Income Tax Act, 1962 (Act No. 58 of 1962)

Department of Finance

Practice Note No. 6

Trading Stock: Consumable Stores, Spare Parts, Etc

Purchase

Date: 5 May 1987

The Appellate Division of the Supreme Court had occasion to consider and interpret the definition of "trading stock" contained in section 1 of the Income Tax Act (the Act), in the case of De Beers Holdings (Pty) Ltd versus Commissioner for Inland Revenue (47 SATC 229). This Practice Note seeks to explain the practice of Inland Revenue in the light of the law as found in that judgment.

Articles and materials acquired by a taxpayer not for the purpose of resale at a profit, but acquired instead with the intention that they will be used up or consumed in the ordinary course of the carrying on by the taxpayer of his trade do not constitute "trading stock". The value of such articles and materials which are held by the taxpayer at the beginning and end of any year of assessment is therefore not required to be taken into account for the purpose of determining his taxable income in terms of section 22 of the Act. Articles and materials which would fall into this category are spare parts, cleaning materials, fuel, oil, etc. (hereinafter referred to as consumable stores). On the other hand, raw materials which will form part of any finished product produced for sale and packing materials, do not fall into this category, but constitute "trading stock" for the purposes of section 22 of the Act.

Where the value of consumable stores on hand at the end of a year of assessment was taken into account as "trading stock", the taxpayer will not be allowed an opening debit in the next succeeding year of assessment, but will be allowed a write-off of such balance on a straight-line basis over three consecutive years, as illustrated in the following example:—

Example:
(i)	Value of consumable stores on hand at the end of year 1, an which was taken into account as "trading stock" for income tax purposes	R 900
(ii)	Consumable stores acquired during year 2	R 3 000
(iii)	Value of consumable stores on hand at the end of year 2 which is the year of change-over	R 1 200
(iv)	LIFO reserve which relates to the R900 consumable stores	R 30

Solution:

i)	The amount of R 900 taken into account as "trading stock" at the end of year 1 will not be admitted as an opening balance in year 2. It will be deducted, instead, in three successive equal annual instalments of R 300, beginning in year 2.

ii)	The purchases of R 3 000 qualify as a deduction in year 2.

iii)	The amount of R 1 200 must not be taken into account as "trading stock" at the end of year 2 for the purposes of section 22(1) of the Act.

iv)	The amount of the LIFO reserve which relates to consumable stores, viz. R 30, must be subjected to tax in three successive equal annual instalments, beginning in year 2, i.e. R10 per annum.

In the event of sequestration, liquidation or death before expiry of the three years in question, any undeducted balance of the said R 900 will be allowed in the assessment raised for the period up to the date of such event. Similarly, any untaxed balance of the LIFO reserve will be included in the assessment for that period.

Should any consumable stores, the cost of which was allowed as a deduction, be sold or disposed of, the amount recovered or recouped will in terms of the provisions of section 8(4)(a) of the Act be included in the taxpayer's income for the relevant year of assessment. Any recovery or recoupment under that section of the Act will be limited to such amounts as were actually allowed as deductions in the determination of the taxpayer's taxable income. The question of whether or not any profit that may be realised on such sale/disposal is taxable, will require to be determined in the light of the particular circumstances of the sale or disposal.

5)	Where any "excess" as contemplated in section 22(3)(d) of the Act has been determined in respect of consumable stores the matter will be dealt with in the manner illustrated in the following example:—

Company A ends its financial year on 30 June. Up to 30 June 1983 it, in good faith, did not take into account any "further costs" (see note (A) below) in valuing its trading stock. Consumable stores were included in trading stock

Assume:

(a)	Value of consumable stores at 30 June 1983		R 1 000
(b)	Value of consumable stores at 30 June 1984	(i)	R 1 500	(A)
	Add: Further costs	(ii)	R 300	(C)
	Value for income tax purposes		R 1 800	(B)
(c)	Value of consumable stores (inclusive of "further costs") at 30 June 1985		R 2 000
(d)	Value of consumable stores (inclusive of "further costs") at 30 June 1986		R 2 300
(e)	"Excess" is equal to ((B)-(A)) i.e.		R 300
(f)	Year ended 30 June 1986 is year of change over and value of consumable stores at that date is not taken into account for income tax purposes.

Solution.

Value of consumable stores to be taken into account for income tax purposes:—

(a)	As at 30 June 1984	R 1 800
	Less: 80% of "excess" (R300) (in terms of section 22(3)(d))	R 240
		R 1 560
(b)	As at 30 June 1985	R 2 000
	Less: 60% of "excess"	R 180
		R 1 820
(c)	As at 30 June1986	R Nil

(No further adjustments in terms of section 22(3)(d) are made.)

Note (A): The expression "further costs" means the costs incurred in getting the trading stock into its existing condition and location, and which costs should in terms of any generally accepted accounting practice approved by the Commissioner, be included in the valuation of the trading stock (Section 22(3)(a) and (b)).

6)	Where assessments were raised in prior years on the basis of taking into account (for the purpose of section 22(1)) the value of consumable stores on hand, the intention is not to revise those assessments.

7)	This Practice Note applies to years of assessment ending on or after 16 September 1985.