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Recoupments, Accounting Practice, and Income-Tax Principles

16 January 2006   (0 Comments)
Posted by: TaxFind ™
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Recoupments, Accounting Practice, and Income-Tax Principles

Introduction

It is generally accepted that the Income Tax Act 58 of 1962 requires that a person's taxable income be determined in terms of a statutory formula, the basic elements of which are the defined concept `gross income' (s 1 sv `gross income'), the permitted exemptions, and the general deduction formula, as well as the specific deductions permitted for purposes of arriving at a person's taxable income (see, for example, D Meyerowitz Meyerowitz on Income Tax (2002±2003) 5.7±5.10; Silke on South African Income Tax memorial ed by A de Koker (1995) 1.11±11.14). Since CIR v George Forest Timber Co Ltd 1924 AD 516 at 522 and 528 our courts have stressed the artificiality of this statutory formula court must, as a point of departure,concern it self not with accounting entries in a taxpayer's books of account, or with accounting principles and practice, but with the provisions of the Act: `What has to be ascertained is the "taxable income'', and this has to be as certained in the manner prescribed by the Act and in no other' (Pyott Ltd v CIR 1945 AD 128 at 135±136). Parliament recently adopted the same approach to the determination of the amount of a person's `taxable capital gain' (para 10 of the Eighth Schedule) that is to be included in that person's taxable income for a tax year (s 26A): it should be determined according to a prescribed scheme that embodies various defined concepts, and not with reference to accounting principles.

So accounting principles can be taken into account when a person's taxable income is determined only if and to the extent to which such principles are recognized by the Act (for example, s 24K(2) regarding the time of incurral or accrual of amounts in respect of interest rate agreements). So I was rather taken a back by the recent judgment of the Supreme Court of Appeal in Omnia Fertilizer Ltd v CSARS (2003) 65SATC 159 regarding the tax consequences of certain accounting entries by the taxpayer. The court's stance in this case poses the important question as to whether an accounting principle not specifically embodied in the Act can be reconciled with the current statutory scheme for the determination of a person's taxable income (including any taxable capital gain).

Source: By Gerrie Swart (University of South Africa)

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