General deductions, Special deductions Flashcards
What are the 4 components of the general deduction formula?
1- Preamble to section 11 (trade test) 2- Section 11(a) (positive test) 3- Section 23(g) (negative test) 4- Section 23H (Prepaid expenditure)
What does the preamble to section 11 say, trade test?
“for the purpose of determining TI derived by any person from carrying on any trade, there shall be allowed as deductions from the income of such person derived..”
- trade
- income derived form this trade
What is the definition of trade?
- every profession
- trade
- business
- employment
- calling
What does the carrying of a trade mean?
- there needs to be a continuity of act
- is their long-term objective to make a profit?
- active steps of earning an income
What activities fall outside the definition of trade?
Passive income = investments made in dividend and interest bearing stock.
What does practice note 31 say?
- it is the Practice of SARS to allow expenditure incurred in production of interest to the extent that it does not exceed such income.
- interest expense deduction is allowed but limited to interest income.
What does S11(a) say ?
expenditure and losses actually incurred in the production of income that is not capital in nature during the year of assessment
What are the cases that refer to expenditure and losses?
And what do they mean?
- Joffe & Co (Pty) Ltd losses = involuntary nature expenditure = voluntary payments - PE electrical tramway losses = floating capital
What does “actually incurred” mean?
- does not necessary mean actually paid
- needs to be a liability that has incurred
What 2 cases deal with “during the year of assessment”?
What do they mean?
- Sub Nigel Ltd
expenditure from prev tax year = not deducted in current - Golden Dumps
matching does not apply
What does Section 23(g) prohibit ?
negative test
Prohibits the deduction of
- any money claimed as deduction
- to extent to which
- money are not laid out for purposes of trade
What did the old Section 23(g) require?
That an expenses should be wholly and exclusively (100%) for purposes of trade
What does the new Section 23(g) require?
Provides an apportionment of expenditure incurred for both trade and non-trade purposes
What does S23H do/limit?
Section 23H limits the deduction of prepaid expenditure.
Can only claim deduction if you receive the benefit in that year/
What are the exemptions for S23H?
It does not apply if:
- benefit is received within 6m from year end
- imposed by legislation
- where aggregate of all remaining prepayments < 100 000
If the taxpayer is a VAT vendor, what amount must be deducted ?
S23C
The VAT exclusive amount.
S11A deals with pre-trade expenses, explain the special deduction and the limitation.
S11A says that all pre-trade expenses are accumulated and then deducted as a total amount.
It is limited to the income earned form the trade
What are the requirements for legal expenses to be deducted as a special deduction, S11(c)?
- actually incurred
- i.r.o. any claim, dispute or action at law
- in course of ordinary operations in carrying of trade
- NOT of capital nature.
What are the requirements for restraint of trade to be deducted as a special deduction, S11(cA)?
- actually incurred
- in course of carrying on trade
- on a natural person, labour broker, personal service provider
- extent that restraint serves as income for recipient.
What is the limitation ito restraint of trade special deduction?
Lesser of - amount / no years OR - a third of amount = amount/3
What are the requirements for bad debts to be deducted as a special deduction, S11(i)?
- needs to be due to TP
- needs to be bad @ the year end
- needs to be included in income at some point.
Explain what the special deduction of doubtful debts are dependent on.
Dependent on Accounting treatment:
- IFRS 9 applied
- not applied
How is the allowance/special deduction for doubtful debts determined if IFRS 9 is applied?
allowance/deduction =
- 40% of lifetime
+ - 25% of 12 month
How is the allowance/deduction for doubtful debts determined if IFRS 9 is NOT applied?
allowance/deduction =
- 40% of debt >= 120 days
- 25% of debt >= 60 days
