Thesis (MAcc (Accountancy))--University of Stellenbosch, 2006. / The potential buyer of a business evaluates the attractiveness of the transaction by
considering the financial status of the business being sold. In determining the
financial status of a business it is more important to determine the nature of the assets
and liabilities recorded on the balance sheet rather than the mere existence thereof.
Included in the liabilities are accounting provisions recorded in terms of the Generally
Accepted Accounting Practice (GAAP) to reflect a fair representation of the financial
status. Although these provisions are made for accounting purposes, they cannot
necessarily be deducted under the terms of the Income Tax Act, no 58 of 1962. The
tax deductibility of accounting provisions has long been a potential contention when a
business is sold.
The Income Tax Act has specific sections that must be applied in determining the
deductibility of accounting provisions, for example, section 11(a), which is the general
deduction formula; section 23(g), which prohibits expenses not laid out for the
purposes of trade; and section 23(e), which does not allow a deduction when a
reserve fund is created (for example a leave pay provision).
In conducting this study, seven types of accounting provision generally recorded by
businesses were identified: the bonus provision, leave pay provision, warranty
provision, settlement discount and incentive-rebate provision, post employment
provision, retrenchment cost provision and other provisions. These provisions are
discussed in view of their possible income tax deductibility, and relevant case studies
were identified to confirm the possible deductibility of these accounting provisions.
In this study, the transfer of accounting provisions during the sale of a business is
considered for the purposes of both the buyer and seller. The tax implications for the
buyer and seller are then evaluated, as well as the subsequent treatment of the accounting provisions for the purposes of the buyer. Because the wording of the
purchase contract is extremely important when a business is acquired, three examples
of the wording of a purchase contract are discussed as well as the income tax
implications thereof.
The extent of the advice given by a tax practitioner will depend on the allegiance of the
practitioner (either for the buyer or seller) and will determine how the contract will be
concluded. In conclusion a tax practitioner would want to assist his client to obtain the
most effective tax position for the transaction and therefore each purchase contract
must be reviewed on its own set of facts.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:sun/oai:scholar.sun.ac.za:10019.1/3336 |
| Date | 12 1900 |
| Creators | Kroukamp, Susan |
| Contributors | Van Schalkwyk, C. J., University of Stellenbosch. Faculty of Economic and Management Sciences. Dept. of Accountancy. |
| Publisher | Stellenbosch : University of Stellenbosch |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis |
| Rights | University of Stellenbosch |
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