Exam (elaborations)
LML4804 EXAM PACK 2023
- Course
- LML4804 - Tax Law (LML4804)
- Institution
- University Of South Africa
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LML4804 EXAMPACK 2023
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LML4804
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LML4804
Income Tax:
QUESTION 1
During the 2003 tax year, Mr Johnson leased a dilapidated but well-
situated shopping centre for a period of 10 years. He intended to sub-let it at a profit. Mr
Johnson had to renovate the property in order to render it suitable for letting. His
expenditure in this regard during the 2003 tax
year included an amount of R30 000 for the replacement of broken windows, an amount
of R80 000 for the painting of the building, an
amount of R250 000 for the replacement of broken and damaged roof tiles, and an
amount of R3 000 on a new burglar alarm control box to
replace a broken-down one that could no longer be repaired. Mr Johnson only started
to look for tenants for the building upon completion of the renovations during the 2004
tax year.
a) What are the requirements for the deduction of the cost of repairs in terms of
section 11(d) of the Act?
S11 (d) – Repairs
Repairs to property used for the purposes of the taxpayer’s trade may be deducted in
the tax year in which it actually incurred. Any costs pertaining to the improvements of a
capital asset will not be deductible.
Expenses incurred by a mine for the rehabilitation of mining soil, water, sea or air is
regarded as repairs.
Therefore nothing could be deducted in the 2003/2004 tax year as repairs as everything
for which money was laid out was improvements or replacement of the entire object.
b) Explain whether the various items of expenditure in respect of the renovation of the
building during the 2003 tax year will qualify as deductible repairs in terms of
section 11(d) of the Act.
The general deduction formula is defined as:
any expenditure or loss
which has actually been incurred or suffered
inside or outside the Republic
in the production of income from the carrying on of any trade
to the extent that the monies claimed as a deduction were laid out for the purposes of
the taxpayer’s trade
Which is not of a capital nature
It can be said that there was an expenditure which was actually
incurred within the Republic with the idea of laying out the money in order to produce
income for the taxpayers trade. However, one must
determine whether the amounts laid out where of a capital nature or not
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and if they are allowable deductions in terms of section 11 or prohibited deductions in terms of
section 23.
Your allowable deductions in terms of section 11 include: repairs (s11(d)) – none of the
mentioned expenditure constitute repairs. As well as improvements made to a leased
property (s11(h)).
An expense can’t be deducted if it is an expense of a capital nature.
If an expense is of an income nature then it can be deducted (because you are taxed
on income). I.e. if you spend money you may deduct the original amount spent.
In New State Areas Ltd v CIR: the court held that if the expense was incurred to acquire a
capital asset then the expense is of a capital nature (not deductible).
In CIR v George Forest Timber Co Ltd: if an expense is incurred as a once-off expense and
is not a recurring expense, it is off a capital nature.
In Herron Investments (Pty) Ltd v SIR: (the enduring benefit test). The taxpayer rented out
property to Pine Forbes (insurance brokers) and the lessee (Pine Forbes) wanted to move
out of the premises because they were not modern enough. The taxpayer made
alterations to the building and tried to claim the cost, i.e. deduct the costs of the
deductions. The court accepted that the expenses were incurred for the purposes of trade
and that the expense of the upgrade was in the production of income. The court held:
the expenses were of a capital nature and could therefore not be deducted, because it was
an advantage of an enduring benefit.
Therefore I would say that based on the fact that it is not a repair and is not included
elsewhere in the list of section 11 specific deduction and in line with the decision of
Herron Investments that such amounts are of a capital nature and therefore not
deductable. The only time such
expenditures would be deductable is where the improvements where made subject to
a lease agreement in terms of s11(h).
S11 (h): The actual expenses of improvements made in terms of a leasing agreement by the
lessee can be deducted from the lessee’s gross income. The amount can only be deducted
in the year in which it was actually incurred.
c) During the 2004 tax year Mr Johnson entered into a contract for the
cession of his rights under the lease for an amount of R2
million. Discuss whether the amount of R2 million
- will be taxable in Mr Johnson’s hands in terms of the general
part of the definition of “gross income” in section 1 or in terms of any
specific inclusion in that definition; AND
The general definition of gross income:
The year or period of assessment
In the case of any resident
The total amount, in cash or otherwise
Received by, accrued to or in favour of such resident
Or any person other than a resident (source)
Excluding receipts or accruals of a capital nature
But including specific inclusions
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