4.1 The General Deduction Formula (17) Flashcards
Allowable deductions fall into two categories:
● Those allowed in terms of the ‘General Deduction Formula” – covered by S11(1) and s 23(g)
● Special deductions – covered by all other sections. Introduced to extend or limit the above
Section 11(a) - General deduction formula, provides
For the purposes of determining the taxable income derived from any person from carrying on a trade there shall be allowed as deductions, expenditure and losses actually incurred in the production of income, provided not of a capital nature.
Section 23(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.
The requirements for an expense to qualify for deduction 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
● Must be actually incurred in year of assessment
● Must be incurred in production of income
● Must not be of a capital nature
● Must to some extent have been paid out or expended for the purposes of trade
● Must not be prohibited under s 23
Trade is defined in Income Tax Act and includes
Every profession, trade, business, employment, calling, occupation or venture, including the letting of any property and the use of, or the grant of permission to use any patent, design, trademark, copyright or other property of a similar nature.
Income
Trade must provide some sort of commercial or business benefit or reward (Not necessary to result in profits)
Expense or loss
Refer to cash outflows and to liabilities that must be settled by ways other than cash (eg. Shares or property), cash equivalent would apply
Losses generally refer to expenses of an involuntary nature
Actually incurred
An expense is deductible in year that it is actually incurred (otherwise forfeited),
Ie. When it becomes unconditionally due and payable, regardless of when it is settled.
Where the expense cannot be quantified, it will be estimated based on information available.
Prepaid expenses may only be deducted in year incurred unless:
● The goods or services paid for are supplied within six months after tax year end
● Value is less than R100 000
● Subject to specific timing and accrual
● Payable in terms of a legislative obligation
In the production of income
Although expenditure itself does not produce income, it is normally a consequence of certain actions undertaken to produce income.
The purpose of the act must be looked at and if performed for the purpose of earning income then deductible.
Expenses incurred to produce exempt income are not allowable.
Not of a capital nature
Capital R&A are excluded from gross income and therefore capital expenses are not allowable.
Generally has following elements:
● It adds to a taxpayers income earning structure
● It is once off expense from which future income will flow
● It creates a lasting benefit or advantage for the taxpayer
Expended for purposes of trade
Where costs are incurred for a purpose other than trade, ie personal, no deduction allowed
Where incurred only party for trade, an apportionment must be made for portion of expense incurred for trade
S 11(1) specific expenses includes:
● Loss in terms of fire, theft and damages
● Recurrent expenses
● Advertising expenses
● Vehicle expenses
Losses in terms of fire, theft and damages
The deductibility depends on nature of asset lost.
● Fixed assets – forms part of capital of business and therefore not deductible
● Trading stock – allowable to extent that these are not covered by an insurance policy
● Cash – allowable to the extent that it is not recoverable under any insurance contract or indemnity. (losses where wrongful act was committed by owners, managers, relatives generally not deductible)
Recurrent expenses
Includes recurring expenses not usually incurred in production of income but required to operate, such as insurance premiums, audit fees, trading licences, security expenses.
