LML4804 Assignment 1 (QUALITY ANSWERS) Semester 2 2024

This document contains workings, explanations and solutions to the LML4804 Assignment 1 (QUALITY ANSWERS) Semester 2 2024. For assistance whats-app us on 0.6.8..8.1.2..0.9.3.4... The provisions of the Act which deal with the deductibility or non-deductibility of amounts can be divided into the following three categories: • the general deduction formula (s 11(a) and s 23(f) and (g)) • deductions which are specifically prohibited (s 23) • deductions which are specifically allowed (s 11(c) to 11(x) and other specific provisions in Part I of Chapter II) In other words, in determining a taxpayer’s allowable deductions, a so-called three-stage test should be applied: • The positive test: s 11(a) sets out what may be deducted. • The negative test: s 23(g) stipulates what may not be deducted even if the deduction complies with the general deduction formula. • The special cases: s 11(c)-(x) makes provision for certain special deductions that would generally not have been allowed under s 11(a). 5.2 GENERAL DEDUCTION FORMULA STUDY: Silke 6.3 The general deduction can be broken down into the following elements: • expenditure or losses • actually incurred • during the year of assessment (although this element is not expressly stated in the Act, it can be deduced from case law) LML4804/501/2/2024 33 • in the production of income • not of a capital nature • either in part or in full laid out or expended for the purposes of trade These requirements (or elements) of the general deduction formula will now be discussed in more detail. 5.2.1 Any expenditure or loss STUDY: Silke 6.3.1 See in particular the meaning of “loss” and “expenditure” 5.2.2 Actually incurred (during the year of assessment) STUDY: Silke 6.3.2 and 6.3.3 CIR v Golden Dumps (Pty) Ltd 1993 (4) SA 110 (A)) Note that section 23H limits the amount of deductions that may be claimed for prepaid expenditure during a year of assessment. Where, for example, certain expenditure is incurred in order to procure services, all of which will not be supplied in that year of assessment, only that portion of the expenditure which relates to the services supplied during that year of assessment may be claimed. Section 23H applies if two conditions are met and none of the four exceptions apply. Where section 23H applies, only the current year portion of expenditure actually incurred can be deducted in the year of occurrence and the future year portion can only be deducted in the applicable year. The two conditions are: • The expenditure must in principle be allowable as a deduction in terms of s 11 (a); s 11(c); s 11(d); s 11A; s 11(w); or s 11D(1) • The expenditure must be in respect of ▪ Goods or services, but not all the goods or services will be supplied or rendered during the year of assessment. ▪ Any other benefits, but the period to which the expenditure relates extends beyond the year of assessment. The following amounts will be deductible in a specific tax year unless the Commissioner directs that the apportionment should be made in another manner which appears fair and reasonable: • in case of the supply of goods, the amount which corresponds to the goods actually supplied during that tax year; • in case of the rendering of services the amount is determined on a time basis, namely the number of months in that tax year during which the services were rendered expressed as a ratio of the total number of months during which the services will be rendered; • in respect of any other benefit to which the expenditure applies, the amount is also determined on a time basis similar to the situation above, namely the number of months in that tax year during which the taxpayer actually or probably will enjoy the benefit, expressed as a ratio of the total number of months during which the taxpayer will be entitled to the benefit. Section 23H does not apply in the following instances (In other words, in these cases an apportionment will not apply, and the full amount will be deductible) • If all the goods are supplied or rendered within six months after the end of the year of assessment during which the expenditure was incurred; or; if the person will receive the full benefit in respect of the expenditure within six months of the end of the year of assessment in which the expenditure was incurred • where the total of all amounts of expenditure incurred by the taxpayer which could possibly be limited by this section, does not exceed R100 000; • in respect of expenditure actually paid in respect of any unconditional liability to pay an amount imposed by legislation; • any expenditure to which the provisions of sections 24K or 24L apply. (These sections fall outside the scope of this module.) Where, however, it is shown by the taxpayer during any tax year that the goods and services will never be received or rendered or that the taxpayer will never become entitled to such other benefit in respect of which the expenditure has been incurred, he will be allowed to deduct the expenditure to the extent that it has actually been paid in that year. It is important to remember that the principles, as laid down in the Golden Dumps case, still apply in respect of all those situations that do not fall within the ambit of section 23H. 34 Self-evaluation question Explain the former Appellate Division’s interpretation of the phrase “expenditure actually incurred” (as used in s 11(a)) in CIR v Golden Dumps (Pty) Ltd 1993 (4) SA 110 (A)). Answer STUDY CIR v Golden Dumps (Pty) Ltd 1993 (4) SA 110 (A) 115G-118F. Section 11A states that any expense: • actually, incurred before commencement of business or in preparation of such a business • which will be deductible under section 11 if the expense was incurred in the year of assessment • which were not allowed in that year, will only be deductible from that source of income in which the expense was made and not any other source. Example: Where X incurred business expenses prior to commencement of that business, such expenses, if a deduction will be allowed under section 11, will only be deductible from the business income and not any other source of income. (e.g. X’s salary as teacher) 5.2.3 Inside or outside the Republic Section 11(a) provides that expenses actually incurred inside and outside the Republic may be deducted if they fulfil all the other requirements of the general deduction formula. 5.2.4 In the production of income derived from carrying on any trade STUDY: Silke 6.2 and 6.3.4 Port Elizabeth Electric Tramway Co Ltd v CIR 1936 CPD 241; 8 SATC 13 5.2.5 To the extent that the monies claimed as a deduction were laid out for the purposes of the taxpayer’s trade STUDY: Silke 6.2 and 6.2.1 Section 23(g) qualifies the (income and trade) requirements in section 11(a) even further by providing that only expenditure incurred for the purposes of trade may be deducted from income derived from the carrying on of a trade. At first glance, section 23(g) may appear merely to duplicate the provisions in section 11(a). However, section 23(g) does more than to merely restate this requirement in the negative. Section 23(g) requires that the expenditure must be incurred for purposes of the taxpayer’s trade, otherwise it may not be deducted. The effect of section 11(a), read with section 23(f) and (g), is therefore that only expenditure incurred for purposes of a taxpayer’s trade may be deducted from income derived from the carrying on of a trade. Section 23(g) only applies within the scope of the general deduction formula. It does not apply to the specific deductions allowed in terms of section 11 and other sections in Part I of Chapter II of the Act. In some of these provisions section 23(g) is expressly excluded, whilst in others it is excluded by implication (Smith v SIR 1968 (2) SA 480 (A) and L Feldman Ltd v SIR 1969 (3) SA 424 (A)).