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Everything you need to know about the income tax consequences on trading stock and allowance assets

by , 20 March 2015
Today, we're taking a look at what you need to know about the income tax consequences on trading stock and allowance assets when transferring assets to your company. Take a look below so you know which rules apply to your situation:

Income tax differs depeneding on whether you're transferring trading stock or an allowance asset

Trading stock: The transfer of trading stock is deemed to be at cost. This means if you're the person making the transfer, you won't make any profit. In fact, you're deemed to have got the equity shares in that company at the same value. This means you won't pay income tax  on the sale of the trading stock (cost = sales price, thus no profit).

However, you should know that there is a difference if you get a part consideration.

That means,  if you get paid in cash as well as the equity shares, the cash portion is seen as payment for the disposal and SARS will tax it in the normal way.

Allowance asset: An allowance asset is described above under the discussion on Section 45. Under Section 42, where
you transfer an allowance asset to a company in an asset-for-share transaction, the allowances and
recoupments are carried over to the acquiring company in the same manner as our example above
for Section 45.

But there's good news. When transferring allowance assets you get rollover relief' for both companies.

And because there are no adverse results due to the transaction, it  means there's no recoupment and no income tax.

If, however, the allowance asset you transfer to the company is intended to be used as trading stock, the following applies:

• The person making the transfer (i.e. the transferor) won't have recoupments;

• The acquiring company (the transferee) is deemed to buy the asset at the same time the transferor originally acquired them, and at the same cost. So the acquiring company steps into the seller's shoes;

• The transferee can choose for the base cost of the asset to be the market value as at 1 October 2001. Or it can use the time-apportionment method to calculate the base cost; and

• Where the seller has claimed any capital allowances for the asset, the transferee must reduce the deemed cost by these capital allowances.

Just remember that if it isn't trading stock then the rules mentioned above for capital assets apply!

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