Taxable income is equal to 'income' minus 'deductions'

Section 11(a) allows deductions for expenditure and losses actually incurred in the production of income during the year of assessment, provided they are not of a capital nature

Section 23(g) disallows deductions for any money claimed as a deduction from trade income if it was not used for trade purposes.

Certain activities, such as investments in dividend-bearing and interest-bearing stock, are not included in the definition of trade.

Pensions and other annuities received are also not considered income from trade.

The first requirement is that the taxpayer must be carrying on a trade.

The second requirement is that income must be derived from trade.

This type of expenditure is considered capital because it is spent in setting up the income-earning structure, not actually working it to produce income.

It is the money that is spent to put the taxpayer in a position to start earning income.

Pre-trade expenditure is capital expenditure because it is incurred before the business begins operations.

Expenditure incurred while carrying on a trade is revenue expenditure because it is incurred in the course of generating income.

b. The expenditure would have been deductible if the taxpayer was already trading under s11 (c) – (w) or 24J.

c. The expenditure must not have already been allowed as a deduction.

a. The expenditure must have been actually incurred.

a. The deduction is limited to the income derived from that trade. It cannot create a loss.

b. Any excess deduction is carried forward to the following year.

In Port Elizabeth Electric Tramway Co Ltd v CIR, the court suggested that losses might refer to losses of floating capital.

In Joffe & Co v CIR, the court suggested that losses might be involuntary expenditure.

Payment made by giving shares or land to the payee represents expenditure in a form other than cash.

Expenditure is not deemed to be actually incurred if it is contingent on a future event or obligation.

A liability is incurred when an unconditional obligation to pay an expense has arisen.

An expense may be incurred if it arises out of a contractual agreement, and the obligations arising out of that contract may determine whether an expense has been incurred or not.

The deductibility of expenditure is not determined on a cash basis, but on an accruals basis, where a liability has arisen and is owed.

The phrase "Actually Incurred" refers to the obligation of a taxpayer to pay a certain expense or liability, regardless of whether it was necessarily incurred or deemed prudent by the tax authorities.

Deductibility of contingent liabilities is not allowed unless the liability has actually arisen.

when a company issues shares in exchange for an asset, the value of the shares is treated as if the company had paid that amount in cash for the asset

The unquantified amount is deemed to be incurred in the year in which it becomes quantifiable or to the extent that it becomes quantifiable in each year.

no expenditure incurred in a year previous to the particular tax year can be deducted because the taxpayer is assessed for income tax for a period of one year.

only at the end of the year of assessment is it possible and imperative to determine the amounts received or accrued and the expenditure incurred during the year of assessment.

expenditure should have been claimed in the year in which it arose, and the company forfeited its right to claim a deduction for claiming expenses in a later year.

the timing of deductions depends on a proper interpretation of the words "expenditure and losses actually incurred." If the outcome of a dispute is unresolved by the end of a tax year, the liability has not been actually incurred. The liability is only actually incurred in the year of assessment in which the Appellate Division hands down its judgment.

deduction for prepaid expenses in situations where the benefits of the expenditure are not enjoyed in full during the year. Deduction of such expenditure is deferred until the benefit is received, subject to certain exceptions.

This means that the accounting principle of matching does not apply for tax purposes.

Expenditure occured due to own negligence in the running of a business is not considered a necessary part of a business operations and therefore cannot be deducted as a business expense for tax purposes under section 11(a).

Expenditure in itself doesn't produce income, but it's the actions that produce income, and expenditure is merely a consequence of those actions.

The broad test as to whether an expense is incurred in the production of income is whether it's incurred in the carrying on of the trade concerned and whether there's a sufficient relationship between the expense and the income-producing operations to justify the deduction

any expense not incurred for the purpose of generating income will not qualify for a deduction.

The expense is attached to the business operation by chance.

The expense is genuinely incurred for the purpose of carrying on the business operation more efficiently.

The expense is necessary for the performance of the business operation.

If an expense is closely tied to the performance of income-producing operations, it is an unavoidable accompanying cost.

It is not always easy to determine whether an expense is of a capital or revenue nature, and guidance must be sought from the courts.

Allowances are granted for certain capital expenditure items under specific provisions such as sections 11(e), 11(o), 12B, 12C, and 13, which are covered in the chapter on capital allowances.

Some capital expenses are allowed as deductions in determining capital gains for the purposes of 'capital gains tax'.

fixed capital, such as buildings or equipment, is considered capital in nature because it is a long-term investment used to create and maintain the income-earning structure

income-earning operations, such as the sale of goods or services, are considered revenue in nature

floating capital, such as stock in trade, is considered revenue in nature because it is constantly changing and is necessary to produce income

while income-earning structure, such as buildings or machinery used to produce those goods or services, is considered capital in nature.

Essentially, Watermeyer CJ's distinction is between expenses that are necessary for day-to-day operations and those that are long-term investments used to create and maintain the infrastructure necessary to generate income.

is the cost of running the day-to-day operations of a business and is usually a short-term expense

is the cost of acquiring, improving or expanding long-term assets that are used to generate income.

The court distinguished this type of expenditure from the expenses incurred in actually working the income-producing asset, which are usually treated as revenue expenses and are deductible for tax purposes.

This means that the expenditure is not deductible for tax purposes as it is considered to be an investment in the asset's future earning potential rather than a current expense incurred in producing income

an expense is capital if it produces an enduring benefit, and it is revenue if it does not.

when deciding whether an expense related to an intangible is capital or revenue, the concept of enduring benefit should be considered, but it is important to assess the individual circumstances of each taxpayer.

if an expense is incurred with the intention of creating an enduring benefit, it is considered a capital expenditure

if the expense is not expected to produce a lasting benefit, it is considered a revenue expense.