DEDUCTIONS

Question 1

Section 11 (a)

Answer 1

Determines which amounts are deductible

Question 2

Section 23 (g)

Answer 2

Determines which amounts are not deductible

Question 3

Trade

Answer 3

• Defined in S1:
o Business, profession, employment, venture, letting of property, earning of royalty income
o All forms of active occupation, including rental and royalty income
o “Burgess” – ‘Trade’ must be given wildest possible interpretation
 Passive Income: not doing anything but getting money
o Commences once there are active business assets

Question 4

Expenditure and losses

Answer 4

• Loss: Expenditure of an involuntary nature

* Cash outflows

Question 5

Practice note 31:

Answer 5

• SARS allows an interest deduction for the production of passive interest income
• Deduction is limited to interest income produced

Question 6

Actually Incurred

Answer 6

Only unconditional amounts are deductible

Question 7

During the YOA

Answer 7

• “Sub-Nigel” – expenditure from previous YOA cannot be deducted in current YOA
o S 23H overrides this principle (Prepaid Expenses)

Question 8

In the production of income

Answer 8

• “PE Electric Tramway” – Expenditure closely connected to the income-earning activities
o Causal link between action and income earning structure
o By chance, is this something that can occur during business activity?
• “Joffe” – Inevitable concomitant
o Is this “thing” happening because of business operations
 Where negligence is not part of business operations
• “Rendle” – Risk sufficiently closely connected to business operations
• “Standard Bank of SA limited” – closeness of the connection between the expenditure and the income-earning operations must be assessed
o If you have an income that is exempt which leads to an expense, that expense cannot be deductible
 If not fully exempt (income) – expense can be deducted
• “Drakensberg Gardens Hotel” – Interest incurred on a loan to purchase shares is generally not deductible
• “Provider” – Retirement bonuses are only in production of income if they are part of the contract or part of a recognised policy

Question 9

Not capital in nature

Answer 9

(No Definition in act – refer to case law)
• “New State Area Ltd”
o Capital nature if it adds to the income earning structure
o Incurred for the purpose of acquiring a capital asset = capital nature (Must have control of the asset)
o Incurred for the purpose of working the income producing operations = revenue nature
• “Rand Mines” – give rise to an enduring benefit and adds to TP’s income earning structure
• “BP SA (Pty) ltd” – payment for the use of an asset may be deductible, but not a once-off payment for the right to use the asset
o Must be a period of endurance to be capital in nature

Question 10

S23 (g) – Trade Test

Answer 10

• Deductions not allowed in determination on Taxable Income
• No deduction if it was an expense incurred but wasn’t for the trade
• “Warner Lambert SA” – Expense does not have to produce a profit itself

Question 11

Pre- Trade Expenditure – s 11A

Answer 11

• Expenditure spend before business has begun is generally capital nature
• S 11A provides that a taxpayer can claim a deduction in the year that trade commences of:
o Expenditure and losses
o Actually incurred
o Prior to the commencement of, and in preparation for
o Carrying on that trade
 Which would have been allowed as a deduction in terms of s11, s11D or s24J
 Which was not allowed when they were incurred

Question 12

Answering deduction questions:

Answer 12

• Start by saying:

1. Whether or not there is a special deduction; if not continue
2. S11 – requires a trade to be carried on
3. S11 (a) – 5 items of the definition
4. S23 (g) – disallows to the extent not laid out for trade