TAX2601 Assignment
1 (COMPLETE
ANSWERS) Semester
1 2026 - DUE 8 April
2026
[Pick the date]
,Exam (elaborations)
TAX2601 Assignment 1 (COMPLETE
ANSWERS) Semester 1 2026 - DUE 8 April
2026
QUESTION 1 (13 marks, 16 minutes) Dzindu Properties (Pty) Ltd (Dzindu) is a
South African resident company that builds and sells residential houses in
and around Vhembe (Limpopo Province). The company’s financial year ends
on 30 March. During a severe rainstorm in the area in November 2025, a
river broke its banks and washed away several recently finished houses that
were in the market for sale. The properties were totally destroyed. The
development cost of the destroyed properties amounted to R2 700 000 in
total. On 20 January 2026, Dzindu’s insurance company paid a total amount
of R2 000 000, in full and final settlement, to Dzindu to indemnify the
company for this loss. REQUIRED MARKS Discuss whether the
expenditure/losses above are deductible by Dzindu Properties (Pty) Ltd in
terms of the general deduction formula (section 11(a) read with section 23)
for the year of assessment ending 30 March 2026. (You need to specify
amounts in your discussion.) Note: • You can support the main issue in the
question with relevant case law from the module's prescribed case law. • List
all the requirements of the general deduction formula but note that most
marks are awarded to the discussion of the requirements and the main issue
in the question. 13
QUESTION 1: Deductibility of Losses – Dzindu Properties
(Pty) Ltd
1. General Deduction Formula (Section 11(a) read with Section 23)
Section 11(a) of the South African Income Tax Act provides that a taxpayer may deduct
expenditure and losses actually incurred in the production of income, subject to the
provisions of the Act. Section 23 outlines exclusions and limitations.
The requirements for deductibility under the general deduction formula are:
1. Expenditure or loss – There must be a genuine economic outflow or financial loss.
2. Incurred by the taxpayer – The expense must have been borne by the taxpayer
personally.
3. In the production of income – The expenditure or loss must be incurred in the course of
earning taxable income.
, 4. Not of a capital nature – Capital expenditure or losses are generally not deductible.
5. Not specifically excluded by the Act – Sections 23 and other provisions may disallow
certain deductions.
Relevant case law includes:
CIR v Pick ‘n Pay Stores Ltd 1974 (4) SA 550 (A) – where it was held that only
expenditure incurred in the production of income is deductible.
SIR v K & N Cartwright (Pty) Ltd 1958 (3) SA 618 (A) – distinguishing between
capital and revenue losses.
2. Application to Dzindu Properties (Pty) Ltd
Facts Recap
Dzindu builds and sells houses.
During a storm in November 2025, several completed houses were destroyed.
Development cost of destroyed houses: R2 700 000
Insurance compensation received: R2 000 000 (full and final settlement)
Financial year-end: 30 March 2026
Step 1: Nature of the loss
The R2 700 000 represents the development cost of completed houses, which were
intended for sale (inventory).
Loss relates to trading stock, not fixed assets; therefore, it is revenue in nature.
Step 2: Amount of expenditure/loss deductible
The general deduction formula allows a deduction of the loss actually suffered, adjusted for any
reimbursements received.
Total loss: R2 700 000
Insurance proceeds received: R2 000 000
Net deductible loss:
R2 700 000−R2 000 000=R700 000R2\,700\,000 - R2\,000\,000 =
R700\,000R2700000−R2000000=R700000
This is the amount actually borne by Dzindu for the 2025/26 year of assessment.
Step 3: Loss incurred in production of income
1 (COMPLETE
ANSWERS) Semester
1 2026 - DUE 8 April
2026
[Pick the date]
,Exam (elaborations)
TAX2601 Assignment 1 (COMPLETE
ANSWERS) Semester 1 2026 - DUE 8 April
2026
QUESTION 1 (13 marks, 16 minutes) Dzindu Properties (Pty) Ltd (Dzindu) is a
South African resident company that builds and sells residential houses in
and around Vhembe (Limpopo Province). The company’s financial year ends
on 30 March. During a severe rainstorm in the area in November 2025, a
river broke its banks and washed away several recently finished houses that
were in the market for sale. The properties were totally destroyed. The
development cost of the destroyed properties amounted to R2 700 000 in
total. On 20 January 2026, Dzindu’s insurance company paid a total amount
of R2 000 000, in full and final settlement, to Dzindu to indemnify the
company for this loss. REQUIRED MARKS Discuss whether the
expenditure/losses above are deductible by Dzindu Properties (Pty) Ltd in
terms of the general deduction formula (section 11(a) read with section 23)
for the year of assessment ending 30 March 2026. (You need to specify
amounts in your discussion.) Note: • You can support the main issue in the
question with relevant case law from the module's prescribed case law. • List
all the requirements of the general deduction formula but note that most
marks are awarded to the discussion of the requirements and the main issue
in the question. 13
QUESTION 1: Deductibility of Losses – Dzindu Properties
(Pty) Ltd
1. General Deduction Formula (Section 11(a) read with Section 23)
Section 11(a) of the South African Income Tax Act provides that a taxpayer may deduct
expenditure and losses actually incurred in the production of income, subject to the
provisions of the Act. Section 23 outlines exclusions and limitations.
The requirements for deductibility under the general deduction formula are:
1. Expenditure or loss – There must be a genuine economic outflow or financial loss.
2. Incurred by the taxpayer – The expense must have been borne by the taxpayer
personally.
3. In the production of income – The expenditure or loss must be incurred in the course of
earning taxable income.
, 4. Not of a capital nature – Capital expenditure or losses are generally not deductible.
5. Not specifically excluded by the Act – Sections 23 and other provisions may disallow
certain deductions.
Relevant case law includes:
CIR v Pick ‘n Pay Stores Ltd 1974 (4) SA 550 (A) – where it was held that only
expenditure incurred in the production of income is deductible.
SIR v K & N Cartwright (Pty) Ltd 1958 (3) SA 618 (A) – distinguishing between
capital and revenue losses.
2. Application to Dzindu Properties (Pty) Ltd
Facts Recap
Dzindu builds and sells houses.
During a storm in November 2025, several completed houses were destroyed.
Development cost of destroyed houses: R2 700 000
Insurance compensation received: R2 000 000 (full and final settlement)
Financial year-end: 30 March 2026
Step 1: Nature of the loss
The R2 700 000 represents the development cost of completed houses, which were
intended for sale (inventory).
Loss relates to trading stock, not fixed assets; therefore, it is revenue in nature.
Step 2: Amount of expenditure/loss deductible
The general deduction formula allows a deduction of the loss actually suffered, adjusted for any
reimbursements received.
Total loss: R2 700 000
Insurance proceeds received: R2 000 000
Net deductible loss:
R2 700 000−R2 000 000=R700 000R2\,700\,000 - R2\,000\,000 =
R700\,000R2700000−R2000000=R700000
This is the amount actually borne by Dzindu for the 2025/26 year of assessment.
Step 3: Loss incurred in production of income
