Special deductions

Income Tax Law

CIR v African Products Manufacturing Company

FACTS

• TP replaced roof over the kilns of TP’s factory

• Usual roof material (timber) not available

• TP used concrete, which was more expensive

• TP claimed deduction for cost of timber roof only → ITO special deduction for repairs

COURT

• Applies the guidelines set out in ITC 817

  • (1)Why did it become necessary to repair the roof?

    (2)Was replacement of roof a replacement of part of structure, or the entirety? (end of p 251 - p 252) ð note examples from other cases

    (3)Is there anything in the facts to suggest that a concrete roof was an improvement (e.g., more durable) than a timber roof?

• “The company was restoring the roof to its original condition and the fact that it used other material than that originally used was not for the purpose of improvement but for the purpose of restoring the roof to the condition in which it was originally

PE Electric Tramway Company

NB: pre special deduction formula → reason why the legislature steps in.

Litigation expenses could not be claimed as it was found that it was NOT in the production of TP income.

Case is important in understanding why S11© is formulated in the way that it is

ITC 1419

“Claim, dispute or action at law”

Dispute defined→ “any disagreement as a result of which parties require legal assistance … at any rate if there is some kind of formal confrontation between the parties such as an arbitration or an enquiry

ITC 1837

“In the course of ordinary trade”

Necessary to establish a causal relationship→ thus, the TP simply has to prove that there is a causal connection between the ordinary trading operations of TP and whatever gave rise to the claim

“by reason of” = signifies “some causal relationship” and would be met not only if a TP ordinary operations are the proximate cause of the institution of an action in respect of which the legal expenses have been incurred but also where it is the efficienmt cause

“damages must be included in income or be deductible ito GDF”

Q= were the damages paid by the premier to Z deductible under the GDF?

• The damages were in the production of premiers income as it met all the requirements under s11(a).

• Thus, the last requirement under S11© WAS met and the expenditure was deductible under S11© special deduction

• “inherent risk associated with politicians, as public figures, taking a stance on various issues of public concern which includes the possibility that such statements could be made that might be construed as defamatory”

Smith v SIR

“Not of a capital nature”

TP incurred legal expenses to defend himself against criminal charges. Comm. argues that legal expenses of a capital nature since the purpose was to protect his goodwill. However, majority viewed that rather the purpose was to stay out of jail and protect his good name and thus were NOT capital assets being protected. Therefore, legal expenses were NOT of a capital nature

Flemming v KBI

Defines a “repair”

Refers to the restoration, renovation or repair of an object which, compared to its previous condition, obtained a defect or shortcoming"

FACTS

• Farm had a borehole. After time, very dry and thus no water → TP sunk a new borehole on different location on the farm where there was still water and claimed expenses as a repair

LEGAL QUESTION

• “Was the object in need of repair?

  • To answer this in the affirmative, it must have deteriorated/ been weakened or damaged in some way

COURT

• Disallowed the deduction: court states that there was nothing wrong with the borehole. It had obtained a defect or shortcoming. Can only repair something that is damaged or a defect

• repairs not about maintaining the income producing possibilities of the structure

ITC 617

Sets out guidelines for the determination of a repair vs merely an improvement/addition or reconstruction

1. restoration by renewal or replacement of

2. subsidiary parts of the whole

3. replacement material need not be identical

4. does work undertaken represent cost of restoring asset to a state in which it will earn income as before?

FACTS

• TP had a racecourse→ one of the stands had to be replaced

• The wooden fence around the racecourse was seen however as part of the racecourse and not a structure in its own right

• one of the whole stands had to be replaced and thus not a repair but rather an improvement

ITC 855

The existence of an element of improvement does not necessarily disqualify a TP from obtaining a deduction.

The point at which work ceased to be repair and crosses the borderline into the category of improvement is not always easy to determine.

The question whether in any particular case work constitutes repair or improvements is and must always be a matter of degree

FACTS

• TP= railroad company

• replaced parts of rail

• replaced with different type tracks

COURT

• Considered:

  • (1)Were repairs necessary (or did t/p want to modernize lines)? (bottom of p 197, top of p 198)

    (2)Was part of, or the entire, structure replaced?

    (3)Was the mere fact that a different material was used, decisive in the court’s decision that ≠ repair?

• Found that they were improvements: the new track would enable heavier engines to be used and heavier loads to be hauled

  • Thus, the TP regarded the old (lighter) rails to be obsolete, and eventually new rails would have had to be introduced throughout the TP railway system

Differs from Rhodesia Railway where repairs held to be repairs: replaced parts of rail : wooden sleepers replaced by steel in some parts→ but not capable of giving more service than the original line

ITC 1408

What we can draw from case law is that the cause of the damage is irrelevant

• Replace a facade to building that deteriorated due to defective design and construction

  • A commercial building → its facade had deteriorated to a point that it was in the risk of collapsing and thus had to be replaced

• In assessing whether such expenses would be considered repairs, the court asked two questions:

  1. It was wrongful built and constructed with fault

  2. Had this been properly built+ constructed, would it have led to the deterioration

  DECISION

  • part of the building: whilst a major and very expensive one, it related to a subsidiary part of the building, viz portion of the exterior walls

  • Whilst different materials were used→ only because it was the most practical way of doing the work. Neither the purpose nor the result was to increase the building’s rental income or to add a new feature to the building.

ITC 1264

FACTS

• Hotel’s septic tank drainage and sewerage system = part of hotel premises

• the property in respect of which the work was done was the hotel premises, consisting of the land and buildings

  • the drainage system is an adjunct to these premises… it can have no useful existence otherwise than to serve the premises… of which it forms a part.

  • Although the drainage system performs an indispensable function, it is not a major part of the property either in terms of size or of value

Rhodesia Railways

Taxpayer was a railroad company→ replaced parts of train lines. Firs hearing of the matter, court held that was not repairs, as replacement of train lines was to take out sharp turns and thus make it more effective.

Second hearing however, purpose was to restore to previous condition → wooden sleepers were replaced by steel in some parts. As the new train lines was not capable of giving more service than the original line, was found to constitute repairs.

ITC 1263

Water of apartment was heated by geyser and solar heating. The solar heater was replaced

Court held that the solar heater was part of water heating system. The solar heater and electric geyser = single waterheating system; hot water in product of two integrated (connected) heating processes (electric geyser and solar heater)

Contrast: if the use of an air-conditioner is augmented by an ancillary electric fan and the fan is replaced, it will not constitute part of the cooling system in the room but rather a replacement of an entire structure (being the fan).