Valuation of trading stock of a company at year-end
Does your business trade in stock of any sort of nature? If so, a recent Supreme Court of Appeal judgement might be of interest to you.
In CSARS v ATLAS COPCO South Africa (Pty) Ltd, it was decided in the supreme court of appeal that a company’s policy which provides for the writing down of the trading stock value is not sufficient to allow for the decreased value for closing stock purposes.
The facts of the case involve a Swedish parent company which had a company policy which provided that the group of companies should write down the value of their closing stock by a certain percentage at year end as a result of that stock not being sold during the year.
Section 22(1)(a) of The Income Tax Act No. 58 of 1962 allows for the writing down of the value of trading stock, provided that such a write down is reasonable and relates to the diminishing of the stock by reason of damage, deterioration, change of fashion, decrease in the market value or for any other reason satisfactory to SARS.
For accounting purposes, it is generally accepted that trading stock will be adjusted to the net realizable value at year end, as determined in accordance with IAS2, IFRS, SA GAAP.
In the Supreme Court of appeal, SARS argued that trading stock should only be written down for tax purposes in two circumstances:
Where an event occurred during the year of assessment which resulted in the value of the trading stock diminishing; or
Where it is known with reasonable certainty that an event would occur during the next year of assessment which will result in the decrease in the value of the trading stock.
SARS relied on the basic principle that the assessment of a taxpayers’ income tax liability must relate to events that already occurred rather than events that may occur in the future.
Therefore, the pertinent question that you should ask yourself when determining whether or not you can claim a deduction of the decrease in value of the trading stock for the year of assessment, is “ did the trading stock as a whole suffer a diminution in value?”
Willem Oberholzer CA(SA), MCom Tax, is executive director and Jade Els MCom Tax is a tax adviser at Probity Advisory.