Capital expenditure and losses Flashcards
New State Areas Ltd v CIR
Summary
The taxpayer was a Gold mining company. Internal Sewers had to be constructed on the land over which the taxpayer held surface rights and external sewers had to be constructed on land outside of this land in order to connect the sewers to the municipal sewage farm. The cost of both the internal and the external sewers was ultimately born by the taxpayer and the internal sewers became its property while the external sewers did not.
Outcome
The cost of the internal sewers was capital in nature but the cost of the external sewers was not. The internal sewers became the property of the taxpayer and it thus acquired a capital asset but the external sewers never became its property and therefore no capital asset was created.
Principles
The question to ask is whether the expenditure forms part of the cost of performing the income earning operations or as part of the cost of establishing, improving or adding to the income earning plant or machinery (more properly called the income earning structure).The true nature of the transaction must be determined. If it is incurred for the purpose of acquiring a capital asset, it is capital expenditure but if it is part of the cost of performing the income earning operations, it is revenue expenditure.
CIR v Genn & Co (Pty) Ltd
(Quoted in CIR v Nemojim (Pty) Ltd) The Court must assess the closeness of the expenditure and the income earning operations, having regard to both the purpose of the expenditure and what it actually affects.
Sub-Nigel Ltd v CIR
Summary
The company carried on the business of mining and took out insurance against loss by fire which would allow then to earn income should any insured events occur and affect the mining operations.
Outcome
The premiums was deductible as the expenditure was occurred in the production of income. It would allow the company to continue earning an income on the happening of certain occurrences.
Principles
The court is not concerned with deductions that would be proper for accounting purposes. Regard must be had to the act and the act alone. The important question is the purpose of the expenditure and whether this purpose was to earn income. The court is not concerned with whether a particular expense produced any part of the income.
Port Elizabeth Electric Tramway Co v CIR
Summary
The tramway company had to pay compensation to the family of a driver of one of its trams that was injured in an accident and who had passed away. The claim for compensation was made in terms of the WCA.
Outcome
The employment of drivers carried with it the risk that compensation would have to be paid if a driver was injured. The employment of drivers was a necessary part of the taxpayers business and the compensation was deductible.
Principles
The tests are: whether the act that lead to the expense was performed in the production of the income and whether the expenditure is linked to in closely enough.
Thus a subjective ‘purpose’ test and an objective ‘nexus’ test.
Joffe & Co (Pty) Ltd v CIR
Summary
A concrete engineering Company had to pay compensation when a structure erected by the company collapsed and a subcontractor was killed.
Outcome
The compensation payment was not deductible as there wasn’t a sufficiently close link between the payment of the expenditure and operations of the taxpayers business. (because expenses must be incurred for the purposes of trade per section 11 (a)).
Principles
A claim for damages can only be payable if the payment is related to a risk which is inherent in the taxpayers trade.
Ticktin Timbers CC v CIR
Summary
The taxpayer company declared a dividend in favour of its sole member. This dividend was credited to the Member’s loan account and interest was paid by the company on this amount. In effect, the company paid a dividend to it’s Member who then loaned this money to the company at interest (although no actual money changed hands).
Outcome
The interest was not deductible as the interest expense was not incurred in the production of income.
The dividend and the loan in this case was interdependent.
Principles
Interest on a loan is deductible if the loan was made in the production of income. When a loan is made not for the purpose of producing income for the company, but to benefit it’s member (or shareholders), it is not deductible.
CSARS v Scribante Construction (Pty) Ltd
Summary
A civil engineering and construction company declared a dividend to its shareholders from surplus funds. The money was credited to the loan accounts of the shareholders and interest was paid on a portion of this money.
Outcome
The interest was deductible as an expense incurred in the the production of income as the purpose of the loan was to secure funds for the company to use in its trading activities.
Principles
Decisive in this case was the fact that the company had the surplus funds available to pay the dividend. It did not have to borrow the money to pay the dividend. Further, the company earned a higher rate of interest on the funds retained than it had to pay to the shareholders.
CIR v Hickson
Summary
The taxpayer, who was a partner in a partnership, travelled to the USA and England on assignment from a client with the purpose of increasing the sales of the clients products in those countries. The client paid the travel expenses of the taxpayer. The taxpayer was disabled and on advice from his Doctor, took his wife with him as he required her assistance to get around. The taxpayer paid for the expenses of his wife and later sought to deduct these expenses from his share of the partnership profits which had been earned in commission on the sales of clients products.
Outcome
The travel expenses was deductible as the trip was undertaken by the taxpayer in the performance of his duties for the purposes of trade. His wife accompanying him was necessary as he would have been unable to undertake the trip on his own without her assistance.
Principles
The case emphasises that a taxpayer does not need to prove that expenses were necessarily incurred, but merely that they were incurred in the production of income.
CIR v Nemojim (Pty) Ltd
Summary
The taxpayer company was a dealer in shares and would, under normal circumstances, be entitled to deduct the purchase price of shares from the income earned. However, the taxpayer company carried on dividend stripping operations and since dividends are exempt income, SARS refused to allow the deduction on the basis that the expenditure was not incurred in the production of income.
Outcome
The expenditure was incurred for a duel purpose, being the income earned on the sale of the shares and the exempt dividend income and therefore only a portion of the purchase price of the shares were deductible.
Principle
The court approved apportionment where expenditure is incurred partly in the production of income but partly for other purposes. The court held that it was a practical solution to an otherwise intractable problem and that the court would approve a fair and reasonable apportionment.
SA Bazaars (Pty) Ltd v CIR
Summary
The company had carried on the business of a general dealer but had closed down it’s business although it maintained a banking account, paid tax, renewed trade licences and prepared annual financial statements. The Company wanted to carry forward its assessed loss which SARS had disallowed.
Outcome
The Company was not entitled to carry forward its assessed loss as it was not trading.
Principles
A taxpayer can only carry forward an assessed loss from the preceding year of assessment. If a taxpayer does not carry on any trade in a year of assessment then the taxpayer forfeits any assessed losses accumulated as it is a requirement for the deduction of expenses in terms of section 11(a) that a taxpayer must carry on a trade and Section 20(1)(a) only allows for the carry forward of assessed losses from the previous year of assessment.
Robin Consolidatd Industries Ltd v CIR
Summary
The taxpayer company, a manufacturer, wholesaler and retailer of stationary had gone into liquidation and the liquidators carried on trading until the business of the company could be sold as a going concern. When the business was sold, all trading operations ceased but the liquidators retained some stock in bond that had not been sold with the business and income was received on the sale of this stock. The Company wanted to deduct its assessed loss carried forward from the income earned on the sale of the stock.
Outcome
The assessed loss could not be deducted against the income as the company did not trade in that year in which the income was earned.
Principles
The realisation of assets in liquidation does not necessarily constitute trading.
