General Deduction Formula

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General Deduction Formula

Specific Expenses and Losses

Fines or Bribes:

These are prohibited deductions.

Theft or Embezzlement:

Only deductible if closely connected tooperations.

Not of a capital nature

Capital expenditure is not deductible.

Tests have been formulated to checkwhether it is Capital or Revenue innature:

Operations vs Structure:

Expense is deductible if it adds to the income earningoperations and is capital if it adds to the income earningstructure.

Fixed vs Floating capital:

An expense is capital if it creates anenduring benefit.

What is the true nature of the transaction?

How closely connected is the expense tothe income?

Money spent in creating a source ofprofit is capital CIR vs George TimberCo

Does the expense relate to fixed capitalor floating capital?

Floating capital is revenue in nature andtherefore deductible New State Areascase.

Was the expense "once and for all"?

Recurring expenses are deductible.

In the production of income

PE Electric Tramway Co vs CIR:

The expense must be closely connected with theincome earned in order for it to be a deductibleexpense.

Joffe & Co:

Compensation paid is disallowed as a deduction if thenegligent action is not a necessary concomitant oftrade.

Sub Nigel Ltd vs CIR:

Expenditure is deductible irrespectiveof the year in which it produces income.

CSARS vs BP SA:

The purpose of the expense must be assessed in order todetermine whether it was incurred in order to produceincome.

WF Johnstone & Co vs CIR:

Expenditure paid in the current year of assessment forservices rendered in prior years of assessment is notdeductible.

CIR VS Nemojim:

Expenditure can be apportioned if it isincurred for two different purposes.

In the year of assessment

An expense can only be deducted in theyear in which it was incurred.

Exception: Prepaid expenditure must bededucted over the period to which the expenserelates.

Actually incurred

Caltex Oil Ltd vs SIR:

Amounts that have been paid and liabilitiesincurred are included in allowable deductions

Nasionale Pers BPK vs KBI:

An expense is only deductible when anyconditions attached to it have beenmet.

Edgars Stores Ltd vs CIR:

An amount is not deductible if it isconditional or subject to a clause orevent.

Port Elizabeth Electric TramwayCo. vs CIR:

As long as the liability to pay an amount has been actuallyincurred the amount will be deductible. Though it does not necessarily have to be paid.

Ackermans Ltd vs CIR:

Contingent liabilities are not deductible.

Expenditure and Losses

Joffe & Co vs. CIR:

Expenditure tends to be voluntarywheras losses tend to be involuntary.