General and Special Deductions Summary-1 PDF

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GENERAL & SPECIALDEDUCTIONS5. IN THE PRODUCTION OF INCOME: Port Elizabeth Electric Tramway: If expense was an inevitable consequence of income production = can be deducted. One must test how closely expense is linked to actions that produce income. Joffe & Co: Negligence that is not deemed a...

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1. TRADE: - Burgess: Trade must be given a wider interpretation. -Concentra: Expenditure accrues to current year, if TP doesn’t claim it, they will forfeit deduction in the next yr. -De Beers: A Co. can trade @ a loss provided there be commercial/business benefit.

2. EXPENDITURE & LOSSES: Joffe & Co: Negligence that is not deemed an inevitable part of trade is not seen as prod. Of income. Therefore was expense an inevitable concomitant (was amt unavoidable). Negligence ≠ deductible. 3. ACTUALLY INCURRED: Caltex Oil: Expenses actually incurred doesn’t mean actually paid during YoA. (All expenditure which links to liability that has been incurred during YoA whether or not the liability has been discharged in that year or not). Nasionale Pers BPK: If a pmt is contingent upon the happening of uncertain future events; expense and corresponding liability will only be deducted once incurred and conditions are met. Edgars Stores: An expense can only be deducted once there is an unconditional legal obligation to pay said expense. Therefore only deducted when event takes place. Golden Dumps: Where there is an obligation to pay an amt that is in dispute; expense only actually incurred when dispute is settled with regards to obligation and amt thereof.

4. DURING THE YEAR OF ASSESSMENT: Sub-Nigel LTD: An expense must be deducted in the year of assessment that it is incurred, even if it will produce income in future years. Cannot be claimed in later years. Matching principle ≠ irrelevant. Caltex Oil: Expenses actually incurred doesn’t mean actually paid during YoA. (All expenditure which links to liability that has been incurred during YoA whether or not the liability has been discharged in that year or not).

GENERAL & SPECIAL DEDUCTIONS

-General deduction formula is split between s11(a): Positive Test & s23(g): Negative Test -Preamble to s11 requires there to be: 1. A TRADE to be carried on and there must be income derived from such a trade. - S11(a): 2. Expenditure and Losses 3. Actually incurred 4. During the year of assessment. 5. Must be in prod. of income. 6. Not of a capital nature. - s23(g): Deductions will not be allowed in determination of TI therefore no deductions shall in any case be made i.r.o.: - Any moneys -Claimed as a deduction from income derived from trade - to extent to which such moneys were not incurred for purposes of trade.

5. IN THE PRODUCTION OF INCOME: Port Elizabeth Electric Tramway: If expense was an inevitable consequence of income production = can be deducted. One must test how closely expense is linked to actions that produce income. Joffe & Co: Negligence that is not deemed an inevitable part of trade is not seen as prod. Of income. Therefore was expense an inevitable concomitant (was amt unavoidable). Negligence ≠ deductible. Pick n Pay Wholesaler: Must be a direct link between expenditure incurred and the earning of income. BP Southern Africa: Recurring pmts for maintain income-earning operations = deductible. Therefore incurred in prod. of income. Royalty pmts are revenue in nature therefore deductible if intellectual property is used in prod. of income. 6. NOT OF A CAITAL NATURE: New State Area LTD: Acquisition of asset = capital. Acquisition of asset for right of use = income therefore deductible. Cost of improving to income earning plant = capital in nature therefore not deductible. Cost of performing income earning operations = revenue in nature therefore deductible. George Forest Timber: Assets are either classified as fixed or floating capital. Fixed Capital = Intention to keep. Floating Capital = Acquired for sale/disposal. BP South Africa: Legal classification of a pmt doesn’t determine whether capital or revenue. Look @ purpose of expense and not legal classification. Was there an enduring benefit created? If yes = capital REPAIRS: Flemming: Expenditure incurred must be as a result of damage or need to repair asset that has been subject to use in order for it to a repair. Cost must maintain income earning ability of asset and not improve it. African Products Manufacturing CO LTD: Repair is restoration by replacement or renewal of subsidiary part of a whole. (Material need not be the same). Improvement creates a better asset: Test for improvements: 1. Has a new asset been created? 2. Is new asset increasing income-earning activity? 3. If yes, improvement is present and might qualify for an allowance.

PRE-TRADE EXPENDITURE: - All pre-trade expenditure is accumulated until trade commences; total will be claimed as a single s11(a) deduction. - Deduction is restricted to the income from that trade. Therefore deduction can’t be set-off against income from another trade. - If trading never commences; pre-trade expenditure is never deductible - Carrying on a trade: 1. Is there continuity? 2. Is the long term objective of trade to make a profit? 3. Is there intention to generate a profit? S23(g): Non-Trade Expenditure: - A non-trade expense can’t be deducted. - Prohibits the deduction of money’s paid to the extent that such moneys were not expected for purposes of trade. - If expense is only partly for trade purposes then only part of it will be allowed as a deduction. S23(h): Notional Interest: - Prohibits the deduction of interest which might’ve been made on capital employed in trade. - Opportunity cost of interest not earned can’t be claimed as a tax deduction. S23(l): Restraint of trade pmt: - Prohibits this deduction except as provided for under s11(cA). - S11(cA) allows the restraint to be deducted over the period of restraint OR 3 yrs; which ever is longer. S23(o): Fines & corrupt activities: - Prevents the deduction of any pmts resulting from illegal activities. (bribes) - Prohibits the deduction of any fines charged or penalties imposed as a result of illegal activities.

S23(d): Tax, Penalties and interest on tax: - Prohibits the deduction of: - Income Tax, Donations Tax - Penalties on above taxes - Penalties on VAT - Penalties on other taxes - Interest on any taxes - Penalties on Skills Dev. Levy. - Penalties & interest on unemployment insurance contributions. - Following can be deducted to extent that they are part of a deductible expense: VAT, Custom Duty, Stamp Duty, Securities Transfer Duty, Transfer Duty & Workmen’s Compensation.

GENERAL & SPECIAL DEDUCTIONS

S23(H): Pre-paid Expenditure: - Must match the deductions in the year that the benefit will accrue to the TP. - Limits the deductions that may be claimed for pre-paid expenses during any YoA. - Applies only to allowances and deductions under: - S11(a): General Deductions - S11(c): Legal expenses - S11(d): Repairs - S11(w): Key-man insurance policies - S11(A): Pre-trade expenditure. - Deduction may only be claimed when G&S are actually supplied and rendered. 1. Services: Deduction is spread over the number of month the service will be rendered. 2. Not possible to determine period: Apportionment must be done over period which services are likely to be rendered. 3. Monthly apportionment not fair: Commissioner must determine a way that is fair and reasonable to apportion.

S23(e): Provisions: - Prohibits the deduction of any amt i.r.o. of income carried to any reserve fund. - Unless ITA provides a deduction of a reserve then TP can’t claim deduction of provision. - Expenditure may only be deducted once actually incurred.

S23(f): Expenses to produce exempt income: - An expense incurred for purposes of earning any amt that is not income therefore exempt will not be deductible. - EG: Buying shares = return = dividends (passive income) = dividends are exempt and therefore not deductible. - Interest paid on a loan= exempt, therefore not deductible. S23(q): Expenditure to earn foreign dividends: - Disallows expenditure incurred to earn foreign dividends. - Therefore if interest is paid on a loan to buy foreign shares = interest on loan is not deductible. S23(B): Prohibition of double deductions: - Expenses can only be deducted once, special deductions take precedence over s11(a) deduction provision. - Deduction that s23(H) allows is as follows: a. i.r.o GOODS supplied = deduct in specific YoA that goods are supplied. b. i.r.o services = Mnths(in YoA) services rendered x exp Total mnths that services will be rendered - S23(H): Does not apply to expenses i.r.o. trading stock. - NB: IF THE FOLLOWING APPLY. THEN S23(H) DOESN’T APPLY THERFORE CAN DEDUCT IN FULL IN YoA: 1. Expense paid is i.r.o. an unconditional liability imposed by law. 2. G&S < 6 mnths after CYoA 3. In AGGREGATE expenses < R100k

S11(c): Legal Expenditure: - Does not provide deduction for damages and compensation – this falls under s11(a). - Legal expenditure which are not incurred in the production of income ≠ deductible. - A dispute need not to reach court for the expenses relating to it to be deducted under s11(c). - S11(c) allows a deduction if legal expenses are incurred to protect income or prevent an increase in expenditure. - Legal expenses that are capital in nature will not qualify for a deduction. - Link to S23(H) - If there is a deduction for damages and compensation there will not be a deduction under S11(c). - Permissible deduction: legal practitioner fees, expenses to produce evidence, court fees, witness fees, costs of sheriffs and messengers in court.

S11(f): Lease Premiums: Over and above normal rental instalments. Must be in respect of right of use of asset. Must be incurred for purposes of lessee’s trade. Deduction is apportioned for part of the year, if paid during the YoA. - For lessee to claim deduction, premium must be taxed in the hands of the lessor. - Amt to prematurely terminate a lease ≠ lease premium. - LESSOR: Include entire premium in his GI. (para g) Entire premium is taxed in yr of receipt. - LESSEE: -No inclusion in GI -Deduction under 11(f). -Deduction spread over lease term (incl. renewal periods) ltd to 25 yrs. -Deduction is apportioned by part of a year. -Premature termination: lessee will qualify for a full years deduction in yr of terminationremaining deductions are lost. - Deduction = Premium x X Lease term 12 -

S11(cA): Restraint of Trade payments: - Not deductible under s11(a) as they are capital in nature. - This section allows a deduction to be made in the hands of the recipient. - A deduction is permitted if the amt is actually incurred, in the course of his trade, as compensation in respect of any restraint imposed by any person who is: 1. A natural person. 2. A labour broker. 3. A personal service provider. - The deduction shall not exceed in any one year the lesser of: 1. The amt incurred divided by the number of yrs of restraint. OR 2. One third. - CANT DEDUCT OVER LESS THAN THREE YEARS.

GENERAL & SPECIAL DEDUCTIONS

S11(i): Bad debts: - REQUIREMENTS: 1. Debt must’ve actually gone bad. 2. Value of debt must’ve been included in income as defined either in CYoA or prev. YoA. 3. Debt must be due to TP therefore TP must be legally entitled to it. - All 3 must be met in order to claim the deduction. - Loan granted to employee that subsequently goes bad will not be a s11(i) deduction as loans are capital in nature and there’s no GI inclusion. - Deduction can only be made in year the debt goes bad. -Bad debts recovered will be included in GI i.t.o. para (n); if recouped later there will be no deduction therefore effect = 0 -Debt collection fee = deduction

S11(d): Repairs: - This deduction is preferred over improvements as improvements is spread over number of years therefore improvements qualify for capital allowances. - CASE LAW!! S11(g): Leasehold Improvements: - Must be in production of income. - If no amt in contract, commissioner will determine amt –usually cost price. - Requirements: 1. Lessee must effect improvements. 2. Must be effected to land or buildings. - Deduction = value stipulated in the contract. - Excess expenditure incurred by lessee will be ignored UNLESS amt in contract is amended before improvements are complete; then the excess will be a deduction under s13(1). (lessee can claim deduction on exceess if in relation to factories) - If lessee incurs expenditure less than amt stipulated in contract; deduction = actual expenditure. - Improvements are only included in lessor’s GI when they are complete (SARS Practice). - Lessee can’t claim deduction if there is no inclusion in lessor’s GI. - Relief for the lessor will not be applicable if: 1. lessor/lessee is a company and one party holds more than 50% in the other. 2. Lessor & lessee are companies and a 3rd party holds more than 50% in both companies. - LESSOR: Inclusion of VALUE of improvements per contract in GI. S11(h) Relief (refer to special inclusions summary) No s11(g) deduction. - LESSEE: -No GI inclusion. -No Relief for lessee. -S11(g): Deduction is spread over REMAINING LEASE TERM -Premature termination: lessee will qualify for a full years deduction in yr of termination- remaining deductions are lost. - Deduction is apportioned by part of a year. - Deduction = Contract Value of improvements x X Lease term 12 X = Time from when improvements are done until y/end (in mnths) Remaining lease term = How many months have passed from time lessee entered into agreement up until time improvements are done

Refunds of salaries and restraint receipts: 1. Refund of salary: If person refunds any amount which he received for services rendered, this amount is deductible for employer in terms of s11(nA) if original income was included in that TP’s TI. 2. Restraint Refunded: Deductible under s11(nB) if it was originally included in TP’s GI.

S11(j): Doubtful Debts: - Provides a deduction for when debts become doubtful. - Allowance is only made i.r.o. debts which would have been allowed as a deduction had they gone bad. - To qualify for deduction: 1. Doubtful debt must be included in his income & 2. Must be due to TP @y/end. -Deduction: 20% of list of doubtful debts @ y/end -Remember to add back the deduction from prev. yr (also 20%) -Doubtful debts deduction not applicable to loans as loans were never included in GI.

Donations to PBO’s: - Donations to tax exempt PBO’s are free from donations tax but this doesn’t mean that such donations are deductible. - Only deductible if PBO is registered as a PBO and issues a tax deduction certificate for donations made to it. - 10% of taxable income if: (deduction): - Available to all TP’s - Cannot exceed 10% in CY; therefore excess is claimed in following year. - 10% of TI (after deductions excluding retirement lump sums, retirement benefits, withdrawal benefits and severance benefits) - If TP has no taxable income or has an assessed loss = no s18A deduction may be claimed for that year. -Donations of non-cash items: 1. Trading Stock: The amt which had been considered for purposes of s22(8) for livestock & produce. As a financial instrument: deduction is based on LOWER of: 1. M/V or 2. Amt i.t.o. s22(8). S22(8) requires M/V of donated stock to be included in TP’s income. S22(8)(c) requires the cost price to be included if donation qualifies for s18A certificate.

GENERAL & SPECIAL DEDUCTIONS

2. Trading Assets: Lower of: 1. Tax Value 2. Fair M/V 3. Other Assets: Lower of: 1. Tax Value 2. Fair M/V If moveable property = cost must be depreciated @ 20% p/a on reducing balance method. 4. Purchased/constructed assets: Lower of: 1. Tax Value 2. Fair M/V 5. Immovable Property: (Cap. in nature) If the lower of M/V or Municipal Value > cost of property; deduction: A= B + (C x D) A= S18A deduction. B= Cost of property. C= Amt that would’ve been cap. gain if property was sold @ lower of M/V or municipal value. D= 66.6% (Natural Person/Trust) 33.3% (Other)

S11(m): Annuities paid to former employee: 1. Annuities paid to former employee: Employer may deduct (in full) an annuity each year that it is paid to a former employee; provided employee retired due to illhealth, old age, infirmity. 2. Annuities paid to dependents of former employees/dependents: A deduction is allowed i.r.o. annuities paid to dependents of a former retired or deceased employee. Ill-health, old age, infirmity = not a requirement Former deceased employee = person who depends on that person will allow company to qualify for a deduction 3. Annuities paid to former partners: TP may deduct annuity paid to a person who was a partner in TP’s business and who retired on grounds of: ill-health, old age, infirmity. Following must apply: - Retired partner must have been a member for at least 5 yrs. - Amt of annuity must be reasonable in light of services as a partner - Amt of annuity must be reasonable in light of profits made by partner. - Pmt not in lieu of any interest (goodwill) - Must be a genuine annuity

Employers Contribution to funds: - No longer 20% of approved remuneration. - No limitation therefore deduct in full. - Contributions to pension, provident, medical aid and UIF will qualify for this deduction. - Lump sums as well as annuity contributions to qualifying funds will be allowed as a deduction....