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General Deductions - Coggle Diagram
General Deductions
Trade Test
Burgess
Case name:
Burgess v CIR
Principle:
A wide interpretation should be given to trade.
Case facts:
Invested money that was borrowed from the bank in a short term investment company as part of a scheme.
Judge decision
The main purpose of the scheme was to make profit. Wider interpretation included in trade where a person takes a risk with the objective of making profit.
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Definition of 'Trade" Section 1
Trade includes every profession, trade, business, employment, calling, occupation, or venture, including the letting of a property and the use of a patent, or design, or trademark, or copyright or other property which is a similar nature.
Requirements:
A trade to be carried on,
Income to be derived from such trade
Trading at a loss
Joffe & Co
Negligence is not part of trade and not incurred in the production of income
De Beers Holdings
Possible to carry on nonprofit making trade as long as commercial or business benefit or reward.
Interpretation Note 33
Activities excluded from Trade
Investments made in dividend and interest bearing stock.
Positive Test
Expenditure or losses actually incurred in the production of the income, provided such expenditure and losses on not of a capital nature.
Expenditure and losses
Joffe & Co
Loses or possibly expenditure of an involuntary nature.
Expenditure is a voluntary payment of money
Port Elizabeth Electric Tramways
Losses refer to losses of floating capital. Expenditure does not only refer to cash outflow but the liabilities which may be settled in cash or otherwise.
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Actually incured
Deductibility of expenditure is NOT determined on a cash basis. It is not necessary to have actually paid As long as liability has been incurred it is deductible..
Nasionale Pers Bpk
Case name:
Nasionale Pers Bpk v KBI
Principle:
If a payment is contingent upon the happening of an uncertain future event the expense and corresponding liability can only be actually incurred once the conditions are made.
Case Facts:
The taxpayer client provision of bonuses as a deduction. The bonuses were payable on a future date, provided that the employee are still with the company and thus the experience will only be incurred on that future date.
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Edgars Stores
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Case name:
CIR v Edgars Stores Ltd
Principle:
An experience can only be deducted once there is an unconditional legal obligation to pay the expense.
Case Facts:
Lease was on monthly rental and annual rental based on turnover. The obligation to fighting over rental is contingent until the turnover is determined and cannot be deducted under its determined.
Golden Dumps (Pty) Ltd
Case name:
CIR v Golden Dumps (Pty) Ltd
Principle:
When 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.
Case facts:
A former employee launched a claim against the company. Only when the claim is upheld by the court will the liability rise.
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Caltex Oil (SA) Ltd
Expenditure actually incurred means all expenditure for which the liability has been incurred during the year whether our liability has been discharged during the year or not.
During the year of assessment
Sub-Nigel Ltd
Case name:
Sub-Nigel Ltd v CIR
Principle:
An expense must be deducted in the year of assessment that it incurred, even if it will only produce income in future years.
Expense cannot be claimed in later years
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Case Facts:
The taxpayer paid insurance premiums on loss of profits insurance policy. Expense should be claimed in the current year. The fact that no income had actually been produced was irrelevant.
Golden Dumps (Pty) Ltd
Can only be deducted in year of assessment the expenses was actually incurred.
Concentra
The company claimed as a deduction certain expenditure relating to directors expenses we had risen in earlier years. The court held that the expenditure should have been claimed in the years in which it arose and that by not doing so the company has forfeited the right to claim the deduction.
In the production of income
Port Elizabeth Electric Tramway
Case name:
Port Elizabeth Electric Tramway Co Ltd v CIR
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Principle:
What is the purpose of the expense?
How closely connected is the expense to the production of income?
Case facts:
A driver employed by the taxpayer died as a result of injuries sustained on the job while working. The taxpayer had to pay damages to the widow and the legal cost resisting the claim.
Judge decision:
The compensation fade is deductible and naturally in the production of income but the legal cost were not part of the income earning operation and the deduction was disallowed.
Joffe & Co
Case name:
Joffe & Co (Pty) Ltd v CIR
Principle:
If something is not an inevitable concomitant of the business operations it is not deductible.
Negligence resulted in the roof collapsing and is does not an inevitable part of the trade and not included in the production of income
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Case facts:
In a concrete engineer business, a concrete hood collapsed killing a workman. It is determined that the company was negligent and had to pay damages to the workman's deceased widow.
Provider
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Case Name:
Provider
Principles:
Expenditure incurred to induce the employment to enter and remain in the service of the taxpayer might qualify as a deduction since the purpose is to produce current or future income. Amounts paid in terms of a service package or deductible.
Case facts:
The taxpayer increased schemes for the benefit of the employees and life insurance scheme and a servers bonus. Both schemes were clearly designed by the taxpayer to induce the employees to enter and remain in service thus the amount is valid for deduction.
Mobile Telephone Networks Holdings (Pty) Ltd
Principles:
Audit fees:
Where there is a split between producing income versus exempt income, apportionment has the take place. Audit fees are incurred in production of income if it's part of the taxpayers income earning operations.
Training Fees:
Expenses needed to see in order to trade effectively, there is a direct link between the training fees and the taxpayers trading activities therefore will be allowed as a deduction.
Case Facts:
Audit fees: 94% of the time on interest income and 6% of the time on exempt income. The judge ruled only 94% in production of income and thus it has a dual purpose and apportionment has to take place.
Training fees: Train staff on learning the new computerized accounting system it is necessary to trade more effectively.
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Rendle
Expense is in the production of income if the risk of the expense being incurred is an inevitable or necessary concomitant of the taxpayers business operations.
Standard Bank of SA
Expenditures included in the production of income it is important to know what is the purpose of the expenditure and what the expenditure actually effects and in this regard the closeness of the connection between the expenditure and the income earning operations must be assessed.
Nemojim (Pty) Ltd
Not of a capital nature
New State Areas Ltd
Case name:
New State Areas Ltd v CIR
Principle:
Fixed (capital) versus floating (revenue) capital
Cost of establishing improving adding income earning plant is capital in nature and therefore not deductible.
Cost of performing income earning operations which is revenue in therefor is therefore deductible.
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Case facts:
Client installed new sewage systems on its own premises and land outside its property. This system on its own premises is capital of nature and the system on outside of its premises is revenue of nature.
Rand Mines
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Case facts:
Mine management company acquire contracts to manage a mine, the cost is related to income earnings structure and therefore capital of nature.
Principles:
Costing incurred to create a capital structure is capital and cost incurred to work the capital structure is revenue.
Expenditure incurred to obtain an income earning right or structure will be capital in nature.
British Insulated and Helsby Cables Ltd
Enduring benefit is capital.
Manganese Metal Company (Pty) Ltd
Enduring benefit is capital
If an asset is clearly a capital asset it is not necessary to apply the enduring benefit test.
George Forest Timber
Acquire a source of profit is capital and working a source of profit is revenue.
Guardian Assurance Holdings (SA) Ltd
A expense can be apportioned between capital and revenue depending on the purpose of the expense.
