The timing of the income tax liability of amounts earned under contracts for difference

Abstract

The year of assessment in which mark-to-market payments earned under contracts for difference stand to be included in gross income for income tax purposes is not specifically provided for in the Income Tax Act, 58 of 1962. Nor is the year of assessment in which deductions of mark-to-market payments made under contracts for difference specifically provided for in the Income Tax Act, 58 of 1962. The absence of specific provisions means that the general rules of receipt, accrual and deductions must be applied in determining the timing of inclusion of these amounts in gross income and the deduction of payments made. Applying the general rules creates results that may be described as inequitable or even anomalous from an economic point of view in that taxpayers may be required to pay income tax even though a loss was made over the period of a contract for difference. These results, however, are not necessarily anomalous or even inequitable from a legal point of view. It is nevertheless concluded in this research that special provision should be made to regulate the timing of the determination of tax - the tax liability arising from mark-to-market payments made and received - so as to address the inequitable economic results that follow from the application of the general rules of receipt, accrual and deductions.

This research takes the reader through the workings of contracts for difference, whereafter the general principles of receipt, accrual and deductions are explained. These general principles are then applied to certain payments made and received under contracts for difference. The results of such applications are then tested to reveal certain anomalies. The research subsequently seeks to determine if the Income Tax Act, 58 of 1962, contains any provisions that may address the identified anomalies. After it is established that there appears to be no provision that addresses these anomalies, the research concludes that the results achieved by applying the general principles, whilst perhaps unfair from an economic point of view, are not anonymous in law. A special provision is then proposed to address what is arguably inequitable from an economic point of view despite not being anomalous in law.