ITC JUNE 2022 SUGGESTED SOLUTION PAPER 3 QUESTION 1 4 © SAICA 2022

Part (c) Discuss, with reference to relevant legislation and case law principles, the income tax implications of the write-down of the closing stock that the financial accountant made for the 2021 year of assessment (see section 4).  Do not provide calculations.

Answer

I will provide a shorter explanation of the suggested solution for Part (c) of Question 1 from the ITC June 2022 Paper 3.

Tax Implications of Stock Write-Down

For income tax purposes, Intellect cannot claim a deduction for the write-down of its silicon chips in the 2021 tax year.

The key reasons are:

• Timing: Tax law requires that a loss must have actually occurred in the year it is claimed.

• Expectation vs. Reality: The write-down was based on the expectation that a new graphene chip would make the old chips less valuable.

• Release Date: The new chips are only scheduled to be released in the 2022 tax year. The loss in value has not yet happened.

• Case Law: This principle is supported by case law, which states that while accounting rules might allow for a write-down based on future events, tax law is stricter and does not.

Therefore, the write-down made by the financial accountant is not valid for the 2021 income tax return.