FUTURE EXPENDITURE ON CONTRACTS – SECTION 24C OF THE INCOME TAX ACT
27 Nov 2018
Section 24C was included in the Income Tax Act as a relief measure to taxpayers.
It is to deal with a situation where an anomaly would arise when income is received in one year and expenditure is incurred in the subsequent year. Absent section 24C, the income would be fully taxable in the year received without any deduction for future expenditure.
PURPOSE OF SECTION 24C:
The purpose of section 24C is to address situations where income is received or accrued in terms of a contract in one year of assessment, and the income is to be utilised to finance future expenditure.
Section 24C was inserted to empower the Commissioner of SARS to allow a deduction in respect of any amount received under a contract, which will be utilised by the taxpayer to finance future expenditure in the performance of his obligations under that contract.
IMPLICATION OF SECTION 24C:
The first requirement, in terms of section 24C, the income of the taxpayer in a particular year of assessment must include an amount received by or accrued in terms of any contract and the analysis required under this section must be performed on an individual contract-by-contract basis.
Secondly, the Commissioner must be satisfied that such amount will be utilised in whole, or in part to finance future expenditure which would be incurred by the taxpayer in the performance of his or her obligations under such contract.
Thirdly, such expenditure must be expenditure that would be allowed as a deduction from income when incurred in a subsequent year of assessment, furthermore these expenses must be eligible for an income tax deduction when it is incurred or it must relate to the acquisition of an asset that will qualify for an allowance in terms of the Act.
Assets already acquired and replacement assets generally used in the taxpayer’s trade does not represent future expenditure.
The purpose of this allowance is to provide temporary, instead of additional tax relief and although it will reduce taxable income in one year, it must be reversed in the following year of assessment. The net effect of this allowance in the long run will be nil and the normal tax liability arising from a contract will not be reduced, but rather postponed. The allowance granted cannot exceed the amount of such income received or accrued in the particular year of assessment. The limiting factor is the amount of income received or accrued under a contract in a particular year of assessment, and not the taxpayer’s taxable income before the allowance is being granted.
CALCULATION OF THE SECTION 24C ALLOWANCE:
It must be determined to what extend the total expenses of a contract relates to the total contract price, this ratio is multiplied by the total advance payments that was received by or accrued to the taxpayer up and until the end of the year of assessment
SIMPLIFIED FORMULA FOR THE DETERMINATION OF THE SECTION 24C ALLOWANCE IS NOTED AS FOLLOWS:
[Total costs/Total revenue] x Income received or accrued to date] – Actual expenses incurred to date relating to that income.
Section 24C(3) stipulates that an allowance deducted in any year of assessment is deemed to be income received or accrued to the taxpayer in the following year of assessment.
Section 24C provides temporary relief, in the form of an allowance which is added back in the following year of assessment to taxpayers that receive income in advance of incurring the expenditure related to the earning of that income.