General Deductions

Question 1

The 14 prohibited deductions following the rhyme ‘there’s no ‘J’ in 23!’ are:

Answer 1

A) Private maintenance expenditure
B) Domestic and private expenditure
C) Recoverable expenses
D) interest, penalties & tax
E) Provisions and reserves
F) Expenditure to produce exempt income
G) Non-trade expenditure
H) Notional interest
I) Deductions against lump sum benefits
K) Labour broker expenditure
L) Restraint of trade
M) expenditure for employment of an office
N) Government grants
O) Unlawful activities

Question 2

CC: Edgars Stores Ltd. vs. CIR

Answer 2

Actually incurred:

1. The liability itself is dependent on an event after the tax year = not incurred in this tax year
2. The liability is certain but the amount cannot be determined yet = incurred!

Question 3

CC: De Beers Holdings (Pty) Ltd.

based on Modderfontein Deep Levels Ltd.

Answer 3

Trading at a loss:

A company is able to carry on a non-profit making trade as long as some commercial or business benefit is produced

Question 4

CC: Joffe & Co.

Answer 4

Expenditure & losses:

Losses are expenditure, though probably involuntary

Question 5

CC: PE Electric Tramway Co. Ltd.

Answer 5

Expenditure & losses:

Losses may refer to losses of floating capital

Question 6

The preamble to s(11) states:

Answer 6

1. Any person carrying one trade

2. Is allowed deductions from income derived from that trade

Question 7

CC: SARS vs. contour Engineering (Pty) Ltd.

Does the laying of plans or incurring expenses constitute trade?

Answer 7

Trade:
A venture must be viewed as a whole and may straddle more than 1 tax year.
A vast difference between laying plans and preparatory activities

Question 8

CC: Burgess vs. CIR

Answer 8

Trade:
Motive for carrying on a trade is irrelevant!
Definition of trade should be given a wide interpretation

Question 9

CC: PE Electric Tramway Co. Ltd.

Answer 9

General deductions:
The general dedication formula is made up of 2 parts.
Both parts must be satisfied for deductions to be claimed.

Question 10

CC: Joffe & Co. (Pty) Ltd.

Answer 10

Trading at a loss:

Trade is earning of profits

Question 11

CC: Caltex Oil (SA) Ltd. vs. SIR

Answer 11

Actually incurred:

All expenditure for which the liability has been incurred whether the liability is discharged during the year or not

Question 12

CC: Nasionale Pers BPK vs. KBI

Answer 12

Actually incurred:
Deduct provisions for staff bonuses?
Still in service of the tax payer = contingent = not actually incurred

Question 13

CC: CIR vs. Golden Dumps (Pty) Ltd.

Answer 13

Actually incurred:
‘actually’ is not superfluous
Only once an obligation of debtor to pay is confirmed is the expenses ‘actually incurred’.

Question 14

CC: Concentra (Pty) Ltd. vs. CIR

Answer 14

During the year of assessment:
Expenditure of previous years should have been claimed
Forfeit right to claim s(11)(a) deduction this year

Question 15

CC: PE Electric Tramway Co. Ltd.

Answer 15

In the production of income:
Expenses do not produce income; actions do
All attendant expenditure, whether necessary or by chance are deductible provided they are so closely connected

Question 16

CC: Joffe & Co, (Pty) Ltd. vs. CIR

Answer 16

In the production of income:

Expenditure which is not an inevitable concomitant of the company’s operations are to deductible

Question 17

CC: COT vs. Rendle

Answer 17

In the production of income:

1. Necessary expenses
2. Attached to business performance by chance
3. Bona fide incurred for more efficient performance

Question 18

CC: Standard Bank of SA Ltd.

Answer 18

Purpose of expenditure:
Purpose of the expenditure, what the expenditure actually effects and the closeness of the connection between it and income-earning operations

Question 19

CC: CIR vs. Nemojim (Pty) Ltd.

Answer 19

Dual purpose:

Expenses incurred for both income and exempt income must be apportioned

Question 20

CC: Sub- Nigel Ltd. vs. CIR

Answer 20

Production of income in future years:

The mere fact that income is not produced does not preclude the deductibility of the expense

Question 21

CC: CIR vs. Pick ‘n’ Pay Wholsalers (Pty) Ltd.

Answer 21

Expenditure after income has been earned:
Expenditure may be deducted before income is earned
A sufficiently distinct and direct relationship or link between the expenditure and the income must exist

Question 22

CC: New State Areas Ltd. vs. CIR

Answer 22

Not of a capital nature:
Fixed vs. floating capital:
Whether expenditure is part of the cost of performing income-earning operations or part of the cost of establishing or improving or adding to income earning plant or machinery

Question 23

CC: George Forest Timber Co. Ltd.

Answer 23

Not of a capital nature:

There is a great difference between money spent in creating or accruing a source of profit and in money spent working it

Question 24

CC: SIR vs. Guardian Assurance Holdings

Answer 24

Not of a capital nature:
There is no halfway house between revenue and capital but it is possible to apportion an expense into its capital and revenue components

Question 25

Components of the general deduction formula:

Answer 25

1. Preamble - Trade test
2. S11(a) - Positive test
3. S23(g) - Negative test
4. S23H - prepaid expenditure

Question 26

S23H: Prepaid expenditure

Answer 26

6 month rule: test every expense separately

R80 000 limit: Test all prepaid amounts together (aggregate)

Question 27

S11(a) provides for deductions of:

Answer 27

1. Income and expenditure
2. Actually incurred
3. During the year of assessment
4. In the production of income
5. Not of a capital nature

Question 28

S23H: Prepaid expenditure

Answer 28

All or a portion of goods, services or benefits will be enjoyed after year end

Services and benefits: deduction is spread over the period

NOT applicable to:

1. Goods and services all supplied within 6 months
2. Aggregate amount does not exceed R80 000
3. Expenditure paid for a liability missed by legislation

If you can show no benefit will flow in future, full deduction will be allowed in the current year