Deductions - Not of a capital nature

Question 1

Facts:
A TP was required to install a new sewerage system on its premises as well as on land outside of its property. The system was installed at a cost of the local authority but the TP had to repay the cost in monthly instalments. The Commissioner disallowed the deduction of both amounts.

Answer 1

New State Areas Ltd

Issue:
Are any of these monthly instalments capital in nature?

Principle:
Fixed capital vs Floating capital
Cost of establishing/improving/adding to an income earning plant (fixed capital) is capital in nature and therefore not deductible, vs
Cost of performing income earning operations (floating capital) which is revenue in nature and therefore deductible.

Question 2

Facts:
A mine management company incurred an expense to acquire a contract to manage a mine in the same group of companies. SARS disallowed this deduction.

Answer 2

Rand mines

Issue:
Is the expenditure to acquire the contract revenue or capital in nature?

Principle:
Expenditure incurred to obtain an income earning right or structure will be capital in nature.
Cost incurred to create a capital structure = capital
Cost incurred to work a capital structure = revenue

Question 3

Facts:
BP SA made an upfront payment to lease premises for 20 years

Answer 3

BP South Africa

Issue:
Whether the lump sum rental payment is deductible for the purpose of sections 11(a) or rather deemed to be expenditure of capital nature?

Principle:
The shorter the period of endurance to which the payment relates, the easier it is to argue that it is revenue in nature. Was an enduring benefit created?
The legal categorisation of a payment does not determine whether it is capital or revenue, but rather the purpose of the expenditure.