CHARGEABLE INCOME (Part VI, S39 - 50)

ALLOWABLE DEDUCTIONS are of two types:

S39 General deductions
S41 Specific deductions

Critical Questions:
 when is an expense deductible for tax purposes?
 May the taxpayer decide when to deduct such amount? (does he
have discretion???)
 In which circumstances is an expense of a capital nature?
 What happens if the amount is not deductible in terms of the general
deduction formula?
 Are there expenses that may never be deducted for tax purposes?

GENERAL DEDUCTION FORMULA S39 (2) Defined as:

UPON DUE CLAIM – taxpayer must state (specify the expense & amount) the
expenditure they want to deduct, in the tax return to be submitted to COT

SUCH EVIDENCE AS THE COMMISSIONER MAY REQUIRE – provide appropriate evidence if

so required by COT, e.g. tax invoices to support your claim

WHOLLY, EXCLUSIVELY AND NECESSARILY

exclusively and necessarily – not personal, must be appropriate and useful, not
voluntary, of commercial necessity, essential for the production of assessable
income

wholly - duality principle prevents the deduction of expenditure for mixed

purposes
e.g. farmer travels abroad to buy a bull for use in his farming operation, also
taking a holiday whilst abroad. NO part of travelling expenses would be allowed
as a deduction on the ground that the expenditure was not incurred exclusively
for the production of his assessable income.

MAPP V PRINCE 1969 – guitarist

INCURRED DURING THE TAX YEAR

In PLATE GLASS & SHATTERPRUFF INDUSTRIES FINANCE CO V CIR, expression

‘incurred’ does not mean “actually paid” during the year of assessment, but that
an unconditional liability to pay the expense had arisen during the tax year ,
whether the liability had been discharged during the year or not. Disputed
amounts at end of tax year may not be deducted as the liability has not yet been
determined and hence has not yet been incurred

However, must be paid in the relevant tax year; and not subsequent ones

IN THE PRODUCTION OF HIS ASSESSABLE INCOME

OWEN V POOK – travel expenses necessary for production of doctor’s

assessable income

PORT ELIZABETH ELECTRIC TRAMWAY V CIR

 Workman compensation paid to a widow of a train driver who died as a

consequence of accident allowed as a deduction. Legal costs not allowed

 Damages closely connected with earning of income; risk of compensation

to injured train
driver always present in a transport business
S39 (3) – deduction only made in respect of appropriate source of accrual

S39 (4) - Reasonable apportionment by Commissioner; expenditure not personal,

e.g. secretarial services in respect of rental property and business

S39 (5) – A company is only person that can have an assessed loss as a
consequence of apportionment of deductible expenditure S39 (6) – relates to Part
III, Div II of Act

S40 – No exempt income, allowable deductions

S41 SPECIFIC ALLOWABLE DEDUCTIONS

S41 (1) (a) – THIRD SCHEDULE, allowances on capital expenditure

(b) Excess stock held at end of tax year

(c) Legal expenses

The expenses should be for the normal operations of a business such as employee
disputes, debt collection, renewal of employment or operational contracts. The expenses
should not be capital in nature such as registration of trade marks, property transfer costs,
legal costs associated with the acquisition of a business etc.

(d) EMPLOYER’S contribution to an APPROVED benefit fund

Contributions by an employer to an approved benefit or superannuation, retirement and
pension fund set-up for employees’ benefit is allowable provided that the cost does not
exceed, in the case of annual contributions, 20% of the employment income accruing
from that employer to each employee. From practice, BURS approves Botswana resident
funds.
e.g. If 10 employees earned P500 000, the employer can contribute only up to
20% of P500 000, which is P100 000 (or P10 000 for each one of them)
towards their ABF, any excess over P100 000 would be disallowed
EI PAID TO EMPLYEES P1,000,000

EMPLOYER CONTRIBUTION TO PENSION FUND P120,000

COMPUTE: AMOUNT TO BE ALLOWED AS A DEDUCTION

AMOUNT: 20% OF 1,000,000 OR AMOUNT ACTUALLY CONTRIBUTED TO PF

20% OF 1,000,000 OR 120000; WHICHEVER IS LESS

200000 OR 120000; LESS

Retirement annuity
A retirement annuity paid by an employer to an employee who retires due to old age or infirmity
or where such payment is made to the former employee’s dependents is deductible. No
restriction in respect of above, so any amount would be deductible

Bad debts
Bad debts are deductible provided that the income was previously included in gross income. A
bad debt in respect of an interest-free loan that is deemed bad cannot be deducted as no income
would have been previously included in gross income.

Provision for bad debts

Specific provisions for bad debts are allowable, provided they would have been included in
income.
Interest
Interest on a loan used for the taxpayer’s business is allowable, including interest on a loan used
to acquire fixed property, as long as the fixed property was used for business in that tax year.
However, interest incurred before fixed property is brought to use is capital in nature. Please
refer to item 5.5.1 for the limitation of interest expenses, which took effect as from 1 July 2019.
You can also refer to the addendum for more details on the same subject.
Small tools
The cost of replacing small utensils/tools or implements is deductible. However, the cost of
acquiring such items is not deductible, implying that it is capital in nature. It is high time that
BURS came up with a ruling whereby assets below a certain cost are expensed, to avoid tedious
accounting for small items such as cups, spoons, and spanners etc for tax purposes. In South
Africa, small items not exceeding R 5 000 are expensed.

Research

Any non-capital expenditure incurred on scientific research for the development of a taxpayer’s
business, including any contribution made to a college, university, association or institution in
respect of such research is allowable.

Entertainment

Hospitality and entertainment expenditure is allowable to the extent to which the Commissioner
General is satisfied that the expenditure was incurred wholly, necessarily and exclusively in the
earning of assessable income. In other countries, entertainment costs are prohibited.

Obligatory lease improvements

An allowance is claimable in respect of the right to use land or buildings under an agreement
which provides for compulsory or mandatory lease improvements. For this section 41(1)g
allowance to claimed, the lessee should be compelled by the lease agreement to effect
improvements on the lessor’s land or premises.

The allowance is granted on the cost of the lease improvements, over the lesser of 25 years or the
lease period. Where the lease does not have any fixed period, the default period will be 25years.
It is critical to note that the allowance is claimed in the year in which the improvements are
completed.
If a lessee (tenant) has entered into a 10 year lease, under which he is required to erect an office
for P8m and the construction takes 2 years such that it is completed on 1 January of year 3, the
allowance would be determined as follows: Cost/ unexpired period of lease (10years - 2 years) =
P 8m/8years = P1m a year. The 8 years is the unexpired period of the lease, i.e. the 2 years would
have been consumed in the construction process.

Right to use property

An allowance may be claimed by a taxpayer in respect of the right to use any building, land,
patent, motor vehicle etc, provided that such allowance is claimed over the lease period or
25years, whichever is lesser. In the case of a ‘motor car,’ a term which includes a station wagon,
the allowance shall be limited to the deemed cost of P 175 000. The Act does not specifically
mention double-cabs as falling within the ambit of motor cars, as defined. The fact that the VAT
Act specifically includes double cabs as part of ‘passenger vehicles’ which is the equivalence of
motor cars does not imply the same treatment should be accorded to such cars for income tax
purposes. If a company purchased a Nissan sedan at P 355 000 under a finance lease of 5years,
the allowance it can claim would be: Deemed cost / Period of lease = P 175 000/5years = P 35
000. Technically, this amount is linked to the amounts paid to the financier as capital lease
repayments, i.e. excluding interest, which is usually expensed in the financial statements.

Management or consultancy fees – payable to a non-resident; CGOT’s discretion

Approved Training Expenditure (by CGOT) deduction of 200% of any expenditure

on approved training S44

Chargeable Income

Allowances
Taxable Income x Rate ( Residence status)