Section 24C Allowance: Income Received in Respect of Gift Vouchers & lay-bye Arrangements
19 July 2013
Posted by: Author: Candice van den Berg
Author: Candice van den Berg (Ernst & Young)
The purpose of section 24C of the Act is to provide relief to a taxpayer who has received an advance payment, in terms of a contract, and who will incur expenditure under that contract in the future. In other words, section 24C provides relief where a "mismatch” between income and expenditure occurs in a tax year and aims to place the taxpayer in the same position as he would have been in had he earned the income and incurred the expenditure in the same tax year.
In terms of section 24C of the Act, where the income of a taxpayer includes an amount received or accrued in terms of any contract and SARS is satisfied that such amount will be used to finance (in whole or part) future expenditure which will be incurred by the taxpayer in the performing his or her obligations under the contract, SARS may grant the taxpayer an allowance in respect of such future expenditure.
A taxpayer is, in essence, required to accurately estimate the expenses that will need to be incurred in order to meet the obligations under the specific contract. SARS will, however, generally accept a section 24C allowance that is based on the ratio that the total estimated expenditure bears to the estimated gross income to be derived from the contract (i.e. the contract’s gross profit percentage).
Amounts received in respect of lay-bye arrangements and gift vouchers (not redeemed at the end of the tax year) are considered income received in advance and consequently constitute income in the hands of the taxpayer for tax purposes. It is, however, common practice for retailers to claim a section 24C allowance in respect of these amounts. This is based on the premise that the retailers have a contractual obligation to honour the redemption of the lay-bye arrangements and gift vouchers.
On the basis that the cost of the goods primarily makes up the future expenditure in respect of gift voucher and lay-bye income and that these goods may be on hand at the end of the tax year, SARS’ view is that retailers do not have an obligation to incur future expenditure in the context of section 24C. This view is documented in a draft Interpretation Note issued by the SARS which addresses the section 24C allowance . In this draft Interpretation Note, SARS states that the gross profit percentage must be reviewed to assess whether there are costs which must be excluded. SARS goes on to note that costs which must be excluded from the gross profit percentage are items which have already been purchased and will be drawn from trading stock on hand at year-end. Consequently SARS has, in practice, been disallowing section 24C allowances claimed by retailers in respect of gift voucher and lay-bye income.
We note, however, that where trading stock is on hand at year-end, the value of these items would have been included in closing stock and added to taxable income in accordance with section 22 of the Act. This closing stock adjustment results in the deduction effectively only being allowed in a subsequent tax year (when the trading stock is applied on redemption of the lay-bye or gist voucher). We submit that this falls squarely into the "mismatched” situations addressed by section 24C and failure to allow the application of this section in the manner proposed would undermine the intention of section 24C.
SARS, however, remains of the view that a section 24C allowance should not be claimed on lay-bye and gift voucher income to the extent that this income will be funded by trading stock that is already on hand at the end of the tax year. And, while the difference is merely a timing one, the disallowance of the section 24C allowance may lead to additional tax, penalties and interest.