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Trade - General deductions and the 5 elements of the positive test -…
Trade - General deductions and the 5 elements of the positive test
Expenditure and losses (5.4.1)
Joffe and Co (Pty) Ltd v CIR
If something is not an inevitable concomitant of the business operations, it is not deductible.
Negligence resulted in the roof collapsing and is thus not an inevitable part of trade and not incurred in the production of income
* Port Elizabeth Electric Tramway Co Ltd v CIR
What is the purpose of the expense?
How closely connected is that expense to the production of income?
3. During the year of assessment (5.4.6)
Sub Nigel Ltd v CIR
An expense must be deducted in the year of assessment that it is incurred, even if it will only produce income in future years. The matching principle is irrelevant.
An expense has to be claimed in the year that it is incurred. It can not be claimed in later years.
CIR v Golden Dumps (Pty) Ltd
Where an obligation to pay an amount is in dispute, the expense can only be actually incurred when the dispute is settled, with regards to the obligation and the amount thereof.
4. In the production of income (5.4.7)
Joffe and Co (Pty) Ltd
If something is not an inevitable concomitant of the business operations, it is not deductible.
Negligence resulted in the roof collapsing and is thus not an inevitable part of trade and not incurred in the production of income
Provider
Expenditure incurred to induce the employees to enter and remain in the service of the TP may qualify as a deduction since the purpose is to produce current or future income.
Amounts paid in terms of a service package (employment contract) are deductible.
Port Elizabeth Electronic Tramway Co Ltd v CIR
What is the purpose of the expense?
How closely connected is that expense to the production of income?
Mobile Telephone Network Holdings
Incurring audit fees is necessarily attached to the performance of the TP's income earning operations, i.e. audit fees are incurred in the production of income.
Where there is a split between income and exempt income (dual purpose), apportionment has to take place.
Apportionment will depend on the facts of each case. A reasonable apportionment approach will thus be followed.
5. Not of a capital nature (5.4.12)
New State Areas Ltd
Fixed (capital) vs Floating capital (revenue)
Cost of establishing/improving/adding income earning plant (fixed capital) is capital in nature and therefore not deductible
Cost of performing income-earning operations (floating capital) which is revenue in nature and therefore deductible.
Rand Mines
Expenditure incurred to obtain an income earning right or structure will be capital in nature
Cost incurred to create a capital structure = Capital
Cost incurred to work the capital structure = Revenue
2. Actually incurred (5.4.2)
Nasionale Pers Bpk v KBI
If a payment is contingent upon the happening of an uncertain future event, the expense and corresponding liability can only be actually incurres once the conditions are met
Section 7B was inserted to deal with the timing of variable remuneration such as bonusses
CIR v Edgars Stores Ltd
An expense can only be deducted once there is an unconditional legal obligation to pay the expense
CIR v Golden Dumps (Pty) Ltd
Where an obligation to pay an amount is in dispute, the expense can only be actually incurred when the dispute is settled, with regards to the obligation and the amount thereof.
Trade:
Expenditure and losses actually incurred in the production of income, providing such expenditure and losses are not of a capital nature
