Koppel Services

Reinvestment within financial year

The Arnhem Court of Appeal in 2012 ruled that a reinvestment reserve could not be created until the very end of the financial year during which the divestment of particular operating assets had enabled a profit to be realised. The stance adopted by the Court in this respect would preclude the creation of a reinvestment reserve in connection with reinvestment within the financial year during which divestment took place. This interpretation is not correct, however: reinvestment within the same financial year too involves a reinvestment reserve being created, which reserve is subsequently charged to the cost of reinvestment.
 

According to the Supreme Court the tax payer is at liberty to defer the levying of tax on a divestment profit by creating a reinvestment reserve. The tax payer’s choice in the matter need not be disclosed until such time as the balance sheet for the financial year of divestment is publicised. If the tax payer opts in favour of creating a reinvestment reserve, this reserve comes about at the time the divestment profit should have been accounted for. The reserve is deemed to have been charged at the moment reinvestment took place in the event of reinvestment occurring before the financial year of divestment is out.

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