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Trade - Coggle Diagram
Trade
Section 1 definition
every profession
trade
business
employment
calling
occupation or venture
Including the letting of any property and the use of any patent/ design/trademark/copyright
5 Elements of the positive test
Expenditure and losses
An expense arises from a conscious decision to pay out an amount in the course of someone’s trade. An example would be a bakery that has to purchase flour with which to bake bread.
A loss, on the other hand, is an unexpected, involuntary event that has negative financial consequences. A supermarket that has a power failure would sustain losses when all of its perishable foods go bad as a result of no power being supplied to its freezers and refrigerators.
actually incurred
To satisfy this requirement, the expense needs to be unconditional. Paying a particular expense in cash will undoubtedly do so; however, an unconditional liability to pay an expense at a future date will also suffice.
An example would be when a motor vehicle repair workshop has purchased several vehicle parts on credit. Provided that there is an unconditional obligation to pay for such parts, the expense is said to have been “actually incurred” even though physical payment only takes place at a later date.
It is however not necessary for the taxpayer to prove that the expense was necessarily incurred. It is not the role of SARS to determine whether the expense was prudent or otherwise.
While it may not, for example, be necessary for a security gate manufacturer to put two coats of paint on their products instead of one, the fact is that it would have incurred expenses relating to the extra coat of paint and would therefore be entitled to claim the deduction.
during year of assessment
Over the years the courts have held that any expense that is incurred by a taxpayer must be claimed in the tax year during which it is incurred.
While it makes sense to do so, there are circumstances where such expenses are not claimed timeously. The late submission of employee expense claims is often cause for such expenditure being recorded in a later year, as is an invoice for services rendered during a previous period.
However, given that SARS allows around 8 months after the end of the tax year for individuals to submit their returns, and 12-24 months in the case of corporate taxpayers, it is not unreasonable to expect such expenditure to be claimed in the tax year in which it is incurred.
in the production of income
This is probably the most onerous requirement since it is not just any expenditure that qualifies for deduction, but only that expenditure which has been incurred for the purpose of producing income.
However, adding to the complication is that there is often not a direct connection between the incurring of expenses and the production of a particular stream of income. For that matter, there are very little (if any) expenses that directly produce income. Even goods purchased for resale do not produce any income unless they are actually sold.
What, then, about indirect expenses such as factory rentals, salaries and wages, utilities such as electricity and water, and the like?
Fortunately, it has become established practice that in order to qualify for deduction, an expense need not directly produce income. As long as such expense has been incurred for the purpose or with the intention of deriving income, such expense will usually qualify for deduction.
This means that salaries and wages, for example, will qualify for deduction provided that the activities of the employees engaged will ultimately result in some or other income being produced.
But what about so-called ‘indirect’ expenditure that does not bear a direct relationship to the income-generating activities of the business? Items that come to mind include bank charges, audit and accounting fees, printing and stationery, and salaries paid to administrative staff.
While these expenses do not directly produce income, they form part of the income-earning structure, and it has become accepted practice to allow such expenses as a deduction.
When such an expense comes before the courts to decide, they normally look at the underlying facts, asking the following two questions:
Is there an act that can be identified as having been performed for the purpose of producing income; and
Is the expense that the taxpayer seeks to deduct sufficiently closely linked to the performance of such act?
Looking briefly at the Port Elizabeth Electric Tramway Co v CIR (1936 CPD) court case, the act identified was that of carrying passengers on trams for reward, for which the employment of drivers is a critical component.
Once the act was thus identified as being in the production of income, all that was left for the court to decide was whether the payment of compensation to relatives of a deceased employee was closely connected enough to that act.
In this case, the court held that there was such a connection, and ordered that the expense be allowed as a deduction.
not of a capital nature
The final requirement that needs to be satisfied is that the expense must not be of a capital nature, and there are probably more court cases attempting to solve the capital / revenue conundrum than any other. It is therefore clear that each individual case must be judged on its own merits.
There are however a few general principles that will guide taxpayers in determining whether an expense is capital or revenue:
Carrying on of trade
continuity of activities?
long-term objective of trade to generate profit?
active step in contrast to passive earning of investment income
Burgess
term trade must be given a wide interpretation