Date: 13 January 1995

It is evident that a variety of questionable methods are used by taxpayers to write-off slow-moving and obsolete stock, without reference to its actual net realisable value. It has, therefore, become necessary to explain Inland Revenue's standpoint in this regard.

Amounts written off, for instance on a fixed percentage basis, which cannot reasonable be justified will not be allowed to be deducted from the cost price of such stock held and not disposed of at the end of the year of assessment in terms of section 22(1) of the Income Tax Act (the Act).

In Income Tax Case No. 1489 (53 SATC 99) it was held, inter alia:

Taxpayers are, therefore, required to disclose the basis on which stock is valued, which disclosure must be made in the annual return of income.

Where stock has not been valued at cost, but at a lower value, the taxpayer is also required to reveal this to the Receiver of Revenue, submit reasons therefor and indicate how the lower value was arrived at. If stock has been written off on a fixed, variable or any other basis, not representing the actual value by which it has been diminished, the write-off will not be accepted without reasonable justification for such basis.

Where it is found that a taxpayer has undervalued his stock and has not revealed this fact to the Receiver of Revenue, such concealment will be viewed in a serious light and the imposition of additional tax in terms of section 76 of the Act will be considered.