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Tax deductions allowed: image - Coggle Diagram

- - - - Two requirements:
        
        1. Taxpayer must be carrying on a trade
        
        Name of the case law: Burgess
        
        Principle: A wide interpretation should be given to trade
        (Trade has wider interpretation including taking risks to make a profit)
        
        Name of case law: Stephan
        
        Principle: Numerous business transactions and employment of capital
        (Even if the company undertook only one operation, salvaging a vessel)
        
        Name of case law: Contour Engineering Pty Ltd
        
        Principle: Not mere laying of plans / preparing for trade.
        (The expenses of making the plans must constitute trading)
        
        Name of case law: Joffe and Co (Pty) Ltd
        
        Principle: Trade is defined as the earning of profit
        
        Name of case law: De Beers Holdings
        
        Principle: Possible to carry on non-profit making trade, as long as it produces some sort of commercial or business benefit/reward
        (Reselling goods at a loss in order to gain another commercial benefit for his business)
        
        2. Income must be derived from trade
    - - Five requirements:
        
        1. Expenditure and losses
        
        Name of case law: Joffe and Co (Pty) Ltd
        
        Principle: If expense is not an inevitable concomitant of the business operations then it is not deductible.
        (Some losses can be expenditure and some expenditure of an involuntary nature can be deductible, but not in this case as it was not linked to the process of producing income)
        
        Name of case law: Port Elizabeth Electric Tramway Co Ltd
        
        Principle: How closely connected is the expense to the production of income?
        (In this case the legal costs were not deductible, but the compensation paid to the widow was as this was in line with the income producing activities as employing drivers was necessary.
        
        2. Actually incurred
        
        Name of case law: Nasionale Pers Bpk
        
        Principle: If payment is contingent upon the happening of an uncertain future event, it can only be actually incurred once the conditions are met.
        (In this case, the provision expense for bonusses was not incurred during the yr of assessment and could therefore not be claimed until the condition, employment at a future date, was met)
        
        Name of case law: Edgars Stores Ltd
        
        Principle: Expense only becomes deductible once there is an unconditional legal obligation
        (Obligation to pay turnover rent was contingent until the turnover was determined)
        
        Name of case law: Golden Dumps (Pty) Ltd
        
        Principle: Expense in dispute is only actually incurred once dispute has been resolved
        
        3. During the year of assessment
        
        Name of case law: Sub-Nigel Ltd
        
        Principle: An expense must be deducted in the year of assessment in which it occurred.
        (Even if it will only produce income in the future)
        
        Name of case law: Golden Dumps (Pty) Ltd
        
        Principle: Expense can only be deducted in the year it actually incurred.
        (In this case, once the dispute has been settled)
        
        4. In the production of income
        
        Name of case law: Port Elizabeth Electric Tramway Co Ltd
        
        Principle: What is the purpose of the expense and how closely connected is the expense to the production of income.
        (In this case the damages paid were an inevitably consequence of the income-producing activities and therefore incurred in the production of income.
        
        Name of case law: Joffe and Co (Pty) Ltd
        
        Principle: If expense is not an inevitable concomitant of the business operations then it is not deductible.
        (Damages were paid due to negligence and not due to it being incurred in the production of income)
        
        Name of case law: BP Southern Africa
        
        Principle: Payments closely connected to the income generating activities
        (BP SA had to pay royalties for using the trademark license). It was closely connected to the income producing activities and therefore deductible.
        
        Name of case law: Provider
        
        Principle: Expenditure incurred to induce employees to enter and remain in service may qualify as deduction as the purpose is to produce current and future income.
        (In this case life assurance and service bonusses could be deducted)
        
        5. Not of a capital nature
        
        Name of case law: New States Areas Ltd
        
        Principle: Costs incurred for improvement (fixed capital) are not deductible and costs incurred for performing income-earning operations (floating capital) are revenue in nature and therefore deductible
        
        Name of case law: Rand Mines
        
        Principle: Cost incurred to create a capital structure is capital in nature and not deductible, while costs incurred to work the capital structure is revenue in nature and therefore deductible.