Chapter 10 Trading Stock

Question 1

Also included

Answer 1

Consumable stores and spare parts and the following:
Anything produced, manufactured, constructed, assembled, purchased or in any other manner acquired by a taxpayer for the purposes of manufacture, sale or exchange by him or on his behalf or,
Anything if the proceeds of the disposal will be included in the TPs gross income.

Question 2

Except

Answer 2

Proceeds from the disposal of capital assets by a mine
Proceeds from the disposal of a plantation by a farmer
An amount received in terms of key-man policy
A recover or recoupment contemplated in S8(4) in gross income

Question 3

Specifically excluded in trading trading stock

Answer 3

Foreign currency option contract or

A forward exchange contract

Question 4

Examples of trading stock

Answer 4

Motor vehicles in a motor dealer business
Land and buildings held by a property dealer
Shares held by a share dealer
Clothing in an outfitters business
Consumable stores
Spare parts
Raw materials, work in progress and finished goods in a manufacturing business
Purchase of trading stock will result in an allowable deduction, being an expense incurred in the production of income, not of a capital nature. Proceeds will be included in good income

Question 5

Notes?

Answer 5

SARS considers packing materials as trading stock

Spare parts are deducted under S11d as repairs

Question 6

Deemed stock -gross income

Answer 6

Paragraph (jA) of the gross income definition states that if an amount is received by a person from the disposal of a capital asset, it is deemed to be gross income if:
That asset has been manufactured, produced, constructed or assembled by that person and
It is similar to any other asset which that person has manufactured, produced, constructed or assembled (effectively for sale as trading stock)

Question 7

Format of trading stock

Answer 7

Year 1
Gross income -sales
S11(a)deduction -purchases
Closing stock
Year 2
Gross income - sales
S11(a) deduction -purchases
Opening stock
Taxable income

Question 8

Closing stock

General rule

Answer 8

S22(1)(a) provides that closing stock held and not disposed of at year end must be accounted for at
Cost price - amount thought by commissioner to be reasonable at representing the amount by which the stock has diminished due to damage

Question 9

Notes

Answer 9

The TP is allowed to value stock below cost price, but must disclose this to SARS in the tax return, with reasons and an indication of how the lower value was arrived at.
Cost of consumables - closing stock of consumables = net deduction

Question 10

Opening stock?

Two types

Answer 10

Included in closing stock at the end of the previous year and
Not included in closing stock at the end of previous year

Question 11

Included in closing stock

Answer 11

Clearly stock which was held and not disposed of at the end of one year will be held and not disposed of at the beginning of the next year
Amount reflected as opening stock will be the same as the amount reflected as closing stock at the end of the proceeding year

Question 12

Not included in closing stock

Answer 12

Assets on hand at the beginning of of the year but not included on closing stock at the end of previous year
Maybe because they were capital or personal assets
Change of intention

Question 13

Change of intention calc?

Answer 13

Deemed disposal - base cost = capital gain
Include in taxable income 66.6% of capital gain
Sale of trading stock - opening stock = taxable income

Question 14

Trading stock definition

Answer 14

Trading stock is basically anything that is acquired or created for the purposes of sale, or which will be incorporated in another asset which will be sold. It is therefore a revenue asset