5. Allowable Deductions Flashcards
What different kinds of deductions are there?
- General deductions
2. Specific deductions
Which deductions come first?
General before specific
What do general deductions relate to?
They relate to people carrying on a business.
So it doesn’t apply to people earning salaries
What happens where deductions are greater than income?
Assessed losses
When will a deduction be prohibited even if it meets the requirements of the general deduction formula?
If it is part of the negative requirements section 23
Are passive investments carrying on a trade?
No
Not deductible
What are passive investments?
Interest, dividends, pensions, annuities
How do you calculate TOTAL taxable income?
Add all incomes and losses from all trades together
When can a trades loss NOT be set off against other trade incomes?
If its a suspect trade
What is a prerequisite for carrying on a trade?
There must be a profit or reasonable expectation of profit
Is the letting of property or designs carrying on a trade?
Yes
Is speculating shares a trade?
Yes
When can you deduct interest expense?
Only the amount occurred in earning interest income, limited to interest income
What is a venture and is it deductible?
Risk taken to make profit
It is deductible
Does the absence of profit mean there is no trade?
No
What are the questions to ask if a loss can be set off against another trades income?
- Would they have paid maximum marginal rate?
- Suspect trade or loss in three of last five years including current year
- Does it qualify for exclusion rule
- Did the trade (excluding farming) have a loss for 6 of the last 10 years
Can the loss from a trade be set off against other income if it would have paid the maximum marginal rate ?
Yes, move one to next step
Can previous losses be accounted for when determining if trade made a loss?
No
Does income from a trade include recoupment and capital gains?
Yes
What are the suspect trades?
- Sports
- Dealing in collectibles
- Rental of residential accommodation unless 80% is to non-relatives and they rent at least 6 months
- Animal showing
- Farming or animal breeding unless full time
- Any form of art
- Gambling or betting
When will the limitation rule not be applied?
If the trade will make a reasonable profit in reasonable time
What happens if the limitation rule is applied?
Losses can not be set off against other income
What are the factors that should’ve be considered when determining if the exclusion rule applies?
- proportion of gross income to allowable deductions
- amount spent on advertising and promotion
- commercial manner the trades carried on
- number of years they’ve had a losses since commencement
- business plans for future taxable income
- extent to which trade asset is used for personal use
What are the two sides of general deduction formula?
- Positive
2. Negative
Do ALL requirements have to met for the deduction formula?
Yes
What are the components of the general deduction formula?
- Carrying on a trade
- Expenses or losses
- Actually incurred
- In year of assessment
- In production of income
- Not of a capital nature
- Expenses laid out for purpose of trade
Can people who only earn salary use deduction formula?
No
It’s for trade
What is the difference between expenditures and loss?
A loss is involuntary
Does expenditure only include cash?
No, any amount in lieu of cash
Can value be placed on an assets labour at the hands of taxpayer?
No, only the value for components can used
What value will be used as deduction for donation?
Usually fair market value
What does actually incurred mean?
Amounts that are paid or owing
Can the value of a liability be deducted if there is a condition?
No, it must be unconditional
If there’s a condition, when can it be deducted?
Only once the condition is met
Is there a difference between contingent liability and estimated Expediture?
Yes
Estimated amounts can be deducted
If the estimated amount is too much, what is done with the difference?
The excess will be included in taxable income next period
What happens if the estimated amount is too little?
The difference will not be allowed as deduction
When is the compensation date when a court case is not settled?
Only when case is settled
When is a contingent liability deductible?
At fair market value on date of disposal
When is they’re of assessment for an individual?
From 1 march to end February
When can something be deducted?
Only in the year it occurred, if it wasn’t claimed then it cannot be claimed
How are expenses deducted when concerning production of income?
When they are so closely related to producing that income they are considered an operating cost
Do expenses have to occur in the same year as income?
No
Should the be a reasonable hope for profit for deductions?
Yes
Is expenditure incurred in production of exempt income or capital income deductible?
No
What is the inevitable concomitant test?
- Establish purpose of expense
2. Ask whether the the tasks as necessary and risk attached
Is compensation paid deductible?
No, it’s usually not necessary production of income
Can expenses be apportioned for deductible amounts?
Yes
Can you deduct bribes, fines or penalties?
No
Is theft deductible?
Look at nature of business
Are social responsibility expenses deductible?
Yes
What recurrent expenses are deductible even though they aren’t in production of income?
- Audit and accounting fees
- Printing costs of reports
- Publishing AFS
- Annual JSE quotes
- Fees of transfer of secretaries
How would you determine if expense is capital in nature or not?
Courts have laid down tests
What are the test court have laid down for determine capital or revenue in nature for deductions?
- True nature of transaction
- Closeness of connection between income-earning operation and income-earning structure
- Does expense create asset or enduring benefit
- Expense relate to fixed or floating capital?
- Is the expenditure once and for all?
- Nature of business being carried on?
When can an expense be deducted even if it is capital in nature?
If its a specific deduction
What are the specific deductions?
- Pension fund contributions
- Retirement annuity fund contributions
- Donation to public benefit organizations
- Medical expenses
Is there a difference money spent in creating a source of income and only spent in working it?
Yes
Creating the source is capital
Working it is revenue
Is recurrent rent paid capital of nature?
No
As long it is paid in production of income
When is interest expense deductible?
If its interest in a loan used for the production of income
Are royalty payments in terms of a licensing agreements deductible?
Yes
What is floating capital?
Where capital frequently charges its form to money. E.g. Trading stock etc.
If an expense is for trade and other purposes, can it be apportioned?
Yes
What is section 23(g)?
The negative side to the deduction formula
It is not allowed as deduction if not laid out in production of income
What are prohibited expenses?
Expenses that can not be deducted from income
What are the prohibited expenses?
- Maintain taxpayer and family and establishment
- Domestic or private expenses
- Where trade is employment UNLESS majority earned from commission
- Losses covered by insurance policies
- Tax duty or levy
- Income carried over to serve fund or capitalized
- Expenses incurred regarding exempt income
- If it meets the negative test
- Interest made in capital
- Costs claimed as deduction on retirement fun
- Expenses incurred by labour broker or personal service provider
- Expenses paid for restraint of trade
- Expenses made from employment of office held
- Bribes, penalties etc.
- Insurance policies ceded to employee
When can a person deduct expenses when they earn remuneration through employment?
If they earn a salary of more than 50% of commission
When is advertising considered capital in nature?
If it creates an asset
Are general donations usually deductible?
No
When is education/training deductible?
Only for the purpose of maintaining skills or knowledge
When calculating how much someone earns in commission what is included?
Any awards or prizes
Is goodwill usually deductible?
No
Unless it is purchased to sale
Are insurance premiums deductible for trade?
Yes
Be careful for insurance on capital
Interest on loans for dividends, taxes, assets and exempt income deductible?
No
Are salaries and wages deductible?
Yes
Are bonuses deductible?
Yes
Are gratuities paid to retired employee deductible?
No
Unless it was part of the employment agreement
Are gratuities paid in terms of keeping staff happy deductible?
Yes
When can theft be deducted?
If it is an inevitable concomitant
Is expenditure on vacant or unproductive property deductible?
No
Is expenditure on wasting assets deductible?
No, they are still capital in nature
What are assessed losses?
Where deductions exceed income.
This is assessed losses instead of taxable income
What is done with assessed losses?
Carried forward to next period and used to reduce taxable income of that period
Is incentive to staff deductible?
Yes
Are meals deductible?
No, they are specifically prohibited in section 23
Does the accounting principle of matching apply for tax purposes?
No
It must be claimed in the period it occurred in
Are gifts deductible?
No
