Tax treatment of stock at year-end

If you have stock on hand at year end, it may be deductible for tax depending on its nature and your trade.

Does it consist of items you purchased for sale or items you purchased to be used in the manufacturing process? If yes, the cost of these items are automatically included in your taxable income as part of your cost of sales calculations and no tax adjustment is required.

If the answer is no, then you may be able to claim it as a consumable in the current tax year. Please note that the principles discussed here are not applicable to farming operations.

The cost at which cost of sales should be recorded in terms of section 22 of the Income Tax Act presents the actual cost incurred to acquire the stock and bring it to its current condition and location, less any impairments/stock obsolescence. If stock was acquired at no cost, you are not entitled to a deduction from your taxable income.

If the stock you have on hand at year end constitutes consumables and spare parts (not expected to last/be held for longer than 12 months), the actual cost of such goods are deductible as expense for tax purposes in the year they were acquired in terms of section 17 (1)(a).

Consumables are items, which are not acquired for purposes of resale but with the purpose to repair equipment. Consumables and spares purchased not for resale, but for own use, fall outside the definition of closing stock. As per section 1 of the Income Tax Act, trading stock is define as “trading stock includes anything produced, manufactured, purchased or in any other manner acquired by a taxpayer for purpose of manufacture, sale or exchange by him or on his behalf or the proceeds from the disposal of which forms, or will form, part of his gross income”.

Typical examples of consumables may be things like materials used that do not form part of your final product, i.e. diesel/petrol/lubricants for machinery, stationery stock, certain packing material etc.

For accounting purposes, consumables and spares may only affect your income statement when it is actually used. However, for tax purposes, the closing balance can be deducted from your taxable income in the year it was acquired.

Please remember that this balance should be added back on the tax calculation in the subsequent year to avoid double deduction of the amounts when the amounts clear to the income statement.

Johan Nel is a partner and director at PwC Namibia. This bi-monthly tax column is published on a Monday in Market Watch.