Module 6 Taxation Tutorials
Q2) In order to determine whether an amount is deductible we must refer to s23(g)
and s11(a).
The general deduction formula applies when the taxpayer is deemed to have been
part of a trade. The restaurant business constitutes a trade as it relates to the
exchange of goods between clients and the entity.
We must check for any specific prohibitions according to s23 before we apply the
general deduction formula. There are no specific prohibitions that apply in this case.
In terms of s11(a) an amount is deductible if the following criteria is met:
Expenditure and losses
Actually incurred by the taxpayer
During the year of assessment
In production of income
Excluding amounts of a capital nature.
All criteria is met except for excluding amounts of a capital nature.
Issue: Is the Royalty payment deductible in terms f s11(a)
The onus to prove an amount is deductible and/or of a capital nature rests upon the
taxpayer according to s102 of the Tax Administration Act.
Capital in nature is not defined according to the income tax act thus we refer to
relevant case law.
BP Southern Africa. An amount that creates a recurring benefit is deemed to be
capital in nature. An amount that does not create a recurring benefit is not deemed to
be of capital nature.
The amount to purchase a asset is capital and the amount to maintain the asset is
revenue in nature.
The royalty fees grants the entity the right to use trademarks and signage from the
Texan Beef SA for a year. The recurring benefit created is the use of these assets
however the entity does not own the asset at the end of the year thus no recurring
benefit is created.
The amount of R236800 is thus revenue in nature and can be deducted for the 2021
year of assessment according to section 11(a).
Question 3
A) In order to determine whether an amount is deductible we must refer to s11(a)
and s23(g) together.
There are no specific deductions which are applicable for the cake flour
purchase.
The bakery is a trade thus s23(g) does not prohibit potential deductions.
The onus to prove an amount is deductible rests upon the taxpayer according to
s102 of the Income Tax Act.
According to s11(a) an amount is deductible if it meets the following criteria:
Expenditure and losses
Actually incurred by the taxpayer
During the year of assessment
In production of income
Excluding amounts of a capital nature.
All criteria is met except for actually incurred and during the year of assessment.
Actually incurred is not defined according to the income tax act thus we refer to
the relevant case laws.
Edgar’s stores case. There must be an unconditional obligation before an amount
is incurred by the taxpayer.
Golden dumps case. If there is a dispute over the obligation at the end of year of
assessment that amount is presumable not actually incurred at that point, There
was an ongoing legal dispute over whether the amount owed was 16000 or
20000 at the time 16000 has been paid thus this portion can be said to have
been incurred,
The additional 4000 rand was still in contention thus we can not account for it
within our tax deductions.
In conclusion during the 2021 year of assessment no deduction can be made for
the whole R20000 as the obligation was not unconditional though 16000 will be
allowed as a deduction under s11(a).
Expenditure is a voluntary loss of assets held whereas a loss is involuntary loss
of assets held. Joffe case. There was no movement of the additional 4000 rand at
the time of assessment.
B) The amount of R960 represents a portion within it that is prepaid expenditure
In order to be deductible according to s11(a) we must apply the s23B
prohibition test and if any prohibition applies on the portion related to the
current year will be deducted.
7/12*960=560. This portion will be deducted within the current year of
assessment regardless of whether or not the prohibition applies.
S23B states that an amount will be fully deductible if:
The entity will obtain all benefits within 6 months of the next year of
assessment
It relates to the trading stock of the business.or
If the accumulated amount of prepaid expense does not exceed R100 000
It relates to a mandatory government payment such as municipal rates.
The magazine are not trading stock.
The magazine are not mandatory government expenditure.
The cumulative amount of prepaid expenses is R960/12*5=R400. This is less
than R100000 thus the whole amount is deductible an alternative is that within
5 months the whole benefit would have been obtained.
The entire R960 will be deductible under s11(a) for the 2021 year of
assessment as the s23B prohibition does not apply.
Details
Legislation
Calculation
Amount
Revenue
S1(1) of gross
590000
income tax definition
Interest income
S1(1) of gross
2000
income ta definition
Exempt income
(2000)
Tax free interest S12T(2)
(2000)
income
Gross income
590000
Deductions and
(132560)
capital
contributions
Investment into
Capital in nature no
tax free savings deduction applies
Milk eggs sugar S11(a)
(22000)
Flour-16000
S11(a)
(16000)
Flour-additional
Not deductible as
4000
not actually incurred
according to s11(a)
Depreciation
Not deductible
according to the
income tax act…not
an actual
expenditure
Rent water and
electricity
Magazine
Bribery
S11(a) applies
though it is limited to
the portion of the
home used to run
the business 20%
according to s23(b)
The current year of
assessment portion
and also the prepaid
portion are both
deductible as s23B
does not prohibit this
deduction due to the
benefits to be
enjoyed within 6
months of the next
year of assessment,
5 exactly, s11(a)
applies
S11(a) does not
apply due to s23(o)
468000*20%
960*7/12+960*5/12=960 (960)
-
Taxable income
Normal tax
payable
Primary rebate
no secondary
one as she is
under 65.
Excess
Contribution to
tax free
investment
Amount due to
sars.
Q4)
(93600)
457440
67144+31%(457440455100)
67869
(14958)
2755*12=33060 below
36000 thus no excess is
taxed.
52911
When determining whether an amount is deductible as a pre-trade expense we refer
to s11A. As trade commence on 1 August whilst this expenditure was incurred
between 1 and 30 July.
S11A reads as follows:
Expenditure and losses incurred by taxpayer in preparation for trade
That would be deductible if the entity had commenced trade.
Excluding expenditure and losses that do not produce income or limited to the
income produced by the operations to which the expense relates.
It wouldn’t have been deductible under any other section besides s11(a)
The rent expense was incurred in preparation of starting business on 1 August.
It would have been deductible under s11(a) as there are no prohibitions that apply
under s23(g) as the business is a trade.
No other section applies for rental expense deductions
The amount of R15000 is deductible according to s11A and will be limited to the
income made by the trade.
In conclusion for the 2021 year of assessment R15000 will be deductible under
s11A.
Q5)
“Expenditure” “actually incurred” are terms not defined according to the income tax
act thus we refer to relevant case law.
The onus to prove the amounts are deductible rests upon the taxpayer according to
s102 of the tax administration act.
Expenditure and losses must result in the movement between the assets of an entity.
There would have been an increase in inventory on 30 January due to the receipt of
good. Labat africa.
S11(a) states the following criteria: Expenditure and losses
Actually incurred by the taxpayer
During the year of assessment
Excluding amounts of capital nature.
Thus we regard this transaction as expenditure.
Actually incurred.
Caltex oil case. An amount is actually incurred when the entity has an obligation to
pay the other party even if it is at a later date. The goods were received on the 30th
of January and the invoice was received on the 1st of February 2021 not part of the
2021 year of assessment. The goods were an unquantified expenditure at that point
thus according s24M we could not have deducted the amount during the 2021 year
of assessment.
For the 2021 year of assessment no deduction can be made as it is prohibited by
s24M.
Q6)
Capital in nature is not defined according to the income tax act thus we refer to
relevant case law.
Provider case. Investment made by the entity in retaining and improving its staff is
arguably revenue in nature. As a staff member prudence has had her entity invest in
her thus this is revenue in nature
BP Southern Africa case. Amounts incurred to acquire assets are deemed to be
capital in nature if there is a enduring benefit created. Amounts incurred for the use
of assets are deemed not to be of capital nature due to no recurring benefit being
created. Prudence can leave the company at any point thus the investment into her
education creates no enduring benefit the amount is thus not capital in nature.
No specific prohibitions apply in regard to this amount thus it is deductible according
to s11(a) and s23(g) does not apply as there is a trade in place.
Q7)
In order to determine whether an amount is deductible we apply s11(a) and s23(g).
Before that we need to determine if any special deductions or prohibitions are in
place.
There are no specific deductions or prohibitions for the coaching fees thus we refer
to s23(g) and s11(a).
Being a tennis player is a trade as defined thus s23(g) does not apply to this
expense.
We need to apply s11(a) criteria to determine if it applies:
Expenditure and losses.
Actually incurred by the taxpayer
During the year of assessment
In production of income
Excluding amounts of a capital nature.
All criteria is met except for “in production of income” and “excluding amounts of a
capital nature.”
The onus to prove an expense is deductible/ not of a capital nature rests upon the
taxpayer according to s102 of the Tax Administration.
In production of income and not of a capital nature are terms not defined according
to the income tax act thus we refer to relevant case laws.
In production of income.
Port Elizabeth electric tramway case. In order to be deemed in production of income
expenditure or loss must be closely linked to the income earning operations of the
entity. The coaching fees is linked to the tennis activity pursued by Shelly. There is a
connection between coaching and the exercise of Shelly playing tennis.
Sub Nigel. If an amount is in production of income it does not matter if no income
was produced during the year of assessment. Regardless of the back injury that led
to no income for Shelly the fees were in production of income.
Excluding amounts of a capital nature.
BP Southern Africa case. Amounts incurred to obtain a asset are capital in nature as
this leads to an enduring benefit. Amounts incurred for the use of an asset are
revenue in nature as no enduring benefit is obtained. The coaches teachings were
only available on a temporary basis and in the nature of coaching in tennis it is a
recurring activity that needs reinforcement repetitively thus no enduring benefit is
created.
The fees of R400000 are in the production of income and are of a capital nature thus
they will be allowed a deduction under s11(a) of the gross income definition.
The full amount of R400000 will be deducted in the 2021 year of assessment.
Unseen A)
There are no specific deductions or prohibitions that apply for customer loyalty
points. Thus we refer s11(a) and s23(g).
The onus to prove an amount is not capital in nature/deductible rests upon the
taxpayer according to s102 of the tax administration act.
The sale of cosmetic products constitutes a trade as defined thus s23(g) does not
apply.
S1(a) states that an amount is deductible if it meets the following criteria:
Expenditure and losses
Actually incurred by the taxpayer.
During the year of assessment
In production of income
Excluding amounts of a capital nature.
All criteria is met except for expenditure and losses, actually incurred, and in
production of income.
Expenditure: Expenditure must result in the decrease in assets or atleast the very
least movements in the assets held by an entity. The loyalty points estimation does
not lead to a movement in the assets held by the entity. Labat Africa.
Actually incurred.
In order to be actually incurred there must be an unconditional conditional for the
taxpayer to pay the amount. There is no unconditional obligation at the time of 28
February for the business to do so. Customers may or may not make of points
allocated to them. Edgar’s Stores case.
In production of income.
In order to be in production of income the expense must be a necessary concomitant
of the entity’s income earning operations. Caltex oil case. Due to the retention of
customers being key to the business model it can be stated the loyalty points would
be in production of income.
Excluding amounts of a capital nature.
An amount is capital in nature if it leads to the acquisition of assets and it is revenue
in nature if it is incurred for the use of assets. The acquisition of assets creates a
recurring benefit. No asset is acquired and the points are aimed at retaining
customers which is revenue in nature.
The amount is not deductible under s11(a) as it is not actually incurred and also not
an expense thus it will not be deductible in terms of the 2021 year of assessment.
Unseen part B
There are no specific prohibitions or special deductions that apply thus we refer to
s11(a) and s23(g)
The company is partaking in trade activity as defined thus s23(g) will not apply.
S11(a) has the following criteria:
Expenditure and losses
Actually incurred by the taxpayer
During the year of assessment
In production income
Excluding amounts of a capital in nature
All criteria is met except for “in production of income” and “excluding amounts of
capital nature.”
The onus to prove an amount is not of capital nature or is deductible rests upon the
tax payer according to s102 of the tax administration act.
In production of income and not of capital nature are not defined according to the
income tax act thus we refer to the relevant case law.
In production of income.
Caltex oil case. An amount must be closely linked to the income earning operations
of the entity in order to be in production of income. The staff cost is linked to the
income earning activities of the entity as it is one of the key capitals that the entity
relies upon. Keeping staff happy and having better retention is thus a decision made
in the production of income.
Excluding amounts of a capital nature:
Provider case. Expenditure incurred as an investment into staff in order to make
them happy and retain their services is deemed revenue in nature. The costs
incurred will likely retain staff and are revenue in nature.
BP Southern Africa. Income spent on acquiring an asset is capital in nature due to
the recurring benefits created by this asset. Income spent on the use of an asset is
revenue in nature. The staff might leave the company at their discretion this
expenditure does not tie them down theoretically thus no enduring benefit is created
and it is not of a capital nature.
The amount of R2 000 000 will be deductible according to s11(a) of the income tax
act during the 2021 year of assessment