Print Page
News & Press: TaxTalk Business

Challenges in disposing of stock

Tuesday, 23 September 2014   (0 Comments)
Posted by: Author: Pieter Faber
Share |

Author: Pieter Faber (SAIT Technical)


Most business owners have the habit of ‘consuming’ some of their trading stock for purposes other than the disposal thereof in the ordinary course of their trade. The commercial rational for using trading stock as a form of reward, compensation or payment is sound as the cost of acquiring such stock is in most instances substantially less than the value that the recipient perceives he or she is receiving. However, such forms of disposal do contain income tax risks which if not negated, may in addition to any tax liability, result in the imposition of the notorious understatement penalties - an unnecessary cost many times the perceived benefit. Though there are many exclusions and exceptions to the general principles below, it is imperative to at least understand the general principles that apply to these specific forms of disposal.

The basic principles of trading stock?

‘Trading stock’ by definition in the Income Tax Act (‘the Act’) includes three things namely, things acquired or made for the purpose of manufacture, exchange or sale (i.e. work in progress), anything which on sale the proceeds would be income and consumable stores on hand. 

Once the trading stock has been purchased during the year of assessment, the taxpayer would be entitled to deduct the costs incurred in acquiring the trading stock, as well as costs to get the stock into its current condition and location, in terms of the so-called general deduction formula contained in section 11(a) of the Act. However, tax law also ascribes to the matching principles often seen in the realm of accounting and would attempt to match your expenses for a specific tax year to the income received or accrued in such tax year. Accordingly, unsold trading stock held at year end would not be deductible which is achieved through an add-back of the stock in terms section 22 of the Act at the lower of cost or the reduced value.  Special rules also apply to stock sold for unquantified amounts during the tax year with the effect that the stock would not be tax deductible in that year (i.e. section 23F of the Act) and would only be allowed to be deducted in the following tax year when the amount of the proceeds become determinable and taxable (i.e. section 24M of the Act). 

Disposal by means other than in the ordinary course of trade?

When a taxpayer disposes of trading stock other than in the ordinary course of its trade, deeming provisions in section 22(8) of the Act will seek to include specific amounts into income. However, the various forms of disposal also seek to apply various valuation criteria to the different forms of disposal which creates challenges for taxpayers, especially as the adjustment sought is only done at the end of the tax year.  The purpose of these provisions is to ensure that the cost price or market value of the trading stock (depending on the purpose behind the disposal of the trading stock) is included in a taxpayer’s income so that the fiscus does not stand lose by granting a deduction on an item for which no tax would otherwise have been received.

Types of recoupment transactions 

Only six disposals are listed in section 22(8) of the Act but they, in reality, represent numerous types of transactions. To illustrate the challenges facing the taxpayer we have dealt with some examples below. 

Private consumption by taxpayer

The private consumption of trading stock by the taxpayer can result in the recoupment of an amount, which could be determined in three manners depending on the facts. For example, if a grocer takes home stock for his family the first value to consider is the cost of acquisition. However, this value can be adjusted to a reduced value if SARS is satisfied that such reduction is warranted. Therefore, if the goods are perishable and would be only be realisable at a lesser value than cost, such lesser value as approved by SARS may be used. However, if the cost cannot be readily determined, the market value must be used. What constitutes market value for this purpose seems to be an open question. The question therefore arises whether the reference to market value refers to the arm’s length price between the grocer and his supplier or between the grocer and his customer?  The SARS Interpretation Note 65 (issue 2), dealing with section 22(8) of the Act does not seem to deal with this matter. It is my view that in this instance, the provision deems the stock to have been sold on a retail basis with the effect that the retail market value would be considered to be the market value (though in different circumstances this may change).

Disposal other than in the ordinary course of a trade or the donation of stock

This form of disposal also triggers a recoupment at market value posing the same challenges as above. However, a taxpayer should first determine what a donation is for this purpose is, which in my view, is a donation in the normal sense, namely a gratuitous disposal. A donation of dog food to the SPCA comes to mind but the advertised sponsorship of a local dog show does not. In fact, in the latter instance, the full value may have been received in the form of the sponsorship advertising and the stock merely represents the payment method, resulting in no recoupment. Donations to the taxpayer’s children’s school may also be seen as not being gratuitously.  Disposals other than in the ordinary course of trade would also include stock prizes awarded to staff or even the sale of stock at reduced cost, notwithstanding that staff and their employment costs are operations of the taxpayer’s trade.  

Change of use or manufactured for different use

Where trading stock is acquired and thereafter used as a capital asset, the stock will be deemed to have been sold at market value and for capital gains tax purposes be deemed to be acquired at that value. An example would be where a lawnmower retailer took floor stock and used it to mow the business lawn. In this instance market value arguably should be the cost between the taxpayer and its supplier. Again the adjustment is done at year end but the value determination is done on the date of change in use.

Where the trading stock is purposefully constructed or assembled for use as a capital asset and consist of goods that the taxpayer trades in, such disposal will not be dealt with under section 22(8) of the Act but in terms of paragraph (jA) of the ‘gross income’ definition in section 1 of the Act. In this respect, the timing of the transaction is when the asset is disposed of and not when it was used as capital asset. Furthermore, the inclusion value will be the actual proceeds and not deemed market value. For example, if the retailer assembles and constructs lawnmowers and constructs one specifically to use for the business’ lawn, no adjustment will be done at year end. It is only when such lawnmower is sold as used stock or as a capital asset that the proceeds will be included in gross income.


The quagmire of the tax consequences of stock disposals other than in ordinary course of trade may override the commercial rationale quite quickly without good preparation with even SARS’ Interpretation Note leaving many questions unanswered in its attempt to provide clarity. Matters such as value determination and timing should be carefully considered, included for other taxes such as employees’ tax and VAT which may also apply on the same transaction. Taxpayers should also ensure that sufficient information is recorded at the time of the transaction so that at year end the correct tax determination can be made by the person doing the tax calculation or submitting the income tax return. Where specific types of disposal outside the ordinary trade occur regularly, it may even be advisable that the taxpayer compile or have compiled a ‘tax guide’ on recording and valuing these transactions.  Consulting a relevant SAIT tax professional in respect of regular transactions or a high value transaction would go far in at least managing the risk associated with these and other types of stock disposals that are occurring outside the ambit of normal sales transactions.



Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

  • Tax Practitioner Registration Requirements & FAQ's
  • Rate Our Service

    Membership Management Software Powered by YourMembership  ::  Legal