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SARS Issues Guide On Tax Concession For Contractors

by Lorys Charalambous,, Cyprus

05 August 2014

In an interpretation note, the South African Revenue Service (SARS) has provided guidance on the application of South Africa's tax code in circumstances where income under a contract is received but relevant expenditure is to be incurred in a subsequent year of assessment.

Such circumstances often arise in the construction industry, and sometimes in manufacturing, for instance when a large advance payment is made to a contractor before the commencement of the contract work to enable the contractor to purchase materials and equipment.

Although the provision was originally intended for taxpayers entering into building and manufacturing contracts, it is emphasized that the section can also be applied to taxpayers entering into other types of contracts as well.

In a number of instances such advance payments are not matched by deductible expenditure, which, without the operation of a specific provision, could result in the full amounts of the advance payments being subject to tax. The tax code usually requires that expenditure should be incurred before a deduction is allowed, and, in addition, specifically prohibits the deduction of income carried to any reserve fund or capitalized in any way.

The advance payment provision stipulates that the deduction of an allowance is permitted if income for the particular year of assessment includes or consists of an amount which is received or accrued under a contract, and if SARS is satisfied that all or part of that amount will be used to finance expenditure which will be incurred by the taxpayer in a subsequent year of assessment in performing the obligations under the contract. An allowance deducted in any year of assessment is therefore deemed to be income in the succeeding year of assessment.

An assessment of whether the provision applies must be performed annually taking up-to-date information on income and expenditure into account, and SARS has the final decision on the amount of deduction that may finally be allowed, subject to objection and appeal.

TAGS: South Africa | compliance | tax | tax compliance | corporation tax | tax authority | manufacturing | tax breaks | construction | Africa

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