissioner’s practice.) -
Sale of 4 000 shares (included in his gross income) 17 000
Closing stock included in his gross income (section 22(1) – determined on a first-in-first-out basis)
 1 000 shares at R3 (at cost) 3 000
 5 000 shares at R3,50 (at deemed cost of R3,50) 17 500 20 500
Capital gains tax
Since the amount that accrues from the sale of Richard Donnelly’s trading stock will be included in his gross income there will be
proceeds of nil on their disposal (paragraph 35(3)). There will also be a base cost of nil since their entire purchase price was deducted
in the determination of his taxable income (paragraph 20(3)). And then since both proceeds and base cost are nil, no capital gain
made or capital loss suffered arises.
Russel-Stover Limited
Investment (Richard Donnelly’s base cost – paragraph 20 of the Eighth Schedule) 12 000
Deemed disposal (at market value on 1 December 2020 – paragraph 12(1) and paragraph 12(2)(c) of the
Eighth Schedule) 13 200
Capital gain 1 200
‘Converted’ trading stock – section 11(a) deduction in the determination of his taxable income (at original
cost under section 22(2)(b), but then its cost is deemed to be its market value under section 22(3)(a)(ii)) -13 200
Sales (included in his gross income) 9 000
Closing stock included in his gross income (section 22(1)): 800 at R6,60 (deemed cost) 5 280
Nestle´ Crunch Limited
Purchases – a deduction in the determination of Richard Donnelly’s taxable income 15 000
Closing stock – an inclusion in his gross income 15 000
-
Opening stock (section 22(2) and section 11(a) deduction in the determination of Richard Donnelly’s
taxable income – see above) -15 000
Local dividends (R1 485 + R1 050) 2 535
Less exemption from normal tax (section 10(1)(k)(i)) 2 535 -
Deemed disposal included in his gross income (section 22(8)(b)(v) and section 22(8)(B) at market value –
500 at R35) 17 500
Unrealised taxable profit included in his taxable income 2 500
Capital gains tax
Capital asset (base cost under paragraph 12(3) and paragraph 20(1)(a)) 17 500
Kitkat Limited
Gross income – trading stock used for domestic purposes (inclusion in his gross income at cost
– 21 × R1 000 under section 22(8)(a) and section 22(8)(A)) 21 000
Sales (gross income) 22 800
Closing stock: 40 × R1 000 (at cost) included in his gross income 40 000
Capital gains tax
The shares in Kitkat Limited given to his nephew result in a deemed disposal at their market value
(paragraph 38(2)(a):
Proceeds (R23 100 – R21 000) 2 100
Less base cost (R21 000 – R21 000) -
Capital gain 2 100
Page 2 of 4 pages
It is assumed that Richard Donnely has not used his annual exemption for donations tax and therefore no donations tax is paid. If
donations tax is paid, an amount would then be included in their base cost as determined under paragraph 22.
Shares in Kitkat Limited sold:
Proceeds (R22 800 – R22 800) -
Less base cost (R19 000 – R19 000) -
Decadance Limited
Purchases (section 11(a) deduction in the determination of Richard Donnelly’s taxable income) -600
Closing stock included in his gross income (50 shares at their cost of R12) being ‘financial
instruments’ their value cannot be written down to their lower R10 market value) 600
Unrealised profit or loss -
Opening stock included in his gross income (section 11(a) deduction in the determination of Richard
Donnelly’s taxable income – see above) -600
Closing stock included in his gross income section 22(1): 50 shares at cost of R12 600
Rocher Limited
Under the definition of a ‘dividend’, a dividend does not include an amount transferred or applied by a
company to the extent that the amount so transferred or applied constitutes shares in it. This means that
no portion of the bonus issue of 2 000 shares in Rocher Limited is a dividend. The entire amount
distributed of R13 000 (2000 shares at R6,50) must then be included in his gross income since he holds
these shares as trading stock 13 000
Bonus issue (deemed deduction in the determination of his taxable income under the Commissioner’s
practice at market value, but then in Ernst Bester Trust v C:SARS (2008) (5) SA 279 SCA,
70 SATC 151) the Supreme Court of Appeal refused to recognise this practice) -
Closing stock included in his gross income (determined on a first-in-first-out basis)
 1 000 shares at R6 6 000
 2 000 shares (deemed cost equal to their market value of R6,50 a share) 13 000
Capital gains tax
Since the amount that accrues from the sale of his 9 000 shares in Rocher Limited is included in Richard Donnelly’s gross income
there will be proceeds of nil (paragraph 35(3)). There will also be a base cost of nil since their entire purchase price was deductible in
the determination of his taxable income (paragraph 20(3)). And then since there are proceeds and base cost both of nil, no capital
gain made or capital loss suffered arises.
Cadbury Limited
Sales (included in his gross income – R44 000 less dividend included in it of R20 000) 24 000
Local dividend ((R300 000 + R700 000) / (R2 200 000 × R44 000)) 20 000
Less local dividend exemption from normal tax 20 000 -
Closing stock included in gross income section 22(1): (7 000 shares at R5) 35 000
Loss deductible in the determination of his taxable income 11 000
Capital gains tax
Since the amount that accrues from the sale of Richard Donnelly’s 5 000 shares in Cudbury Limited is included in his gross income there
will be proceeds of nil on their disposal (paragraph 35(3)). There will also be a base cost of nil since their entire purchase price was
deductible in the determination of his taxable income (paragraph 20(3)). And then since both proceeds and a base cost are nil, no capital
gain made or capital loss suffered arises.

Page 3 of 4 pages
Patrice Chapon Limited
Opening stock deductible in the determination of Richard Donnelly’s taxable income (at 2020 year of
assessment closing stock value) -9 000
Sales included in his gross income 6 900
Realised loss deductible in the determination of his taxable income -2 100
Lindt Limited
Opening stock (section 11(a) deduction in the determination of his taxable income) -12 000
Sales (deemed capital in nature under section 9C) -
Gross income (reversal of amount previously deducted in the determination his taxable income – 3 000
500 / 2 000 × R12 000)
Closing stock included in his gross income (1 500 at cost of R6) 9 000
Taxable profit included in his taxable income -
Capital gains tax
Proceeds (R90 000 – R3 000) 87 000

Less base cost (500 / 2 000 × (R12 000 – R12 000)) -
Capital gain 87 000
Truffles Limited
Purchases (section 11(a) deduction in the determination of his taxable income) -300 000
Sales included in his gross income – cash (R220 000) and otherwise (R110 000) 330 000
Capital gains tax
Since the amount that accrue on the sale of Richard Donnelly’s Truffles Limited shares is included in his gross income there will be
proceeds of nil on their disposal (paragraph 35(3)). There will also be a base cost of nil since their entire purchase price would have
been deducted in the determination of his taxable income (paragraph 20(3)). And then since there are proceeds and a base cost both
of nil, no capital gain made or capital loss suffered arises.
De Brand Limited
Purchases (section 11(a) deduction in the determination of his taxable income) 110 000
Closing stock included in his gross income (100 000 at R1,10 (at cost)) 110 000

Opening stock deductible in the determination of Richard Donnelly’s taxable income (see above) -110 000
Sales included in his gross income 48 000
Closing stock included in his gross income (60 000 at R1,10) 66 000
Capital gains tax
Since the amount that accrues to Richard Donnelly on the sale of his 40 000 shares in De Brand Limited is included in his gross
income there will be proceeds of nil on their disposal (paragraph 35(3)). There will also be a base cost of nil since their entire
purchase price would have been deducted in the determination of his taxable income (paragraph 20(3)). And then since there are
proceeds and a base cost both of nil, no capital gain made or capital loss suffered arises.
Guittard Limited
Closing stock included in his gross income (150 000 at their cost of R5)) 750 000

Page 4 of 4 pages
Opening stock deductible in the determination of Richard Donnelly’s taxable income (at 2020 year of
assessment closing stock value – see above) -750 000
Local dividend (revenue profits (R200 000) + capital profits (R225 000)) 425 000
Less exemption from normal tax (section 10(1)(k)(i)) 425 000 -
Return from trading stock (gross income: R800 000 – R425 000) 375 000
Opening stock reversal under the so-called CIR v Nemojim (Pty) Ltd (1983 (4) SA 935 (A), 45
SATC 241) principle (R720 000 × R425 000 / R800 000) 382 500
Since the amounts that accrue to Richard Donnelly on the liquidation of Guittard Limited are included in his gross income there will
be proceeds of nil on their disposal (paragraph 35(3)). There will also be a base cost of nil since their entire purchase price would
have been deducted in the determination of his taxable income (paragraph 20(3)). And then since there are proceeds and a base cost
both of nil, no capital gain made or capital loss suffered arises.
Kilwins Limited
Deemed gross income inclusion at market value (section 22(8)(b)(ii)(B)) 12 000
Accounting fees incurred and paid (section 11(a) deduction in the determination of Richard Donnelly’s
taxable income read with section 22(8) proviso (a)) 12 000
**2021**
Page 1 of 2 pages
Jumbo Tusks
The normal tax implications to Jumbo Tusks that arise include the following:
 Expenses of clearing his natural forest.
 Expense of building a new farm road and a new bridge.
 Expenses of picking, his sorting, grading and packing the fruit.
 Valuation of his closing stock on hand.
 Normal tax treatment of his closing (and opening) stocks.
Clearing his natural forest
Capital development expenditure as set out in paragraph 12(1) of the First Schedule, includes expenditure incurred by a farmer on the
planting of certain ‘qualifying’ trees and expenditure on the establishment of an area used for planting of these trees (paragraph 12(1)
(g)).
The expenses incurred by Jumbo Tusks in clearing parts of the natural forest would not fall within the provisions of paragraph 12(1)(g).
The trees already exist, they are not being planted. These expenses are, however, capital expenses, being expenses incurred in developing
his income-producing asset into a position whereby it can start earning him income.
Although capital in nature, these expenses do not form part of Jumbo Tusks’s capital development expenditure. This means that they are
not deductible in the determination of his taxable income.
Roads and a bridge
Capital development expenditure includes expenditure incurred by a farmer on the building of roads and bridges used in connection with
farming operations (paragraph 12(1)(h)). This means that the expenses incurred by Jumbo Tusks on building a new farm road and a
new bridge are deductible in the determination of his taxable income, but against only his farming income.
Picking, sorting, grading and packing
The expenses incurred by Jumbo Tusks on picking, sorting, grading and packing the marula fruit are deductible expenses in the
determination of his taxable income (section 11(a)). To the extent that they are included in his closing stock valuation (see below), they
are in effect, being carried forward for deduction in the determination of his taxable income in the year of assessment when the fruit is
sold.
These expenses may be deducted in the determination of Jumbo Tusks’s taxable income (under the general deduction formula) against
farming income for the year.
Valuation of closing stock
Fruit on the trees
Under paragraph 2 of the First Schedule, it is the value of only ‘livestock and produce’ on hand that must be brought into account for
trading stock purposes. ‘Produce’ is not defined in the Income Tax Act. Only ‘produce’ that has been gathered and is marketable needs
to be included in a farmer’s closing stock valuation. Thus growing crops, including the fruit still on the tree, are not ‘produce’ and are
therefore excluded from trading stock.
Since Jumbo Tusks’s fruit on the trees does not form part of his closing stock, there is no value to be included in his gross income.
Picked fruit but still unpacked
The value to be placed upon produce is its fair and reasonable value (paragraph 9). The value of produce on hand requires that it be
valued at the lower of its
 average cost of production, and
 market value.
The average cost of production is determined by taking into account the farmer’s actual costs of production. Capital development
expenditure is not taken into account.
Capital development expenditure includes expenditure incurred by a farmer on the planting of specified trees (they are listed and they
include fruit trees) and expenditure on the establishment of an area used for the planting of these trees (paragraph 12(1)(g)). These types
of expenses will therefore not be taken into account when determining the average cost of production.
It is the accounting policy of Jumbo Tusks to ‘capitalise’ all expenses of his marula-farming activities. This may be a sound accounting
practice, but it does not conform with the provisions of the Income Tax Act. Only the expense of the trees themselves, their planting
expenses and the expenses of establishing the ‘orchard’ are included in a farmer’s capital development expenditure. All other expenses
of Jumbo Tusks’s marula-farming activities are deductible in the determination of his taxable income (section 11(a)).
Jumbo Tusks’s average cost of production must therefore exclude the above capital expenses. But it would include all other expenses
incurred in getting this produce, being the marula fruit, into its then existing condition and location. Yet these expenses must be limited
to those relating to this particular crop.

Page 2 of 2 pages
These expenses would include costs of fertilisers, insecticides and crop sprays, irrigation, wages (of employees maintaining the ‘orchard’
and of the fruit-pickers). Other costs, provided they are not of a capital nature, relating directly to Jumbo Tusks’s marula-farming
activities, and this particular crop, would also form part of his average cost. Since his crop is now picked, the expenses of transporting it
from the trees to wherever it is stored should also be taken into account.
Should overheads be included in valuing this trading stock?
Whether overheads should be included as part of the closing stock value of a farmer’s trading stock is not separately dealt with in the
Income Tax Act. Whereas the provisions of section 22(1) and section 22(2) specifically exclude farmers, section 22(3), where the
overhead provisions are found, does not exclude farmers.
The trading stock of all taxpayers should be valued according to generally accepted accounting practice. This practice specifies that
certain overheads be included in the value of trading stock. Therefore Jumbo Tusks’s average expenses as determined under their relative
parts (see below) should be increased by a share of the overheads relating to his marula-farming activities.
Jumbo Tusks’s average cost as determined above should then be compared with the market value at the end of the year of assessment.
This market value would be determined by reference to the trading price applicable at the end of the year of assessment at the market
where the fruit is sold. This market value should then be reduced by an estimate of his expenses of grading, sorting, packing, storage, and
transporting of the fruit from the farm to the market.
The lower of these two values will be Jumbo Tusks’s closing stock value.
Graded, sorted and packed fruit in the packing shed
Jumbo Tusks’s average cost as determined above must be increased by his expenses incurred in grading, sorting and packing the fruit.
The market value as established above should be reduced by his expense of transporting his fruit from the farm to the market.
Graded, sorted and packed fruit which had been delivered to the point of sale
Jumbo Tusks’s average cost as determined above must then be increased by his expense of transporting the fruit to the point of sale.
The market value will be the trade value (refer above).
Normal tax position of closing (and opening) stocks
The closing stock value as determined above will be included in his Jumbo Tusks’s ‘farming’ gross income for the year (paragraph 3 of
the First Schedule).
This value (now, opening stock) will then be deductible in the following year’s determination of Jumbo Tusks’s taxable income from
farming operations (paragraph 4 of the First Schedule).
**2021**
Page 1 of 6 pages
The provisions that are relevant to Ivan Klue’s for the transactions relating to his purchased trading stock that took place in the 2019
year of assessment are as follows:
Purchased trading stock 1
 Section 11(a) and section 23(g) (so-called general deduction formula) for the deduction in the determination of his taxable income
for the cost of his trading stock.
 Section 22(8)(a). It applies when his trading stock is now being used by him as a private or domestic asset.
 Section 22(8)(A). It applies resulting in an inclusion in his gross income of this trading stock at its cost (since this price has been
readily determined).
 Paragraph 12(3) of the Eighth Schedule. It deems him to have acquired his personal-use asset (ex-trading stock) at its section 22(8)
value, in this instance, at its cost (see above).
 Section 11(e) allows the so-called wear-and-tear or depreciation capital allowance. But it does not apply to a private or domestic
asset.
 Section 22(1) includes in the value of his closing stock the amount of his trading stock held and not disposed of at the end of the
year of assessment. But a private or domestic asset is not included in a trader’s closing stock.
 Section 11(a) and section 23(g) (so-called general deduction formula) for the deduction in the determination of its taxable income
 Section 22(8)(b)(v). It applies when his trading stock is now being used by him as a capital asset.
 Section 22(8)(B). It applies resulting in an inclusion in his gross income of this trading stock at its market value.
 Paragraph 12(3) of the Eighth Schedule. It deems him to have acquired his capital asset (ex-trading stock) at its section 22(8) value,
in this instance, at its market value (see above).
 Section 11(e) allows the so-called wear-and-tear or depreciation capital allowance.
 Section 22(1) includes in the value of his closing stock the amount of its trading stock held and not disposed of at the end of the
year of assessment since it is ‘trading stock’ as defined. This basis of valuation will generally be its cost less the amount by
which its value has been diminished by reason of damage, deterioration, change in fashion, decrease in the market value or for
any other reason satisfactory to the Commissioner. But it does not apply to a capital asset.
Manufactured trading stock
 Section 11(a) and section 23(g) (so-called general deduction formula) for the deduction in the determination of his taxable income
 Section 11(e) allows the so-called wear-and-tear or depreciation capital allowance on his capital asset. But it does not apply to a
capital asset that is still deemed to be trading stock.
 Section 22(1) includes in the value of his closing stock the amount of his trading stock (including its ‘deemed’ trading stock) held
and not disposed of at the end of the year of assessment since it is ‘trading stock’ as defined. This basis of valuation will
generally be its cost less the amount by which its value has been diminished by reason of damage, deterioration, change in
fashion, decrease in the market value or for any other reason satisfactory to the Commissioner.
The provisions that are relevant to Ivan Klue’s transactions that took place in the 2020 year of assessment are as follows:
There are no tax consequences since the asset is now Ivan Klue’s personal use asset.
Since Ivan Klue’s former trading stock is now his capital asset, a wear-and-tear or depreciation capital allowance is deducted in the
determination of his taxable income for the 2020 year of assessment.
 Section 22(2) includes in the value of its opening stock the amount of Ivan Klue’s trading stock (including his ‘deemed’ trading
stock) held and not disposed of at the beginning of the year of assessment.
 Section 11(e) allows the so-called wear-and-tear or depreciation capital allowance on Ivan Klue’s capital asset. But it does not apply
to a capital asset that is still deemed to be trading stock.
 Section 22(1) includes in the value of Ivan Klue’s closing stock the amount of his trading stock (including his ‘deemed’ trading
stock) held and not disposed of at the end of the year of assessment since it is ‘trading stock’ as defined. This basis of valuation
will generally be its cost less the amount by which its value has been diminished by reason of damage, deterioration, change in
fashion, decrease in the market value or for any other reason satisfactory to the Commissioner.

Page 2 of 6 pages
The provisions that are relevant to Ivan Klue’s transactions that took place in the 2021 year of assessment are as follows:
 Section 22(1) includes in the value of Ivan Klue’s opening stock the amount of his trading stock held and not disposed of at the
beginning of the year of assessment. But a private or domestic asset is not included in a trader’s opening stock.
 Section 11(e) allows Ivan Klue the so-called wear-and-tear or depreciation capital allowance. But it does not apply to a private or
domestic asset.
 Paragraph 12(3) of the Eighth Schedule. It deems Ivan Klue’s to have acquired his trading stock (ex-personal-use asset) at its
section 22(8) value, in this instance, at its cost (see above).
 The definition of ‘gross income includes Ivan Klue’s actual receipt or accrual from its sale.
 Section 22(1) includes in the value of Ivan Klue’s opening stock the amount of his trading stock held and not disposed of at the
beginning of the year of assessment. But a capital asset is not included in a trader’s opening stock.
 Section 11(e) allows Ivan Klue the so-called wear-and-tear or depreciation capital allowance.
 A deemed disposal and reacquisition at market value takes place when an asset held by a person otherwise than as trading stock (for
example, a capital asset) is ‘converted’ into his trading stock (paragraph 12(1) and paragraph 12(2)(c) of the Eighth Schedule).
Paragraph 12(3) of the Eighth Schedule deems Ivan Klue to have trading stock (an ex-capital asset) at its market value.
Paragraph 20, paragraph 35 and paragraph 3 or paragraph 4 of the Eighth Schedule will then all apply to him to determine if there is
a capital gain made or capital loss suffered on its deemed disposal.
 Section 8(4)(a). It applies and includes the recoupment of the wear-and-tear or depreciation capital allowances in Ivan Klue’s gross
income when the capital asset is deemed to be disposed.
 The definition of ‘gross income to include Ivan Klue’s actual receipt or accrual from its sale.
 Section 22(1) includes in the value of Ivan Klue’s opening stock the amount of its trading stock held and not disposed of at the
beginning of the year of assessment.
 Section 11(e) allows Ivan Klue the so-called wear-and-tear or depreciation capital allowance on his capital asset. But it does not
apply to a capital asset that is still deemed to be trading stock.
 Gross income under its paragraph (jA) applies to Ivan Klue.
A deduction of R60 000 is made in the determination of Ivan Klue’s taxable income. But he then has a deemed inclusion in his gross
income of its cost of R60 000. A taxable income of nil (R60 000 – R60 000) then results.
Cost on 1 March 2018 60 000
Deemed disposal on 31 October 2018 for 60 000
Taxable income -
The base cost of Ivan Klue’s personal-use asset is then R60 000.
The base cost of Ivan Klue’s personal-use asset remains R60 000 throughout the 2020 year of assessment. There are no other tax
implications.
Personal-use asset
Cost (deemed) 60 000
Less wear-and-tear or depreciation capital allowance (a personal-use asset) -
Tax value (at 28 February 2019) 60 000
Tax value (at 1 November 2020) 60 000
Deemed disposal on 1 November 2020 for 106 000
Capital profit and capital gain (disregarded under paragraph 53(1)) 46 000
Trading stock
Cost (deemed on 1 November 2020) 106 000
Less wear-and-tear or depreciation capital allowance (now trading stock) -
Tax value (at 24 December 2020) 106 000
Sold for 110 000

Page 3 of 6 pages
Analysis
Recoupment of previous capital allowance included in Ivan Klue’s gross income -
Capital profit and capital gain (but excluded from gross income and disregarded under paragraph 53(1)) 46 000
Cash profit 50 000
Ivan Klue paid R60 000 for this painting and he sold it for R110 000. His cash profit is R50 000 (R110 000 – R60 000. He has a
taxable income from it of nil in the 2019 and 2020 years of assessment and a taxable income from it of R4 000 in the 2021 year of
assessment. A total taxable income of R4 000 (Rnil and Rnil and R4 000) results. He did not enjoy a deduction in the determination
of his taxable income of a wear-and-tear or depreciation capital allowance. And a ‘disregarded’ capital gain on a personal-use asset
of R46 000 resulted.
A deduction of R20 000 is made in the determination of Ivan Klue’s taxable income. But he then has a deemed inclusion in his gross
income of its market value of R24 000 on its conversion into a capital asset. A taxable income of R4 000 (R24 000 – R20 000) then
results.
Cost 20 000
The base cost of Ivan Klue’s capital asset is then R24 000.
And a wear-and-tear or depreciation capital allowance of R240 is deducted in the determination of Ivan Klue’s taxable income for the
2019 year of assessment (R24 000 × 1 / 25 × 3/ 12).
A wear-and-tear or depreciation capital allowance of R960 is deducted in the determination of Ivan Klue’s taxable income for the 2020
year of assessment (R24 000 × 1 / 25 × 12 / 12).
Capital asset
Less wear-and-tear or depreciation capital allowance (R24 000 × 1 / 25 × 3 / 12) 240
Tax value (at 1 July 2020) 22 480
Deemed disposal on 1 July 2020 for 34 000
Capital profit and capital gain 11 520
Analysis
Recoupment of previous capital allowances included in Ivan Klue’s gross income 1 520
Capital profit (R34 000 – R24 000) 10 000
11 520
Capital gains tax
Proceeds (R34 000 – R1 520) 32 480
Less base cost (R24 000 – R1 520) 22 480
Capital gain 10 000
Trading stock
Cost (deemed on 1 July 2020) 34 000
Sold for 39 000
Ivan Klue’s paid R20 000 for this painting and he sold it for R39 000. His cash profit is R19 000 (R39 000 – R24 000. He has a
taxable income from it of R4 000 in the 2019 year of assessment, nil in the 2020 year of assessment and R5 000 in the 2021 year of
assessment. A total taxable income of R9 000 (R4 000 and Rnil and R5 000) results. He enjoyed deductions in the determination of
his taxable income of a wear-and-tear or depreciation capital allowances of R1 520 (R240 and R960 and R320). But he then has an
inclusion in his gross income of R1 520 being a recoupment of his deductions in the determination of his taxable income of wear-
and-tear or depreciation capital allowances of R1 520 (R240 and R960 and R320). And a ‘capital gain on a capital asset of R10 000
resulted.

Page 4 of 6 pages
Overall analysis
Wear-and-tear or depreciation capital allowance - 1 520
Recoupment of previous capital allowance included in Ivan Klue’s gross income 1 520
Capital gain 10 000
Cash profit 19 000
A deduction of R1 000 is made in the determination of Ivan Klue’s taxable income. He does not have a deemed inclusion in his gross
income when it is converted into a capital asset since it is still deemed to be trading stock.
Section 22(1) includes in the value of Ivan Klue’s closing stock the amount of his trading stock (including its ‘deemed’ trading stock)
held and not disposed of at the end of the year of assessment since it is ‘trading stock’ as defined. This basis of valuation will
generally be its cost less the amount by which its value has been diminished by reason of damage, deterioration, change in fashion,
decrease in the market value or for any other reason satisfactory to the Commissioner. Its closing stock value will then be R1 000
(the lesser or R1 000 (its cost) and R48 000 (its market value)).
A taxable income for Ivan Klue of nil (R1 000 – R1 000) then results.
Cost 1 000
Closing stock value 1 000
Taxable income -
Section 22(2) allows a deduction in the determination of taxable income as Ivan Klue’s opening stock the amount of his trading stock
(including its ‘deemed’ trading stock) held and not disposed of at the beginning of the year of assessment since it is ‘trading stock’ as
defined.
And section 22(1) includes in the value of Ivan Klue’s closing stock the amount of his trading stock (including its ‘deemed’ trading
stock) held and not disposed of at the end of the year of assessment since it is ‘trading stock’ as defined. This basis of valuation will
generally be its cost less the amount by which its value has been diminished by reason of damage, deterioration, change in fashion,
decrease in the market value or for any other reason satisfactory to the Commissioner. Its closing stock value will then be R1 000
(the lesser or R1 000 (its cost) and R50 000 (its market value)).
A taxable income for Ivan Klue of nil (R1 000 – R1 000) then results.
Opening stock value 1 000

Closing stock value 1 000
Taxable income -
Cost (deemed) 1 000
Less wear-and-tear or depreciation capital allowance (deemed trading stock) -
Deemed disposal on 1 December 2020 for -
1 000
Sold on 31 January 2021 for 66 000
Analysis
Recoupment of previous capital allowances included in his gross income -
Capital profit made or capital loss suffered -
Cash profit 65 000
Ivan Klue’s paid R1 000 for this painting and he sold it for R66 000. His cash profit is R65 000 (R66 000 – R1 000). He has a taxable
income from it of nil in the 2019 year of assessment, a taxable income from it of nil in the 2020 year of assessment and a taxable
income from it of R65 000 in the 2021 year of assessment. A total taxable income of R65 000 (Rnil and Rnil and R65 000) results.
He did not enjoy a deduction in the determination of his taxable income of a wear-and-tear or depreciation capital allowance. And no
capital gain on capital loss resulted.

Page 5 of 6 pages
Only the 2021 year of assessment changes.
Personal-use asset
Tax value (at 1 November 2020) 60 000
Trading stock
Cost (deemed on 1 November 2020) 106 000
Sold for 55 000
Loss deductible in the determination of Ivan Klue’s taxable income 41 000
Analysis
Recoupment of previous capital allowance included in his gross income -
Cash profit 5 000
Ivan Klue’s paid R60 000 for this painting and he sold it for R55 000. His cash loss suffered is R5 000 (R60 000 – R55 000). He has
a taxable income from it of nil in the 2019 and 2020 years of assessment and a tax deductible loss from it of R41 000 in the 2021
year of assessment. A total loss of R41 000 (Rnil and Rnil and R41 000) is deductible in the determination of his taxable income. He
did not enjoy a deduction in the determination of his taxable income for a wear-and-tear or depreciation capital allowance. And a
‘disregarded’ capital gain on a personal-use asset of R46 000 resulted.

Tax value (at 1 July 2020) 22 480
Deemed disposal on 1 July 2020 for 34 000
Profit 11 520
Analysis
Recoupment of previous capital allowance included in his gross income 1 520
Capital profit (R34 000 – R24 000) 10 000
Profit 11 520
Capital gains tax
Proceeds (R34 000 – R1 520) 32 480
Less base cost (R24 000 – R1 520) 22 480
Capital gain 10 000
Trading stock
Cost (deemed on 1 July 2020) 34 000
Sold for 12 000

Page 6 of 6 pages
Ivan Klue paid R20 000 for this painting and he sold it for R12 000. His cash loss is R8 000 (R20 000 – R12 000. He has a taxable
income from it of R4 000 in the 2019 year of assessment, of nil in the 2020 year of assessment and a tax deductible loss from it of
R22 000 in the 2021 year of assessment from it. A total loss of R18 000 (R4 000 and Rnil less R22 000) is deductible in the
determination of his taxable income. He enjoyed deductions in the determination of his taxable income of wear-and-tear or
depreciation capital allowances of R1 520 (R240 and R960 and R320). But he then has an inclusion in his gross income of R1 520
being a recoupment of his deductions in the determination of his taxable income of his wear-and-tear or depreciation capital
allowances of R1 520 (R240 and R960 and R320). And a ‘disregarded’ capital gain on a personal-use asset of R46 000 resulted.
Overall analysis
Wear-and-tear or depreciation capital allowance - 1 520
Recoupment of previous capital allowance included in his gross income 1 520
Capital gain 10 000
Cash loss 8 000
Deemed trading stock
Cost (deemed) 1 000
Deemed disposal on 1 December 2020 for -
Sold for 30 000
Analysis
Recoupment of previous capital allowance included in his gross income -
Capital profit and capital gain -
Cash profit 29 000
Ivan Klue paid R1 000 for this painting and he sold it for R30 000. His cash profit is R29 000 (R30 000 – R1 000). He has a taxable
income from it of nil in the 2019 year of assessment, a taxable income from it of nil in the 2020 year of assessment and a taxable
income from it of R29 000 in the 2021 year of assessment. A total taxable income of R29 000 (Rnil and Rnil and R29 000) results.
He did not enjoy a deduction in the determination of his taxable income of a wear-and-tear or depreciation capital allowance. And no
capital gain on capital loss resulted.
**2021**

Graded Questions Trading Stock Sol20 of 2021

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Graded Questions Trading Stock Sol20 of 2021

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SUGGESTED SOLUTION TO EXERCISE 20.

**2021** /continued on page 2

 It needs to be increased by R19 500 for the sale of bottles.

Original cost 20 000

Proceeds (paragraph 35 of the Eighth Schedule) -

Original cost 40 000

Proceeds (paragraph 35 of the Eighth Schedule) 70 000

Capital gains tax

Proceeds (R1 400 000 – R1 400 000) -

There are no donations tax consequences.

Output tax payable by Burton Mallet 210 000

Trading stock converted to a capital asset

 market value on valuation date of R250 000,

**2021** /continued on page 2

Capital gains tax

There are no donations tax consequences.

Purchases (section 11(a) deduction in the determination of Burton Mallet’s taxable

Capital gains tax

Value of property donated (excludes value-added tax) 1 300 000

There are no capital gains tax consequences.

There are no donations tax consequences.

There are no value-added tax consequences.

Younger sisters’s tax liabilities

She has a donations tax liability of R240 000 (see above).

**2021** /continued on page 2

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Trading stock donated to the local public benefit organisation

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Suggested Solution to Part 3

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Proceeds (R90 000 – R3 000) 87 000

2021 year of assessment

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Opening stock value 1 000

**2021** /continued on page 5

Purchased trading stock 2

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