4.2 Special Deductions (23)

Question 1

The Income Tax Act makes provision for

Answer 1

The deduction of specific expenses which may not fall within General. Expenses may only be deducted once and a special deduction overrides s 11(a).

Question 2

Special deductions – S 11, includes:

Answer 2

● Pre-trade expenditure – s 11A
● Legal expenses – s 11(c)
● Restraint of trade payments – s 11 (cA)
● Lease premiums – s 11(f)
● Leasehold improvements – s 11(g)
● Patents, copyrights, designs and trademarks – s 11(gB)
● Purchase of patents, copyrights and designs – s 11(gC)
● Expenditure to acquire a licence from the State – s 11(gD)
● Relief for lessors – s 11(h)
● Bad debts – s 11(i)
● Doubtful debt allowance – s 11(j)
● Deductions to pension, provident and retirement annuity funds - Section 11F (was s 11(k)
● Employer contributions to pension, provident or benefit funds – s11(l)
● Annuities paid to former employees – s 11(m)
● Refund of salary and restraint receipts – s 11(nA) & (nB)
● Employer owned insurance policies – s 11(w)

Question 3

Pre-trade expenditure – s 11(A)

Answer 3

Relates to expenses incurred before business has actually started. Generally this is treated as capital (incurred in setting up an income earning structure). However this allows certain start-up costs that would generally be regarded as revenue in nature (eg: salaries, rent, etc)
These would be accumulated and allowed in year that trade commences. If trade does not commence then not deductible.

Question 4

Legal expenses – s 11(c)

Answer 4

Provides for specific legal expenses that might not qualify under s 11(a):
● Fees for services of legal practitioners
● Procuring evidence or expert advice
● Court fees
● Witness fees and expenses
● Taxing fees
● Sheriffs or messengers of the court
● Other expenses of litigation

Question 5

The deduction of legal expenses is limited to the amount of that:

Answer 5

● Is actually incurred
● In respect of any action, claim, dispute or action of law
● Is not of a capital nature
● Incurred in course of carrying on trade
● Amount being claimed by taxpayer would be taxable if he wins or amount claimed against would be deductible if he loses

Question 6

Restraint of trade payments – s 11(cA)

Answer 6

Usually capital in nature, however this allows deduction of amounts paid in the course of carrying on trade to:
● A natural person
● A labour broker
● A personal services company, trust or provider
Provided that amounts paid will constitute income in hands of receiver.
Allowed over LONGER between restraint period or 3 years and not apportioned for part year.

Question 7

Lease premiums – s 11(g)

Answer 7

The lessee is entitled to deduct this premium, provided that lease premiums are income in hands of lessor (ie. Not exempt body).
May be deducted in annual instalments starting year premium was first paid over period of lease (LIMITED to 25 yrs).
IS Apportioned for part year.
If lease terminates earlier balance of lease premiums not deducted fall away.

Question 8

Leasehold improvements – s 11(g)

Answer 8

Where a lessee incurs costs in making improvements to land and buildings that are occupied for purpose of trade (provided constitutes income in hands of lessor) – entitled to deduct cost stipulated in lease agreement or fair and reasonable value if not stipulated.
Any amount over amount stipulated allowed @ 5% on manufacturing buildings.
Deducted in annual instalments over initial period of lease plus right to renew period or MAXIMUM of 25 years.
Deducted in year completed and must be reduced for partial year.
If lease terminates and there is still a balance, may be deducted in full in year of termination.

Question 9

Patents, copyrights, designs and trademarks – s 11(gB)

Answer 9

● Obtaining grant of any patent
● The restoration or extension of the term of any patent
● The registration or extension of any design
● The renewal or registration of any trademark

Question 10

Purchase of patents, copyrights and designs – s 11(gC)

Answer 10

Provides for an allowance to be deducted in year that property is brought into use for purpose of trade.
● If < R 5000 – full amount deducted
● If > R 5000 – 5% for invention, patents, copyright or similar and 10% for design or similar

Where property is acquired from a connected person allowance is based on = cost to connected person of developing/acquiring such property LESS Allowances claimed by seller PLUS recoupments PLUS CGT included in sellers income.
No allowance since October 1999 for trademarks or similar.

Question 11

Expenditure to acquire a licence from the State – s 11(gD)

Answer 11

Deductible over the LESSER of:
● Period that taxpayer has the right to the license
● 30 years

Licence fee and directly related costs only deductible if licence relates to following trades:
● Telecommunication
● Petroleum related
● Gambling facilities

Question 12

Relief for lessors – s 11(h)

Answer 12

Lessor required to include lease improvements in gross income in year completed. This provides some relief by allowing them to deduct such amounts as Commissioner considers reasonable.
Commissioner may grant an allowance that takes into account that these improvements will not benefit the lessor until after lease has expired.
In practice commissioner grants a deduction equal to difference between amount of improvements included AND amount of improvements discounted at a rate of 6%, over period of initial lease

Question 13

Bad debts – s 11(i)

Answer 13

Bad debts may only be deducted if:
● They are due to you
● Debt arose from amounts which have been included in current or previous years income
● The debt has become bad during current year
● Limited to amount not recovered from an issuer, guarantor or surety.

Must provide statement showing name of debtor, date debt incurred, reasons why irrecoverable and how debt was incurred.

Question 14

Doubtful debt allowance – s 11(j)

Answer 14

Claimable allowance depends on whether:
(i) Taxpayers apply IFRS9 (accounting statement dealing with the measurement of financial instruments)
(ii) Taxpayers not applying IFRS9
An allowance claimed must be included in following years income.

Question 15

Doubtful debt allowance for taxpayers applying IFRS9 (i)

Answer 15

(aa) 40% of:
● The IRFS9 loss allowance measured at an amount equal to the lifetime expected credit loss; and
● The amounts of bad debts that have been written off for accounting purposes, but that do not meet the requirements for a tax deduction.

(bb) 25% of the IFRS9 loss allowance in respect of debt other than lease receivables and debt covered under (aa)

Question 16

Doubtful debt allowance for taxpayers not applying IFRS9 (ii)

Answer 16

(aa) 40% of face value of debts that are at least 120 days past due; and

(bb) 25% of face value of debts that are between 60 days and 120 days past due date

Question 17

A ruling can be obtained from SARS for a higher percentage in case of sub-par (i)(aa) and (ii)(aa) based on

Answer 17

Following criteria: (not exceeding 85%)
● The history of debt – number of repayments outstanding and duration of debt
● Steps taken to enforce debt
● Likelihood of debt being recovered
● Security available in respect of debt
● Criteria applied by taxpayer in classifying debt as bad
● Any other factors that Commissioner may deem relevant.

Question 18

Deductions to pension, provident and retirement annuity funds – S 11F

Answer 18

Total deduction allowed limited to LESSER of:
(a) R 350 000; or
(b) 27.5% of the HIGHER of:
(i) Remuneration (excluding retirement lump sum benefits, retirement fund lump sum withdrawal and severance benefits)
(ii) Taxable income (same exclusions as above) before any deductions under s 11F itself, s 18A and foreign tax
(c) Taxable income (excluding same) before s 11F deduction, s 18A, foreign tax and taxable capital gain.

Question 19

Amount deducted for pension, provident and retirement annuity funds limited to

Answer 19

Actual contribution plus any carried forward balance not allowed as deduction in prior year. (where contribution was more than deduction)
Amounts carried forward are reduced by contributions set off when determining taxable retirement fund lump sums or retirement annuities.

Question 20

Employer contributions to pension, provident or benefit funds – s 11(l)

Answer 20

Amounts contributed by employers on behalf of employees are taxed as fringe benefits and are treated as contributions by employee when calculating their allowable deduction. (no limit)

Question 21

Annuities paid to former employees – s 11(m)

Answer 21

Allows a deduction of full annuity in following scenarios:
● Where annuity is paid by employer to employee who retired on grounds of old age or ill-health
● Where annuity is paid to dependents of former employee
● Where annuity is paid to former partner of business, provided partner 5+ years, reasonable in light of services rendered and profits earned, payment not in lieu of any other interest, and is a genuine annuity

Question 22

Refund of salary and restraint receipts – s 11(nA) & (nB)

Answer 22

Where a salary amount or restraint of trade payment is refunded by a person and the original receipt was included in their taxable income - a deduction for amount refunded will be allowed

Question 23

Employer-owned insurance policies – s 11(w)

Answer 23

Allows for deduction of premiums on a policy taken out over the life of an employee / director provided that the
● Employer is policy holder and beneficiary (if policy pays out must be included in income)
● Premiums payable included in taxable income of employee
● Policy is a key-man policy

If paid in lump-sum deduction will be spread out over lifetime or reasonable period. If matures before total written off, balance may be deducted in total.