Deductions (case laws)

Question 1

Which case law follows under “carrying on a trade”?

Also state the principle

Answer 1

Burgess case:
* The definition of trade should be given a wide interpretation and includes a “venture”. A venture is a transaction where someone risks something with the object of making a profit. Whether a scheme is a trade or not would depend on its own facts

Question 2

What case law follows under “year of assessment”?
State the case principle

Answer 2

Sub-Nigel
- No expenditure incurred in a year before that particular year can be deducted

(Note that this is subject to exceptions such as s23H and s23M)

Question 3

Disclose the case principle for “Expenditure or loss”

Answer 3

Labat case:
* Issuing of shares with a value equal to the value of a ‘trade mark’ did not in any way reduce the assets of the company (although it may reduce the value of shares held by shareholders) and it can therefore not qualify as an expenditure

Question 4

State the case laws under “Actually incurred”

Answer 4

• Edgars stores
• Nasionale Pers Bpk
• Golden Dumps

Question 5

State the principle for case law Edgars stores

Answer 5

Only expenditure in respect of which a taxpayer has incurred an unconditional legal obligation may be deducted under s11(a). No deduction for estimates of contingent (uncertain) liabilities

Question 6

State the principle for the case law Nasionale Pers Bpk

Answer 6

There is no unconditional legal liability to pay an amount – so not yet actually incurred

Question 7

State the principle for the case law Golden Dumps

Answer 7

The court held that a liability is contingent in a case where a claim is genuinely disputed and, if at the end of the tax year the dispute is unresolved, the liability has not been actually incurred

Question 8

What are the case laws under “in the production of income”?

Answer 8

• Port Elizabeth Electric Tramway
• Joffe & Co
• Mobile Telephone Networks Holdings
• COT
• BP South Africa

Question 9

Disclose the principle for case law Port Elizabeth Electric Tramway

Answer 9

For purposes of s 11(a) it is essential to show that relevant
expenditure is incurred in the production of income. It is not
necessary to show that it is essential for the production of income but at least incidental and that there is a necessary link that is not too remote

Question 10

Disclose the principle for the case law Joffe & Co

Answer 10

In this case the court referred to the expenditure or the act leading to the expenditure as being a necessary concomitant of the business operations and thus disallowed the amount of damages paid by the taxpayer (negligence is not an inevitable concomitant of trade)

Question 11

Disclose the principle for the case law Mobile Telephone Networks Holdings

Answer 11

Audit fees needed to be apportioned because portion that related to a dividend income is exempt from “income” in terms of s10(1)(k) and therefore expenditure to earn “exempt income” will be prohibited by *s23(f) *of the Income Tax Act

Question 12

Disclose the principle for the case law COT

Answer 12

The Commissioner only allowed the amounts paid as bonuses but not the amounts paid to the dependents. The court held that no clear distinction could be drawn between the two sets of payments and that since both were clearly designed by the taxpayer to induce the taxpayer’s employees to enter and remain in its service – the total amount constitute expenditure actually incurred in the production of income

Question 13

Disclose the principle for the case law BP South Africa
(in the production of income)

Answer 13

In terms of the interest expenditure the court held that the purpose of the loan was to continue its income producing activities and that the interest paid on the loan was an expense incurred on order to produce income within the meaning of s11(a)

Question 14

Which case law is has the dual purpose? {General deductions}

Answer 14

Nejomin
The principle:
° court held that the expenditure in acquiring the shares had a dual purpose: the receipt of moneys on resale (i.e. gross income) and the receipt of a dividend (i.e. exempt income) and that it would be appropriate to apply the principle of apportionment

Question 15

General deductions

What are the case laws under “not of a capital nature”?

Answer 15

• New State Areas
• Rand Mines
• BP South Africa

Question 16

What is the principle for the case law New State Areas?

Answer 16

The court held that the repayment of the amounts for the internal sewers (sewers on the taxpayer’s own property) was of a capital nature, being the payment of instalments towards the acquisition of an asset which remained the property of the taxpayer (income earning structure). With regards to the external connection (not part of the taxpayer’s property) the payments did not produce any permanent asset for the company which did not lose its nature of a recurrent business charge (payable over a period of time) and needs to be allowed as a deduction – revenue in nature (income earning operations)

Question 17

What is the principle for the case law Rand Mines?

Answer 17

The expenditure was held to be capital in nature as it gave rise to an enduring benefit and added to the taxpayer’s income earning right or structure

Question 18

Capital in nature

What is the principle for the case law BP South Africa?

Answer 18

The expenditure neither created nor preserved any capital assets in the hands of the taxpayer, no enduring benefit was created, and the expenditure was closely linked to the taxpayer’s income-earning operations and were a deductible expense in terms of the general deduction formula (s 11(a))