Taxation 2 nd
2020
semester
298
by: Alexandra Shtein
,Table of Contents
CHAPTER 6: GENERAL DEDUCTIONS ............................................................................................................ 3
CHAPTER 7: NATURAL PERSONS ................................................................................................................ 30
,
,CHAPTER 6: GENERAL DEDUCTIONS
Overview:
Subsequent to determining ‘income’ (gross income – exempt income) the next step in the calculation of taxable income
is to deduct all amounts allowed as tax deductions under s11(a).
Unless specifically provided for elsewhere in the Income Tax Act, expenditure and losses are only deductible if the
requirements laid down in the general deduction formula are met.
S11(a) contains the positive test (what may be deducted), and s23 contains the negative test (prohibitions on certain
deductions). The prohibitions in s23 must always be considered in conjunction with the general deduction formula.
The fact that accounting principles (IFRS) or business practice would treat an amount as deductible is irrelevant.
◦ ‘[T]he court is not concerned with deductions that may be considered proper from an accountant’s point of
view or from the view of the prudent trader, but is merely concerned with the deductions which are permissible
according to the language of the Act’ [Joffe & Co Ltd v CIR 1946 AD 457 at 165]
S11(a): General deduction formula
MUST meet ALL 6 requirements
before deducting
Deduction of expenses:
1. Expenditure and losses (voluntary & involuntary);
2. During the YoA (s11(a) silent – courts);
3. Actually incurred (paid or unconditional liability to pay);
4. In the production of income (act that gave rise to expenditure is closely connected to income-producing
activities);
5. Not of a capital nature (must be closely related to the income generating operations not the income producing
structure, floating not fixed capital, does not create enduring benefit); and
6. Laid out for trade purposes (opening words of s11(a)- deduction from the taxable income derived from the
carrying on of a trade)
, 1) Expenditure & losses:
expenditure
• voluntary payment of money (Joffe & Co) (there doesn’t have to be an obligation or liability)
• Action of spending funds/ disbursement/ consumption (Labat)
• Diminution (even if temporary) or at very least movement of assets of person who expends
(Labat)
loss:
• involuntary deprivation i.e loss of inventory (Joffe & Co)
• Within the context of s11(a) means losses of floating capital employed in trade which produces
income (PE Electric Tramway)
2) During the year of assessment:
• Expenditure is only deductible during the YoA in which it was incurred. It cannot be carried forward to claim
in a subsequent year or carried backward to claim in a previous year (Sub-Nigel).
• To be deductible, it is not necessary that expenditure produce income in the year that it was incurred – the
income may only be earned in future years (Sub-Nigel).
• Remember: ‘during YoA’ requirement laid down by the courts and not listed as a requirement in s11(a) itself.
Centlivres CJ in Sub-Nigel Ltd v CIR:
‘[T]he whole scheme of the Act shows that, as the taxpayer is assessed for income tax for a period
of one year, no expenditure incurred in a year previous to the particular tax year can be deducted’.
• Exceptions: s24M and s23H
* if an amount is not claimed as a deduction in the correct year of assessment, the deduction may not be claimed
in a later year.
2020
semester
298
by: Alexandra Shtein
,Table of Contents
CHAPTER 6: GENERAL DEDUCTIONS ............................................................................................................ 3
CHAPTER 7: NATURAL PERSONS ................................................................................................................ 30
,
,CHAPTER 6: GENERAL DEDUCTIONS
Overview:
Subsequent to determining ‘income’ (gross income – exempt income) the next step in the calculation of taxable income
is to deduct all amounts allowed as tax deductions under s11(a).
Unless specifically provided for elsewhere in the Income Tax Act, expenditure and losses are only deductible if the
requirements laid down in the general deduction formula are met.
S11(a) contains the positive test (what may be deducted), and s23 contains the negative test (prohibitions on certain
deductions). The prohibitions in s23 must always be considered in conjunction with the general deduction formula.
The fact that accounting principles (IFRS) or business practice would treat an amount as deductible is irrelevant.
◦ ‘[T]he court is not concerned with deductions that may be considered proper from an accountant’s point of
view or from the view of the prudent trader, but is merely concerned with the deductions which are permissible
according to the language of the Act’ [Joffe & Co Ltd v CIR 1946 AD 457 at 165]
S11(a): General deduction formula
MUST meet ALL 6 requirements
before deducting
Deduction of expenses:
1. Expenditure and losses (voluntary & involuntary);
2. During the YoA (s11(a) silent – courts);
3. Actually incurred (paid or unconditional liability to pay);
4. In the production of income (act that gave rise to expenditure is closely connected to income-producing
activities);
5. Not of a capital nature (must be closely related to the income generating operations not the income producing
structure, floating not fixed capital, does not create enduring benefit); and
6. Laid out for trade purposes (opening words of s11(a)- deduction from the taxable income derived from the
carrying on of a trade)
, 1) Expenditure & losses:
expenditure
• voluntary payment of money (Joffe & Co) (there doesn’t have to be an obligation or liability)
• Action of spending funds/ disbursement/ consumption (Labat)
• Diminution (even if temporary) or at very least movement of assets of person who expends
(Labat)
loss:
• involuntary deprivation i.e loss of inventory (Joffe & Co)
• Within the context of s11(a) means losses of floating capital employed in trade which produces
income (PE Electric Tramway)
2) During the year of assessment:
• Expenditure is only deductible during the YoA in which it was incurred. It cannot be carried forward to claim
in a subsequent year or carried backward to claim in a previous year (Sub-Nigel).
• To be deductible, it is not necessary that expenditure produce income in the year that it was incurred – the
income may only be earned in future years (Sub-Nigel).
• Remember: ‘during YoA’ requirement laid down by the courts and not listed as a requirement in s11(a) itself.
Centlivres CJ in Sub-Nigel Ltd v CIR:
‘[T]he whole scheme of the Act shows that, as the taxpayer is assessed for income tax for a period
of one year, no expenditure incurred in a year previous to the particular tax year can be deducted’.
• Exceptions: s24M and s23H
* if an amount is not claimed as a deduction in the correct year of assessment, the deduction may not be claimed
in a later year.
