Trading stock sold under a contract requiring full or partial payment for ownership to transfer falls under section 24. Section 24 taxes the full amount upfront and grants the taxpayer a debtors’ allowance deduction, resulting in a cash flow basis of taxation. Section 24 was amended to specify that the relief also applies to lay-by agreements.
Certain credit agreements provide that ownership of the goods sold will pass to the purchaser only when a certain part or the entire price has been paid. Section 24 is applicable to agreements in respect of property that are both movable and immovable, where ownership passes to another person after receipt of the whole amount or a portion of the amount as per the agreement, in which case the taxpayer is deemed to have received the full amount of the agreement on the date on which the agreement was entered into. According to National Treasury: ‘[A] seller under a layby arrangement is subject to the provisions of section 24(1) of the Act and is required to recognise an upfront inclusion of the sale price in full.’
Implication
Section 24 deems the whole of the amount, excluding finance costs, to have accrued to the taxpayer on the day the agreement was entered into. It also provides relief for taxpayers, taking into account the doubtful debt allowance under section 11(j), in respect of a further debtors’ allowance. The relief only applies to contracts that are at least one year long and under which at least 25% of the amount owed to the taxpayer is payable only in a subsequent year of assessment, but the law is now amended to clarify that this requirement does not apply in relation to lay-by agreements.
The relief ensures that taxpayers are taxed on the cash flow basis. According to SARS, finance charges and VAT must be excluded from turnover (sales) and cost of sales in determining the gross profit percentage, which is calculated as follows: [(sales – cost of sales) / sales] × 100 = gross profit percentage; or (gross profit / sales) × 100 = gross profit percentage.
Thus, the section 24 allowance = gross profit % x outstanding debtors (after adjusting for bad debts (section 11(i)) and the provision for doubtful debts (section 11(j)). According to SARS the section 24 allowance granted in any year can also be used to create an assessed loss or to increase an assessed loss.
Paper delivered at iCAB
Michelle van Heerden and I presented a paper at the 2023 International Conference on Accounting and Business (iCAB) in which we presented arguments that lay-by agreements do not fall within the scope of section 24 because, until the goods are delivered, deposits do not constitute receipts for the supplier, so the amendment and relief are unnecessary. The paper concludes with recommendations for National Treasury to clarify the ambiguity through additional legislative amendments.
Author
Muneer Hassan CA(SA)
Tax Consultant, Senior Lecturer in Taxation at UJ, Lecturer on the Gauteng Board Course