Case law- on general deductibility Flashcards
Sub-Nigel Ltd
v CIR
1948
Principle- The purpose for which the expenditure was incurred is
an important factor. If the purpose is to earn income,
then the expense is deductible
The Commissioner claimed that the cost of the insurance
policies was not deductible as no income was earned during
that year
A bit of facts of case- The taxpayer, a gold mining company, took out insurance
policies against loss of profits and the cost of standing charges
in the case of loss of operations due to fire.
No claims were made in terms of these policies during the year
in question.
Burgess v CIR
1993
Principle- Trade (Trade includes a venture, which is a
transaction in which a person risks something with the
purpose of making a profit.)
The court found that the taxpayer had been carrying on a
“trade”
Facts of the case -The taxpayer entered into a scheme through a partnership
whereby amounts were borrowed and then invested indirectly
in the stock market, through a single premium endowment
insurance policy.
The scheme limited the risk to the taxpayer in the case of a
downturn in the market while allowing the taxpayer to
participate greatly in any market gains.
In the event, the market crashed, and the taxpayer was forced
to pay certain guarantees to the bank that had funded the
scheme.
Port Elizabeth
Electric
Tramway Co
Ltd v CIR
1936
purpose- Expenses are deductible if they are so closely linked to
the act of producing income as to be regarded as part of
the cost of performing them
The purpose of the act must be looked to.
If the act is performed for purpose of earning income,
then the cost associated with performing those acts is
deductible.
“All expenses attached to the performance of a business
operation bona fide performed for the purpose of
earning income are deductible whether such expenses
are necessary for its performance or attached to it by
chance or are bona fide incurred for the more efficient
performance of such operations provided they are so
closely connected with it that they may be regarded as
part of the cost of performing it.”
Brief summary of case- A tramway driver who was an employee of the taxpayer
sustained injuries and subsequently died as the result of an
accident involving the tram he was driving.
The employee was entitled to compensation, but the company
resisted these claims. The company was eventually forced, by
court order, to pay the claims.
The taxpayer sought to deduct the claims and the legal
expenses incurred.
Joffe & Co
(Pty) Ltd v CIR
1946
purpose - necessary concomitant of the trading operations”
The court found the amount was not deductible, as it was not
incurred in the production of income.
Brief summary - the taxpayer was an engineering firm who was forced to pay
damages and compensation to the family of an employee who
was killed when a concrete structure the firm was erecting
collapsed
CSARS v BP
South Africa
(Pty) Ltd
2006
purpose - The purpose of the expenditure and what it actually
effects are important, if not overriding factors in
determining whether the expenditure is in the
production of income
Loan for Dividend ≠ Income Production Expense
If a loan is taken out to pay dividends, not to make money (income), it can’t be counted as an expense for earning income.
Therefore, this type of loan doesn’t meet the criteria for tax deduction under section 11(a).
Borrowing with Sufficient Cash Reserves
A company with enough cash to pay a dividend and stay financially healthy, but borrows to fund its business operations, isn’t considered to be borrowing to pay the dividend.
Such a loan is likely to be seen as a business expense, not a dividend financing.
The court found that the purpose of the loan was to finance
future capital expenditure projects and that the interest was
therefore deductible.
BPSA (Pty) Ltd
v CSARS
2007
Purpose - The court was called upon to decide whether the royalty
payments were deductible in terms of section 11(a).
Purpose of the expense: BP was paying for the right to use the trademarks, not to own them outright. Like paying for the right to use the cartoon character, not buying the character itself
Recurrent payments: BP had to pay these fees regularly. It’s like paying the fee for the character every year, showing that it’s a regular business expense, not a one-time purchase.
No capital asset created: Paying the fee didn’t give BP any long-term assets; they were just paying for the ongoing use of the trademarks. It’s like your lemonade stand’s sign that you use to keep attracting customers, not something that adds to the value of your stand.
Provider v
COT
Purpose- A lump sum paid in terms of a general policy is
considered to be in the production of income.
summary- The taxpayer satisfied the court that a termination lump sum
payment was not paid in recognition of past services, but as an
incentive to the rest of the staff.
CSARS v
Mobile
Telephone
Network
Holdings (Pty)
Ltd
2014
purpose - . Whatever the case, the apportionment must
be fair and reasonable under the circumstances
Section 11(a) read with section 23(f) and section 23(g)–deductions in the production of
income.
Better love MTN !!!!!!!!!!!!!!!!!!!
This is the the brief summary
MTN was a holding company that had a small lending trade. It
incurred audit fees and claimed a full section 11(a) deduction
on the basis that the actual audit work related to dividends
earned was negligible and the work was mainly in respect of
the interest-earning operations.
SARS added back 94% of the deduction claimed on the basis
that 94% of gross income was dividend income.
The SCA found that the assertion that most of the audit work
related to the interest-earning operations was not correct and
held that 10% of the audit fees were deductible.
MTN had also claimed under section 11(a) for 100% of a fee to
install a new computer system within the group. SARS
disallowed this amount on the basis it was capital, and the
court upheld the assessment in this regard. The benefit of the
system was for MTN’s subsidiaries, not for MTN itself
Edgars Stores
Ltd v CIR
1988
The provisions of the lease agreement relating to
turnover rental created a contingent liability which was
only determined at the end of the lease year; therefore
it was not “actually incurred” in a tax year which ended
prior to the termination of the lease year
Nasionale
Pers Bpk v KBI
1986
Purpose - Where an expense is subject to an uncertain future
event falling outside the year of assessment, no expense
has been “actually incurred”.
The deduction was disallowed by the court, as it had not yet
been actually incurred.
CIR v Golden
Dumps (Pty)
Ltd
1993
Purpose - No deductions are allowed for contingent liabilities, as
there has been no actual incurral of an expense
Brief summary -
An employer entered into an agreement with one of its
employees whereby the employee was entitled to buy certain
shares at a stipulated price.
The employee was subsequently dismissed but claimed his
right to purchase the shares at the stipulated price.
The employer disputed this claim, and the matter was only
settled some years later by court decision, which ruled in
favour of the employee. By this stage, the price of the shares
had increased substantially.
The employer wanted to deduct the cost of acquiring the
shares at the time the dispute was resolved while the
Commissioner claimed that only the cost of the shares at the
point in time the employee first became entitled to them was
deductible
CSARS v Labat
(669/10)
2011
Purpose -
owever, the principle
still applies in respect of shares issued in respect of
shares issued generally – it does not constitute
expenditure.
CIR v George
Forest
Timber
1924
Money spent in acquiring an income-producing concern
or a source of future profits is capital expenditure.
New State
Areas Ltd v
CIR
1946
If expenditure is incurred for the purpose of acquiring a
capital asset, then it is capital even if paid in instalments.
If expenditure is incurred for the purpose of working the
income producing operations, then it is revenue even if
paid as a lump sum.
Rand Mines
(Mining and
Services) Ltd v
CIR
1996
In other words, the expenditure
resulted in the creation of an income-earning
opportunity for the taxpayer.
The court found that the amount was not deductible as it was
capital in nature.
