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Whether the valuation by an independent valuator will be accepted by SARS as proof of expenditure

06 November 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: My client initially began operating as a sole trader but subsequently converted to a close corporation (CC). When the entity was converted into a CC the accountant did not bring the assets of the individual into the CC. A period of time passed and a new accountant was appointed. He then discovered that there was a lot of plant and machinery that was not included in the assets of the CC in the financial statements. He advised the client to get an independent valuator to value the assets. The valuation showed that the assets were worth R 3.5 million. 

The accountant then used this valuation and brought these assets into the financial statements for the 2014 financial year. He adjusted for depreciation accordingly. The depreciation resulted in the CC having a taxable loss. The accounting rate of depreciation differed from the tax rate of depreciation. The accountant did not provide for deferred tax. I now have to do the ITR14 submission. I'm sure this will raise a red flag with SARS as the client has a big loss. If SARS does an audit will the documentation of the valuation be sufficient information for them? The client does not have any invoices relating to the assets as these were purchased more than 10 years ago. So the only documentation used is the valuation certificate. 

A: We can’t comment on whether or not the ITR14 will be selected for a review or an audit.  In terms of section 102(1)(e) of the Tax Administration Act a taxpayer bears the burden of proving that a valuation is correct.  We don’t know on what basis the valuation was prepared, but as the assets were transferred between connected persons the market value had to be used and at the time of the transfer.  The valuation documents would certainly have to be presented to SARS and if they dispute the valuation the matter can go to court.  

Our guidance assumes that the special rules (section 42 of the Income Tax Act) didn’t apply.  This is an important assumption.  

Under paragraph (vii) of the proviso to section 11(e), the acquisition cost of qualifying assets, shall be deemed to be the cost which, in the opinion of the Commissioner, a person would incur if that person had acquired that asset under a cash transaction concluded at arm’s length (also known as the market value) – see binding general ruling 7.  The section 11(e) deduction had to be made in the year that the assets were used.  

The owner had to account for the recoupment and resultant capital gains also in the year of disposal.  

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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