Module 6 Case Law/Section Principles

Section 11a Requirements

Which cases are discussed for the ‘Expenditure & Losses Requirement’ of s11a?

• Labat Case

• Joffe & Co (Pty) Ltd Case

What does the Labat Case state?

“Expenditure” means the action of spending funds, disbursements or consumption in the form of money or assets with a monetary value that show a reduction or movement of assets of the taxpayer.

What does the Joffe & Co (Pty) Ltd Case state?

The term “loss” usually means an involuntary deprivation suffered whereas the term “Expenditure” means a voluntary payment of money

Which cases are discussed for the ‘Actually Incurred’ Requirement of s11a?

• Caltex Oil (SA) Ltd Case

• Edgars Stored Ltd Case

• Nasionale Pers Bpk Case

• Golden Dumps (Pty) Ltd Case

• Labat 2011 SCA Case

What does the Caltex Oil Ltd Case state?

Expenses actually incurred does not mean expenditure actually paid during the year of assessment. It means all expenditure for which a liability has been incurred during the year, where it has been discharged.

What does the Edgars Stores Ltd Case state?

The taxpayer must incur an unconditional legal obligation before an amount is actually incurred.

What does the Nasionale Pers Bpk Case state?

If there is no definite and absolute liability during the year of assessment to pay an amount, expenditure has not been actually incurred.

What does the Golden Dumps (Pty) Ltd Case state?

A liability to pay a claim is not unconditional where the validity of a claim is genuinely disputed and if at the end of the relevant tax year the dispute is unresolved.

Disputed Expenditure can therefore not be said to be actually incurred when the outcome of a dispute is unresolved.

What does the Labat 2011 SCA Case state?

An allotment or issuing shares does not in any way reduce the assets of a company and therefore does not qualify as “expenditure” or an expense actually incurred

What does Section 23M specifically deal with and what is it applicable to in terms of s11a

It refers to the acquisition of an asset and is only applicable to the acquisition of trading stock for the purposes of s11a.

What does Section 24M specifically state?

The unquantified portion of an asset acquired for consideration is deemed to be incurred only in the year of assessment in which it can be quantified

Which cases are discussed for the ‘During the Year of Assessment’ Requirement of s11a?

Sub-Nigel Ltd Case

What does the Sub-Nigel Ltd case state in terms of Requirement 3 of s11a?

Deductible expenditure can only be deducted in the year of assessment in which it was incurred and therefore cannot be carried back or forward to other years of assessment.

What is the exception to Requirement 3 of s11a?

Section 23H

Which cases are discussed for the ‘In the Production of Income’ Requirement of s11a?

• Sub-Nigel Ltd Case

• BP South Africa (Pty) Ltd Case

• Port Elizabeth Electric Tramway Co Ltd Case

• Joffe &Co (Pty) Ltd Case

• BP Southern Africa (Pty) Ltd Case

• MTN Holdings (Pty) Ltd Case

• Provider Case

What does the Sub-Nigel Ltd Case in terms of Requirement 4 of s11a state?

An expense is actually incurred in the production of income if the expense was incurred for the purpose of producing income. It is irrelevant whether income was actually produced or not.

What does the BP South Africa (Pty) Ltd Case in terms of Requirement 4 of s11a state?

For an expense to be incurred in the production of income the purpose of the expense must be to produce income.

What does the Port Elizabeth Electric Tramway Co Ltd Case in terms of Requirement 4 of s11a state?

Expenditure must be closely connected to the income-earning activities of an entity or be a necessary concomitant of the income-earning activities in order for it to be considered to be in the production of income

They must be so closely linked that they are regarded as part of the cost of performing them.

What does the Joffe &Co (Pty) Ltd Case in terms of Requirement 4 of s11a state?

The payment of damages or compensation resulting from negligence will only be deductible if the taxpayer can prove that the negligence constitutes an inevitable concomitant (necessary part) of the taxpayer’s income-earning operations.

What does the BP Southern Africa (Pty) Ltd Case in terms of Requirement 4 of s11a state?

Continuous costs incurred in respect to the use of something of another person is generally of revenue nature and in the production of income.

What does the MTN Holdings (Pty) Ltd Case in terms of Requirement 4 of s11a state?

When expenditure is incurred for a mixed or dual purpose(to earn income and exempt income) only a fair and reasonable portion of the expenditure will be considered to be in the production of income and allowed as a deduction.

What does the Provider Case in terms of Requirement 4 of s11a state?

Expenditure incurred to induce employees to enter and remain in the service of the taxpayer the expenditure may qualify as a deduction since the purpose is to produce current or future income.

What does the Provider specifically apply to?

Sign on or Retention Bonuses

Which cases are discussed for the ‘Not of a Capital Nature’ Requirement of s11a?

• New State Areas Ltd case

• Rand Mines Ltd Case

• BP Southern Africa (Pty) Ltd Case

• BP South Africa (Pty) Ltd Case

What does the New State Areas Ltd Case state?

Expenditure incurred to perform the income-earning operations is revenue in nature. Expenditure incurred to establish improve or add to the income-earning structure is capital in nature.

What does the Rand Mines(Mining & Services) Ltd Case state?

Expenditure that is more closely related to the cost of adding to or enhancing the income earning structure of a business than to the cost of performing its income-earning operations is capital in nature.

What does the BP Southern Africa (Pty) Ltd Case in terms of Requirement 5 of s11a state?

Expenditure incurred for the purposes of acquiring a capital asset of the business (which creates an enduring benefit that endures like fixed capital) is capital expenditure whereas expenditure incurred for the use of an asset or expenditure that does not create an enduring benefit is revenue in nature.

What does the BP South Africa (Pty) Ltd Case in terms of Requirement 5 of s11a state?

Prepaid rent incurred with the purpose to obtain long-term advantages or benefits that will strengthen the taxpayer’s income earning-structure is of a capital nature.