Section 8(4)(a) of the ITA contains recoupment provisions that aim to include in a taxpayer’s income all amounts claimed as a deduction or allowance under certain sections of the ITA whether in the previous or current years of assessment, which have been recovered or recouped in the current year of assessment. Therefore, the effect of section 8(4)(a) is, subject to certain exemptions and exclusions under the ITA, to include in income, amounts which have either been recovered or recouped by the taxpayer on the disposal of an asset or where an expense is recovered. However, section 8(4)(a) does not create a deemed disposal in circumstances where a taxpayer commences holding an asset as trading stock.
Prior to 2020, deductions and allowances previously granted on an allowance asset which commenced to be held as trading stock would only be required to be recouped upon the disposal of an asset. Based on this, in terms of the Draft IN, the recoupment of the allowances or deductions claimed were either deferred to the time of the disposal of the asset or never triggered.
With effect from 15 January 2020, section 8(4)(k)(iv) was introduced to create a deemed disposal where an allowance asset commences to be held as trading stock. Since this provision does not regulate the recoupment of amounts claimed as allowances or deductions, SARS has, from a reading of the Draft IN, contended that section 8(4)(a) must be considered to determine whether any amounts can be recouped and included in the taxpayer’s income. Given that there is no clarity on the interplay between these provisions, this Draft IN appears to provide guidance on the interpretation and application of these provisions. SARS states that when an allowance asset commences being held as trading stock, both capital gains tax (CGT) and normal tax implications arise:
- from a CGT perspective, the disposal will be deemed to occur for an amount equal to the market value of the asset, immediately before the day the deemed disposal is triggered under the Eighth Schedule to the ITA;
- the taxpayer will be deemed to have disposed of the asset for an amount equal to the market value of the asset at the time that the asset commences being held as trading stock and on the same day thereafter, the taxpayer will be deemed to have immediately reacquired the asset at an expenditure equal to its market value; and
- a recoupment of the amounts previously granted as a deduction will be triggered under the provisions of section 8(4)(a) and section 8(4)(k)(iv).
Although it appears as though there is a double tax because of the deemed disposal and recoupment under the income tax provisions, as well as the deemed disposal under the Eighth Schedule, SARS appears to demonstrate by way of an example that where a person purchases an allowance asset and later holds that asset as trading stock (assuming that the asset has appreciated in value), then:
- the in-principle taxable amounts on the disposal of the asset will comprise a recoupment amount and a capital gain; and
- the amount recouped would be applied to reduce the capital gain.
In this way, the tax implications arising for the taxpayer are less harsh considering that the provisions work to eliminate the incidence of double taxation.
Although the Draft IN is merely SARS’ guidance on the interpretation and application of these provisions and given that taxpayers often change their intention in use and purpose of assets, it is helpful to understand how SARS will likely interpret and apply the provisions in a relevant scenario. Comments on the content of this Draft IN are due on 3 June 2022 and must be sent to policycomments email@example.com.