Expenses that may be claimed can be split into two categories:

• General expenses – Section 11(a)
• Specific expenses – Sections 11(b) – 19

GENERAL EXPENSES

Section 23 prohibits a deduction for various deductions, and must be read with section 11(a).

1. EXPENDITURE AND LOSSES

Expenditure refers to something that the trader chooses to pay out. A loss on the other hand, is an involuntary deprivation.

2. ACTUALLY INCURRED

This refers to an amount paid, or where there is a liability to pay.

In the case of a liability, there must be an absolute liability. There should be no conditions imposed on the future payment of the debt.     (Cross reference to section 23(e))

3. IN THE PRODUCTION OF INCOME

Expenditure incurred for the purpose of producing income must be allowed. In this case, it is irrelevant that the income may be earned in the current or future years.

The expenditure must be considered to be an inevitable concomitant of the business.

Generally therefore:

• We would allow normal, recurrent business expenditure

• We would allow expenses arising out of actions that are closely linked to business operations, if the likelihood of such an action arising is high considering the nature of the business.

NOT OF CAPITAL NATURE

• Expenditure to acquire or create an income producing asset = Fixed Capital, And
• Expenditure in actually working the income producing asset = Floating Capital
• Payments creating an enduring benefit or the business are capital in nature.

Other rules:

• Payments for the use of a capital asset = revenue in nature;
• Payments for the right to use an asset (one-off) payment = capital in nature.

EXCESSIVE EXPENDITURE

• Not entirely in the production of income.
• Inspired by other motives ( i.e. wife is working for the husband)
• Take note of:
• The nature of the services rendered ( i.e. wife is the receptionist)
• Nature of the business
• Employer / Employee relationship
• Remuneration paid in relation to the net profit
• Whether there are large increases between years

ADVERTISING (Commission agents)

• Generally deductible if incurred for trade purposes ( i.e. to attract revenue, to advertise a sale, to recruit employees)
• Not allowed if the expenses is connected with capital assets
• If the advertising results in the acquisition of an asset of a permanent nature, then it is not allowed
• If the expenditure is to create an enduring benefit, it will be of a capital nature

PRODUCT LAUNCH:  To alert consumers to a new product name, the intention must be to create an enduring benefit – not deductible.

BILLBOARDS:    Permanent advertising or affixed to a motor vehicle – not allowed

TV AND RADIO:       Production cost incurred in producing an advertisement which will be screened for a prolonged period are of a capital nature. The actual cost of screening such adverts is clearly revenue. If the advert is screened for a short period – production cost will be allowed

COMPUTER COST

• Acquiring cost – capital
• Cost of hardware – Section 11(e)
• Cost of software – Section 11(e) and Practice note 19
• Cost of attending a conference to update knowledge of computer products – Section 11(a)

FINES

• According to ITC 1490, it is not allowed
• It is not an inevitable concomitant of trade

RECURRENT EXPENDITURE

• Although the act does not allow this, revenue practice is to allow it
• This will include audit fees, insurance premiums, security fees, accounting fees, etc.

TRAVELLING EXPENSES

• To acquire assets / in connection with creating / improving assets is not allowed
• In connection with the income earning operations, will be allowed.

Travelling between taxpayers home and place of business is private – not deductible

1. CALCULATION – ACTUAL EXPENSES = Total expenses x Business kilometres / Total kilometres = Deductions

Practice Note 24 provides that self employed taxpayers who uses their vehicles for both business and private purposes may, use the provisions of paragraph 7(4) of the 7^th Schedule to determine their private travel cost

Determine total cost for the year, + reducing it by 1,8% per month times the determined value (excluding VAT)     LESS R120 per month for fuel and R85 per month for maintenance cost .

2. FIXED COST METHOD. Two ways to claim with or without logbook. Determine the fixed cost value

Fixed cost / total km x days/365 = ?????

+ maintenance cost =  ???

+ fuel cost =  ???

total cost per KM ???

business km     x cost per km = claim limited to allowance

if less than a year and no logbook – prorate. Use 32000km per annum as basis to determine whether 14000km private will be used or 18000km business will be used.

If total km exceed 32000km per year deem business to be 18000 and excess is private.

If total km is less than 32000km per year then deem private to be 14000km and excess is business.

EMPLOYMENT COSTS

• Salaries & wages – Commission agents secretary
• Fringe benefits – If capital asset, allow the wear and tear or lease payments

INSURANCE

• Allow if in respect of the business ( i.e. motor vehicle)

ENTERTAINMENT

• Allow in full in terms of section 11 (a) if incurred in the production of income

DAMAGES AND COMPENSATION

If a close connection is between the expenses and the income earning capacity of the business then allow.

GOODWILL – Capital nature therefore not allowed

INTEREST – if close connection between expense and income earning capacity exist then allow.     However will be limited to income if it is allowed and if the person is not a money lender by trade as per practice note 31.

INTEREST ON LOANS TO ACQUIRE SHARES – not allowed as shares give rise to dividend income that is exempt.

INTEREST ON LOANS TO ACQUIRE CAPITAL ASSETS – if the asset is acquired for business purposes then the finance costs will be allowed

INTEREST RAISED ON A LOAN TO PAY DIVIDENDS – no allowed

SECTION 11(c) – LEGAL EXPENSES

This is allowed if it is incurred in connection with trade.

• The expenses must not be of a capital nature.
• If it is connection with claims made by/against the taxpayer, first apply the section 11(a) criteria with regard to the deductibility or taxability of compensation and damages paid / received.
• If the compensation and damages paid are allowed (or would have been allowed) as a deduction or the compensation, the expenses must be allowed.
• If the damages received are taxable (or would have been taxable), the legal expenses must be allowed.

LOSSES – FIRE, THEFT AND EMBEZZLEMENT – trading stock – the taxpayer will automatically get a deduction as the closing stock figure will not take the missing stock in to account. Fixed asset – not allowed as a deduction as it is a capital asset. Cash – by managing director or owner of business then it is not allowed as a deduction. If by employee then you can allow as a deduction.

PROPERTY – DOMESTIC PREMISES – not allowed as a deduction if not used for trade purposes.

SUBSCRIPTIONS – entrance fees (annual subscriptions to trade to societies) is not allowable as it is a capital expense. Subscriptions to an association i.e. SAMCA, SAICA is allowable.