Section 24 Amendment Introduces Additional Uncertainty in Interpretation, Enforcement and Tax Compliance

Trading stock sold under a contract requiring full or partial payment for ownership to transfer falls under section 24. Section 24 taxes the full amount upfront and grants the taxpayer a debtors’ allowance deduction, resulting in a cash flow basis of taxation. Section 24 was amended to specify that the relief also applies to lay-by agreements. The application of section 24 to lay-by agreements is ambiguous, resulting in multiple interpretations, which posed the research problem. This paper presents three distinct interpretations of lay-by agreements and the application of section 24. A qualitative research methodology and a doctrinal research method were applied. Through a review and analysis of practical, simulated examples, this paper illustrates the three interpretations. The first opinion is that lay-by agreements are scoped into section 24 and relief is applied, which has the effect of taxing deposits received on a cash flow basis at the gross profit percentage. The second interpretation also scopes in lay-by agreements, but applies the full amount taxed as gross income as the relief, resulting in no impact on the taxpayer’s taxable income. This interpretation yields the same result as the third interpretation, which is that lay-by agreements do not fall within the scope of section 24 because, until the goods are delivered, deposits do not constitute receipts for the supplier. The paper concludes with recommendations for the National Treasury to clarify the ambiguity through additional legislative amendments in support of the third interpretation based on sound arguments presented, namely court case principles and views of commentators, to provide taxpayers with certainty.