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Summary TAXN7311 - LU 4 DEDUCTIONS
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Summary of 23 pages for the course Taxation at Varsity College (DEDUCTIONS)
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LU4 – ALLOWABLE DEDUCTIONSIn s1 of the Act, taxable income is defined as the sum of:
a) The amount remaining after deducting from the income of any person all the amounts allowed under part 1 of LU 2 (i.e.
S5 to S37) to be deducted or set off against such income; and
b) All amounts to be included or deemed to be included in the taxable income of any person i.t.o the Act (e.g. capital
gains)
Allowable deductions fall into 2 categories:
1. Those allowed i.t.o the ‘general deduction formula’ – covered by S11(a) read together with s23 (g); and
2. Special deductions - covered by all other sections. These special deductions were introduced to extend or limit the
‘general deduction formula’.
THE GENERAL DEDUCTION FORMULA
S11(a) – ‘for the purposes of determining the taxable income derived by any person from carrying on a trade there shall be
allowed as deductions from the income of such persons so derived, expenditure and losses actually incurred in the production of
income, provided such expenditure and losses are not of a capital nature’.
S23(g) provides that no amount will be allowed as a deduction to the extent that it was not laid out or expended for the
purposes of trade.
Requirements for an expense to qualify for deduction i.t.o the general deduction formula are:
The taxpayer must be carrying on a trade
The taxpayer must, in carrying on that trade, derive income.
The amount claimed must constitute an expense or loss.
The expenditure or losses must be actually incurred during the year of assessment.
The expenditure or losses must be incurred in the production of the income.
The expenditure or losses must not be of a capital nature
The expenditure or losses must to some extent have been paid out or expended for the purposes of trade.
The expenditure or losses must not be prohibited under s23.
CARRYING ON TRADE
Trade = every profession, trade, business, employment, calling, occupation or venture, including in the letting of the property
and the use of, or the grant of permission to use any patent, or any design or any trademark, or any copyright, or any other
property which is of a similar nature.’
INCOME
Trade must produce some sort of commercial or business benefit or reward.
EXPENSE OR LOSS
Losses = expenditure which is of an involuntary nature. Both expenditure and losses refer not only to cash outflows but also
liabilities that must be settled by ways other than cash e.g. handing over of shares or property. The cash equivalent of the shares
or property disposed of would represent the amount of the expenditure.
ACTUALLY INCURRED
An expense is deductible in the year in which it actually incurred – i.e. the year in which it becomes unconditionally due and
payable – regardless of when it actually settled. Where the expense incurred during the year cannot be quantified, the expense
will have to be estimated base on the information available.
Expenditure must be claimed as a deduction in the year in which it is incurred - it cannot be deducted in any subsequent years
and will be forfeited if not claimed in the year in which it incurred.
,Note prepaid expenses may only be deducted in the year it actually incurred unless the goods and services paid for are supplied
within 6 months after the tax year-end or the value of the goods or services is less than R100 000 in value. In either case, i.t.o
s23H, the prepaid amount is fully deductible in the tax year it was paid.
S24M(2) provides that where a person acquires an asset during any year of assessment and the consideration for that asset
consists of or includes any amount which cannot be quantified, then such unquantified amount is deemed to be incurred in the
year in which it becomes quantifiable ( and not in the year in which it incurred).
IN THE PRODUCTION OF INCOME
If it is performed for the purpose of earning income, then the expenditure attendant upon it is deductible. Expenses must be
incurred to produce income. Therefore, expenses incurred to produce exempt income are not allowable.
NOT OF A CAPITAL NATURE
From various court cases, the following elements could point to expenditure being of a capital nature:
It adds to a taxpayer’s income-earning structure;
It is once-off expenditure from which future income will flow; and
It creates a lasting benefit or advantage for the taxpayer
EXPENDED FOR THE PURPOSES OF TRADE
Where costs are incurred only partly for the purposes of trade, an apportionment must be made and only the portion of costs
incurred for the purposes of trade may be deducted.
SPECIFIC EXPENSES – S11(A)
LOSSES I.T.O FIRE, THEFT AND DAMAGES
The deductibility of such losses depends on the nature of the asset lost.
Assets considered to determine the success of your claim:
Fixed assets - A loss of a fixed asset is not deductible as the fixed asset forms part of the schedule of the business (a
capital loss may, however, be claimed i.t.o the 8th schedule)
Trading stock – losses as a result of fire, theft or damage are allowable (to the extent that these are not covered by an
insurance policy)
Cash – a loss of cash due to burglary, pilferage or misappropriations by subordinate personnel is allowable to the extent
that it is not recoverable under any insurance contract or indemnity. This is allowable as the risk of loss is closely
related to any income-earning business. Losses where the wrongful act was committed by persons, such as a
proprietor, partner, an employee holding a, managerial position, a director, shareholder, or a relative of a shareholder,
are generally not deductible. However, the courts have allowed similar losses where more senior employees and
executives committed the acts. In 2 separate cases it was stated that:
o Deductibility of fortuitous losses and expenditure depends upon the facts of each particular case.
o The risk of the loss must relate directly to the income-producing operations of the business.
RECURRENT EXPENSES
E.g. insurance premiums, audit fees, company secretarial fees, trading licenses, security expenses, etc.
Allowed by SARS because they’re recurrent
ADVERTISING EXPENSES
Generally deductible, provided that it is incurred in the production of income, because it is regarded as not creating a
long-term benefit.
Certain methods of advertising may, however be of a capital nature and are not deductible.
QUESTION 4.1 PAGE 68 - ANSWERS
, 1. Product launch: Where a new product is launched through an advertising campaign, the intention is to create a lasting
benefit as the consumer’s knowledge of this new product is generally intended to be long-term. As such this type of
advertising expenditure would generally be capital in nature and therefore not deductible.
2. Television and radio adverts: Where an advert is to be played over a long period; it would appear that the intention is
to create an enduring benefit and as such the nature of the production costs on this advert would be capital. If the
advert was only played over a short period it could be argued that no long-term benefit was created and therefore the
production costs should be allowed as a deduction as they are not capital in nature.
3. Billboards: Advertising structures that create an enduring benefit or are of a permanent nature may be regarded as
being of a capital nature and therefore not deductible for tax purposes, e.g. a lighting system in a display window that is
of a permanent nature, permanent adverts on billboards, and erection of a model for the display of goods at the show
grounds which is of permanent nature.
VEHICLE EXPENSES
Vehicles used for business purposes, you are entitled to deduct the business expense i.t.o the general deduction formula.
Provided the expenses that actually incurred are deducted such as:
Fuel
Maintenance
Licence
Insurance
Finance charges
Wear and tear can only claim either or but not both.
lease payments
Parking expenses
QUESTION 4.2 PAGE 68 - ANSWERS
Travel to and from your home and your business, office, etc. is not business travel, and may not be claimed as a
deduction. This was established in the case of CIR v De Villiers (1962 AD)
Travelling between two distinct businesses carried on by you in different places is not business travel;
If your office is at your home, then travelling from home to clients, etc. is business travel. Your home is your “base”
from which you commence your business;
Directors of companies are not entitled to deduct expenses incurred by travelling between different places to attend
directors’ meetings from directors’ fees received. Directors may, however, qualify for a deduction of business travel
against a travel allowance received;
Travelling to clients from your place of work is business travel.
SPECIAL DEDUCTIONS
PRE-TRADE EXPENDITURE – S11A
Expenses incurred before a business has actually started
Capital in nature, as it is expenditure incurred in setting up an income-earning structure
S11A – introduced to allow deductions regarded as revenue in nature e.g. salaries, rent etc.
Any expenditure and losses incurred before the start of and in preparation for the carrying on of that trade which
would have been allowed as a deduction under s11 or s24J (interest) had the taxpayer already commenced trading
which were not allowed when they were incurred.
This deduction is restricted to income from the trade i.r.o which the expenses were incurred. Therefore, if that specific
trade does not commence then the pre-trade expenses will never be deductible.
LEGAL EXPENSES S11(C)
Covers the following legal expenses:
Fees for the services of legal practitioners;
Expenses incurred in procuring evidence or expert advice
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