Trading stock

Question 1

Facts:
The TP sold sand on his farm (it was removed from the ground by a transport contractor) to another person for a fixed monthly consideration.

Answer 1

Ernst Bester Trust

Issue:
Is the sand trading stock? i.e. S22 trading stock provisions apply? Furthermore, is the sale of the sand the sale of a right of use of a capital asset (employment of capital) or the sale of trading stock?

Principle:
Sand only becomes trading stock when removed from the ground.
s11(a) is relevant for the purchase of trading stock whilst s22 is relevant for the opening and closing stock if it has not been sold yet.
If a capital asset subsequently becomes trading stock in the same YOA, then it will not be within the scope of s22. The proceeds from the sale thereof must still be gross income as the asset is now revenue in nature (trading stock).

Question 2

Facts:
Volkswagen’s T/S constituted a number of unsold vehicles including trucks, busses and passenger vehicles. VW carried its T/S at NRV in terms of IAS 2. NRV being the expected selling price less any expected selling expenses. So the effect was that where trading stock’s NRV was lower than the original cost, such closing stock was accounted for at NRV.

Answer 2

Volkswagen (2018)

Issue:
In terms of s22(1), the closing stock value to be included in the income of the TP is the cost price of the T/S, less such amount as the Commissioner may think just and reasonable as representing the amount by which the value of such T/S has been diminished by reason of damage, deterioration, change of fashion, decrease in market value or for other reason satisfactory to the Commissioner.

Principle:
There are only 4 circumstances in which C/S is allowed to be written down and they are, damage, deterioration, change of fashion or decrease in market value.
T/S may be written down in 1 of the following 2 circumstances:
a) based on events that are known at the end of the tax year, or
b) based on events that it is known will occur in the following year.

NRV cannot be used to determine C/S value, due to the fact that the use of NRV is inconsistent with two basic principles that underpin the Act.
1) NRV is forward looking whilst taxation is backward looking.
2) NRV has the effect that expenses that will only be incurred in a future tax year would become deductible in an earlier tax year.
NRV is not equal to MV