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The General Deduction Formula - Coggle Diagram
The General Deduction Formula
In the production of income
Port Elizabeth Tramway
Are amounts incurred in production of income?
11(a) If incurred during "natural" production of income = deductible
Expected that liabilities incurred to compensate employees = deductible - naturally in production of income ;
Legal costs = not deductible - not naturally in production of income
Driver died - injuries on duty. Pay widow damages & legal costs - commissioner disallowed.
Joffee and Co
Concrete engineering co. ; worker killed - pay damages to widow
Commissioner disallowed claim for compensation & legal costs - negligence not part of engineering trade - not incurred for purpose of producing income
If something is not an inevitable concomitant of business operations - not deductible
Negligence resulted in roof collapsing = not an inevitable part of trade = not incurred in production of income
Provider
Employee benefit schemes:
Life assurance
Service bonus - length of service
Amounts paid in terms of a service package (employment contract) are deductible
Purpose = produce current or future income
Life assurance not deductible
Mobile Telephone Networks Holdings (Pty) Ltd
Expenditure of audit - 94%-time auditing interest income, 6%-time auditing exempt dividend income
Expenditure of training new staff to use system that deals with interest income
Audit fees - only the 94% deductible - incurred in production of income. Where incurred for dual purpose - apportionment to take place
Training fees - deductible - necessary concomitant of trade - not of a capital nature
Carrying on a trade
Burgess
Borrowed money from bank - invested in short term investment co. - scheme
Deduct losses from scheme?
Scheme - carrying on of a trade?
A wide interpretation should be given to trade
Where a person takes risks with object of making a profit
In the year of assessment
Sub-Nigel Ltd
Insurance policy on loss of profit
Only pay out in future, if certain events take place
Expense must be deducted in year it incurred, even if it will only produce income in future years
Has to be claimed in year it incurred, CANNOT be claimed in later years.
Actually Incurred
Nasionale Pers Bpk
Claimed provision for staff bonuses - only payable if employees still in service of company at certain time after year end
If payment is contingent upon happening of uncertain future event, the expense & liability can only be actually incurred once conditions are met
"Timing of variable remuneration"
Edgars Stores
Leased premises to conduct business - monthly rental & annual rental based on turnover
Estimated annual amount & claimed deduction
Obligation to pay turnover rental contingent until turnover determined
Expense can only be deducted once there is an unconditional legal obligation to pay the expense
Golden Dumps (Pty) Ltd
4 year dispute with former employee - over shares promised by TP. TP claimed cost of shares as deduction
Only when claim upheld by court will a liability arise. Dispute outcome undetermined = no liability incurred
Where obligation to pay amount in dispute, expenses only actually incurred when dispute settled.
Not of a capital nature
New State Areas Ltd
Sewerage system installed on property & land outside property. Local authority covered cost - TP repays monthly
Instalments of a capital nature?
Cost of establishing / improving / adding income earning plant (fixed capital) = capital nature = not deductible
Cost of performing income earning operations (floating capital) = revenue in nature = deductible
Not deductible - acquisition of asset
System outside property - incurred due to right of use - belongs to municipality = deductible
Rand Mines
Incurred expenses to acquire contract to manage mine in same group of companies
Expenditure incurred to obtain income earning right / structure = capital of nature
Cost incurred to create capital structure = capital
Cost incurred to work capital structure = revenue
Section 23(g)
Warner Lambert SA (Pty) Ltd
American parent co. operating in SA had to ensure SA subsidiary co's complied with Sullivan Code (social responsibility) expenses incurred to comply. Claimed deduction under section 11(a)
Expenses did not have to produce a profit itself. Would have lost its 'privileged subsidiary status' if not paid = loss of trade advantages
Expenditure incurred in ensuring income is not lost = in production of income
If there is a link between co's ability to trade & expenditure = incurred for purpose of trade.
Social responsibility seen as crucial for trade
