Special Deductions

Question 1

The 15 special deductions following the rhyme ‘back cadef 7 alphabet O W’ are:

Answer 1

S11(bA) Pre-production interest
S11(c) Legal expenses
S11(cA) Restraint of trade
S11(d) Repairs
S11(e) Wear & tear
S11(f) Commencement of lease and lease premiums
S11(g) Leasehold improvements
S11(h) Relief for the lessor
S11(i) Bad debt
S11(j) Doubtful debt
S11(k) Pension funds
S11(l) Contributions by employers to funds
S11(m) Annuities paid to employees
S11(o) Disposal of assets
S11(w) Key-man policies

Question 2

S11(g): Leasehold improvements: The lessor is NOT entitled to use the asset until…

Answer 2

…the lease ends

Question 3

S11(g): Leasehold improvements: The lessor includes…

Answer 3

…an amount in gross income in year the right accrues (can apply for relief - typically only included the year improvements are completed!)
…stipulate an amount or fair and reasonable value

Question 4

S11(g): Leasehold improvements: the lessee can deduct costs annually calculated as follows:

Answer 4

Cost / years (max: 25) x apportionment

Commences when improvements are completed!

Question 5

S11(g): Leasehold improvements: if the lease is terminated early…

Answer 5

…the balance may be deducted!

Question 6

S11(g): Leasehold improvements: the term of the lease must at least be…

Answer 6

…for 20 years!

Ignore the renewal period!

Question 7

S11(g): Leasehold improvements: In determining the amount and actual vs. stipulated…

Answer 7

Actual < stipulated: Actual for both lessee & lessor

Actual > stipulated: stipulated for both!

Question 8

S18A: Deductible donations:

Answer 8

Limited to 10% of taxable income
Made to PBO’s
Exclude lump sum benefits from taxable income when calculating taxable income!

Question 9

S11(o): Disposal of assets:

Answer 9

Claimable on all assets EXCEPT buildings (scrapping allowance)
MUST be disposed of
not for assets with useful lives of 10 years or more
Actual costs + costs of moving
Amount by which cost exceeds allowances + deductions + proceeds!

Question 10

S11(l): Contributions by employers:

Answer 10

10% of approved remuneration (SARS allows up to 20%)

Question 11

S11(i): Bad debt:

Answer 11

1) Show you have ceased active recovery collection OR handed it over to attorneys or debt collectors
2) Written the debt off in your books

Question 12

S11(f): Lease premiums:

Answer 12

Paid in addition to or in lieu of rent
Lessee may deduct the premium (if it is income to the lessor)
1. Used by lessee in production of income
2. Allowance commences in year premium is paid
3. Consider renewal periods
4. If the lease ends early, the balance is NOT deductible
5. The lessor is taxed in the year the premium accrues

Question 13

S11(f): Lease premiums: Paid in annual installments calculated as follows:

Answer 13

Total premium / years (max: 25) x apportionment

Consider renewal periods!

Question 14

S11(f): Commencement of lease:

Answer 14

Unless the lease premium is paid = no infomercial tax implications!
Full lease premium is included in lessor’s gross income
Lessee writes premium off over the lease period
(VAT: Finance lease: at commencement)
(VAT: operating lease: on each rental payment)

Question 15

S11(d): Repairs:

Answer 15

1. There must be damage or deterioration
2. Intention of taxpayer must be to restore asset to its original condition
   ( does NOT result in an improvement!)

Question 16

S11(cA): Restraint of trade: Payments shall not exceed…

Answer 16

…the lesser of:

1. The amount / years of restraint OR
2. 1/3 of the amount

Question 17

S11(h): Relief for the lessor:

Answer 17

A deduction equal to the difference between:

1. The amount of improvements in gross income &
2. Improvements discounted at 6% over the period of the lease (excluding renewals!)

Question 18

Special deductions and deductions are covered by sections:

Answer 18

S11 to 19: Deductions
S23B: double deductions prevented!
S23C: VAT

Question 19

S11(c): Legal expenses: To qualify, costs must be…

Answer 19

1. Actually incurred
2. Any action, claim, dispute or action of law
3. Incurred in the course of carrying on a trade
4. Not of a capital nature (i.e. eliminating competition)

Question 20

S11(m): Annuities to former employees:

Answer 20

1. Retired on grounds of old age, ill health or infirmity
2. Person was dependent on employee immediately prior to their death
3. Former partner retired on grounds of old age, ill health or infirmity:
   A. Partner for at least 5 years
   B. Amount is reasonable (services)
   C. Amount is reasonable (profit earned)
   D. Not in lieu of other interests (goodwill)
   E. Genuine annuity

Question 21

S11(e): Wear & tear allowance:

Answer 21

Does NOT apply to buildings, ships or aircraft (12C) (permanent nature)
Take into account s11(d) Repairs in determining S11(e) allowance
Value is increased by moving costs
Installment credit agreements: seller cannot claim / buyer can claim until final payment
Not for assets written off over 3 years
Assets brought into use after 1 March 2009
MUST be apportioned!
Based on cost less residual value
< R7000: write off in full in first year