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General Deductions Formula, image, image, image, image, image, image,…
General Deductions Formula
Not of a capital nature
Capital receipts and accruals do NOT form part of gross income
Capital expenses are not allowed as a deduction from income
Test: Enduring benefit = CAPITAL
Case Law: Rand Mines
Principle: 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
Case Law: BP South Africa
Principle: The legal categorization of a payment does not determine whether it is capital or revenue, but rather the purpose of the expenditure. The shorter the period of endurance to which the payment relates, the easier it is to argue that it is revenue in nature.
Case law: New State Areas Ltd
Principle: Fixed (capital) vs Floating capital (revenue)
Cost of establishing/ improving/adding income earning plant
(fixed capital) is capital in nature and therefore not deductible vs. Cost of performing income-earning operations (floating capital) which is revenue in nature and therefore deductible
Trade
Definition of Trade:
Every profession, trade, business, employment, calling, occupation or venture, including the letting of any property and the use of any patent/ design/ trademark/ copyright
Case law: Burgess
Principle: A wide interpretation should be given to trade
Case Law: Scribante Constructions
Principle: Borrowing of money and relending constitutes the carrying on of trade
Case Law: Contour Engineering Pty Ltd
Principle: Merely planning a business is not carrying on a trade
Case Law: Joffe & Co
Principle: Trade equals the earning of profits
Case Law: De Beers Holdings
Principle: it is possible to carry on non-profit making trade as long as there is a commercial or business benefit or reward
Trade Test (Preamble to section 11)
Two requirements:
A trade to be carried on and
Income to be derived from such trade
Expenditure to generate dividend and interest income is not allowed as a dectuction under this section 11(a)
Interest incurred is allowed under Practice Note 31
Positive Test has:
5 Elements
expenditure and losses
actually incurred
during the year of assessment
in the production of income
not of a capital nature
Expenditure and losses:
Case law: Joffe and Co Pty Ltd
Principle: If something is not an inevitable concomitant of the business operations it is not deductible. Negligence is not considered an inevitable part of trade.
Case Law: Port Elizabeth Electric Tramway Co Ltd
Principle: Losses refer to losses of floating capital
Actually incurred
As long as the liability has been incurred
Case Law: Edgars Store
Principle: An expense can only be deducted once there is an
unconditional legal obligation (not contingent) to pay the
expense.
Case Law: Golden Dumps Pty Ltd
Principle: 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.
Case Law: Nasionale Pers Bpk
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 met.
Case Law: Caltex Oil SA
Principle: Expenditure is incurred when the taxpayer becomes unconditionally liable to pay, not when payment is made.
Case Law: Ackermans Ltd
Principle: Contingent liabilities tranferred to another party are not expenditure actually incurred
During the year of assessment
Case Law: Sub Nigel Ltd
Principle: Expenditure incurred in a previous tax year cannot be deducted in the current year
Case Law: Golden Dumps Pty Ltd
Principle: Can only be deducted in year of assessment the expense was actually incurred.
Case Law: Caltex Oil SA
Principle: Income tax is assessed annually; deductions relate only to that year
In the production of income
Case Law: Joffe and Co
Principle: 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
Case Law: BP Southern Africa
Principle: Recurring payments for maintaining income earning operations are deductible. This will naturally mean it is incurred in the production of income. Royalty payments are of a revenue nature and deductible if the intellectual property is used in the production of income. Therefore, use of rights of patents, copyright and inventions are deductible
Case Law: Port Elizabeth Electric Tram
Principle: The damages paid were an inevitable consequence of the income-producing activities, thus incurred in the production of income.
Case Law: Provider
Principle: Expenditure incurred to induce the employees to enter and remain in the service of the taxpayer 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.
Case Law: Mobile Telephone Networks Holdings Pty Ltd
Principle: Audit fees: Audit fees are deductible because they are incurred to earn income. If they relate to both taxable and exempt income, they must be reasonably apportioned based on the facts.
Training fees: Training fees are deductible if they are directly related to the taxpayer's business and are necessary for carrying on the trade. They are not capital in nature.
