New Interpretation Note on Trading Stock Valuation
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If you have clients with trading stock, this one is for you. SARS has scrapped Practice Note 36 of 1995 and introduced Interpretation Note 140 (IN 140), offering a more precise framework for valuing closing stock when its value drops.
Below is what you need to know.
What is the New Guidance?
This applies to all taxpayers who hold trading stock (excluding farmers and miners, who have separate provisions). It’s especially relevant if you claim a deduction due to a drop in stock value.
It sets out when and how SARS will accept a lower valuation on unsold goods for tax purposes, with clear criteria and stronger documentation requirements. IN 140 takes over with a more robust and case-law backed interpretation, especially considering recent rulings like the Volkswagen and Atlas Copco cases.
IN 140 gives guidance on how to determine if the value of your closing stock has diminished, and under what circumstances SARS will accept a reduced amount for tax purposes. It directly impacts how you calculate closing stock under section 22(1)(a) of the Income Tax Act.
When Can You Claim a Reduction in Closing Stock Value?
You can claim a reduction only if the value of your stock has dropped below cost and due to one of the following reasons:
Damage (e.g., goods destroyed in transit)
Deterioration (e.g., expired goods or spoiled perishable items)
Change in fashion (e.g., last season’s clothing)
Decrease in market value (e.g., price undercut by cheaper imports)
Other reasons satisfactory to the Commissioner (with proof).
Key Requirements
You must assess diminution item-by-item or appropriate category. No more blanket write-downs (like 25% off all stock).
Use actual events or foreseeable near-future events. SARS only allows reductions based on events that occurred before year-end, or are certain to occur soon after.
The deduction is based on cost price, not estimated resale value or NRV (Net Realisable Value).
In your tax return you must declare how you valued your stock, why you believe it’s dropped in value, and provide supporting evidence if requested.
For example, if you bought air fryers at R1,500 each, but due to market saturation they’re now selling for R1,200. You may deduct the R300 loss if you can show the decrease is due to market value drop and provide proof (like post-year-end sales invoices).
Why It Matters
Get this wrong, and you risk understatement penalties. IN 140 gives SARS the legal muscle to challenge stock write-downs that aren’t properly supported.
