Module 6 - GDF v13 (Video) - 2023

01 May 2023
Module 6
General Deduction Formula
2023
1 © School of Accountancy, University of the Witwatersrand
Lecture outcomes
Lecture outcomes
By the end of this lecture, you should be able to:
1 Apply the term ‘carrying on a trade’ to both practical case studies and theoretical
advice questions to determine if a taxpayer carried on trade.
2 Apply the requirements of section 11A (Pre-trade expenditure) to both practical case
studies and theoretical advice questions to determine if pre-trade expenditure
incurred qualifies for a section 11(A) deduction.
3 Apply the requirements of section 23(g) read together with section 11(a) (General
Deduction Formula) and relevant case law to both practical case studies and
theoretical advice questions to determine if an amount incurred qualifies for a
deduction in terms of the General Deduction Formula (GDF).
4 Apply the requirements of section 23H (Prepaid expenditure) to both practical case
studies and theoretical advice questions to determine if the deduction of the
expenditure incurred is limited by section 23H.
5 Apply the prohibited deductions (deductions disallowed) of section 23 to both
practical case studies and theoretical advice questions.
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01 May 2023
Lecture outcomes
Lecture outcomes
6 Apply the prohibition against double deductions of section 23B to both practical case
studies and theoretical advice questions.
7 Apply the requirements of section 23C to both practical case studies and theoretical
advice questions if VAT was borne by the taxpayer.
8 Apply the principles of specific transactions to determine if the specific expenditure
incurred qualifies for a deduction for both practical case studies and theoretical
advice questions.
Reading
Silke: First Touch to Tax 2023: M Stiglingh et al. - Chapter 6 (page. 123 - 148)
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Lecture focus areas

Lecture focus areas
1 Discuss the 2 types of deductions that are permitted in terms of the Income Tax Act -
General Deduction Formula (GDF) and Specific Deductions
2 Discuss the main features of the General Deduction Formula (GDF) - provide an
overview of the GDF
3 Discuss the meaning of the term ‘carrying on a trade’
4 Discuss the section 11A requirements that need to be met for pre-trade expenditure
incurred by a taxpayer to qualify for a section 11A deduction.
5 Discuss the 6 elements of the General Deduction Formula (GDF) in detail:
▪ ‘Expenditure and losses’
▪ ‘Actually incurred’
▪ ‘During the year of assessment’ (from case law)
▪ ‘In the production of income’
▪ ‘Not of a capital nature’
▪ ‘To the extent that it is laid out or expended for the purposes of trade’
6 Discuss the section 23 prohibited deductions.
Lecture focus areas

Lecture focus areas
7 Discuss the section 23B prohibition against double deductions
8 Discuss the section 23C normal tax implications for a taxpayer.
9 Discuss the principles that need to be applied in respect of the following specific
transactions to determine if the amount incurred are deductible:
▪ Advertising
▪ Copyrights, inventions, patents, trademarks and know-how
▪ Damages and compensation
▪ Education and continuing education
▪ Employment and services rendered
▪ Goodwill
▪ Legal fees
▪ Losses: Fire, theft and embezzlement
▪ Losses: Loans, advances and guarantees
▪ Losses: Sale of debts
▪ Provisions of anticipated losses or expenditure.
▪ Loyalty points
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01 May 2023
Lecture focus areas

Lecture focus areas
1 Discuss the 2 types of deductions that are permitted in terms of the Income Tax
Act: General Deduction Formula (GDF) and Specific Deductions
2 Discuss the main features of the General Deduction Formula (GDF) - provide an
overview of the GDF
Deductions: GDF & Special deductions
Income Tax Act (ITA) permits

deductions in terms of
The General
Specific deductions:
Deduction Formula
(GDF):
The remainder
of section 11
Section 11(a) read
to section 19
with section 23(g)
8 Source: Taxation of Individuals Simplified 2018 K.L. De Hart et al page 101 &
Notes on South African Income Tax - 2023 P & E Haupt page 108
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Framework – Normal tax payable

(For a company)
Description Amount
Gross Income (definition in s 1(1)) xxx
Less: Exempt Income (s 10)) (xxx)
Equals: Income (as defined in s 1(1)) xxx
Less: Deductions and capital allowances (various, but excluding s18A) (xxx)
Less: Assessed loss brought forward (s 20 and s 20B) (Tax III) (xxx)
Add: Amounts included in taxable income xxx
Add: Taxable capital gain (s 26A) xxx
Subtotal xxx
Less: s 18A deduction (Donations to PBOs) (Tax III) (xx)
TAXABLE INCOME XXX
28% or 27% of taxable income XXX

Less: s 6quat rebate (Tax III) (xxx)
NORMAL TAX PAYABLE XXX

(For a natural person)
Description Amount
Gross Income (general and specific inclusions in s 1(1), s 7, s 8(4)(a)) xxx
Less: Exempt Income (s 10, s 10A - s10C, s 12T exemptions) (xxx)
Equals: Income (as defined in s1(1)) xxx
Less: Deductions and capital allowances (ss 11 -19, ss 21-24P, excl. s 11F (xxx)
& s 18A)
Less: Assessed loss brought forward (s 20 - s 20B) (Tax III) (xxx)
Add: Amounts included in taxable income (e.g. s 8(1)(a)) xxx
Add: Taxable capital gain (s 26A) xxx
Less: Deductions in terms of s 11F (Tax III) (xxx)
Subtotal xxx
Less: s 18A deduction (Donations to PBOs) (Tax III) (xxx)
TAXABLE INCOME XXX
The normal tax payable framework for a natural person continues on next slide.
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(for a natural person)
Description Amount
Normal tax per progressive tax table (based on the natural person’s taxable xxx
income)
Less: S 6(2) rebates (primary, secondary, tertiary rebates) (xxx)
Add: Additional tax in terms of s 12T(7)(a) & (b) xxx
Add: Normal tax payable on the taxable income of lump sums (Tax III) xxx
Less: S 6A and s 6B tax credits (Tax III) (xx)
Less: S 6quat (1) rebate (Tax III) (xx)
NORMAL TAX PAYABLE XXX
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Lecture focus areas

Lecture focus areas
1 Discuss the 2 types of deductions that are permitted in terms of the Income Tax Act:
2 Discuss the main features of the General Deduction Formula (GDF) -
provide an overview of the GDF
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01 May 2023
General Deduction Formula (GDF): overview

Prerequisite: Taxpayer carrying on a trade
General Deduction Formula (GDF)
Section 11(a) Section 23(g)

Positive Test Negative Test
Fully or partially
5 requirements
expended for
of section 11(a)
purposes of trade
NB! Also consider the following:

• Section 23(a) - (r): Prohibited deductions
• Section 23B: Prohibition against double deductions
• Section 23C: Normal tax treatment of the VAT portion of expenditure
• Section 23H: Limits the deduction of certain prepaid expenditure
13 Source: Taxation of Individuals Simplified 2018 - K.L. De Hart et al page 101 &
Adapted from First Touch to Tax - 2023 - M. Stiglingh et al. page 124, 133 & 142
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Lecture focus areas

Lecture focus areas
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01 May 2023
Meaning of ‘carrying on trade’

▪ The opening words of section 11 stipulates that before ANY section 11 deduction can
be claimed, a taxpayer must be ‘carrying on a trade’. The ‘carrying on of a trade’ is,
therefore, a prerequisite for section 11(a).
▪ The implication of the above is that pre-trade expenditure is not deductible in

terms of section 11(a). Certain pre-trade expenditure is, however, deductible in terms
of section 11A.
▪ ‘Trade’ is defined in section 1(1) of the Income Tax Act and includes:
‘Every profession, trade, BUSINESS, EMPLOYMENT, calling, occupation or venture,
including the letting of any property and the use of or the grant of permission to use
any patent as defined in the Patents Act or any design as defined in the Designs Act or
any trademark as defined in the Trade Marks Act or any copyright as defined in the
Copyright Act or any other property which is of a similar nature.’
Case Principle
Burgess v CIR ▪ The definition of ‘trade’ should be given a wide interpretation.
▪ The definition of ‘trade’ is not necessarily exhaustive, and the
term ‘trade’ was intended to include every profitable activity.
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▪ Characteristics of ‘carrying on of a trade’:
❑ Continuity of activities
❑ A profit motive
❑ It involves an active step
NB!
❑ In respect of continuity of activities - a single venture undertaken by a taxpayer

can, however, constitute a trade.
Sources: Silke: First Touch to Tax 2023 - M. Stiglingh et al. page 125 & Notes on South African Income Tax -
2023 P & E Haupt page 110.
❑ In respect of a profit motive - if a taxpayer carries on a non-profit-making trade

(trade at a loss), the taxpayer should then derive a commercial or business
benefit or reward instead.
Source: Notes on South African Income Tax - 2023 P & E Haupt page 111.
❑ Continuity and a profit motive are not prerequisites (requirements) for the
carrying on of a trade.
Source: Silke: First Touch to Tax 2023 – M. Stiglingh et al. page 125
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❑ In respect of an active step - not all activities that produce income constitute a
‘trade’. ‘Trade’ exclude activities that produce passive income (such as interest
income, dividend income, annuities and pensions), UNLESS the taxpayer is a
moneylender or a share dealer. The reason for this is that such activities require
no active taxpayer involvement.
Sources:
Silke: First Touch to Tax 2023 - M. Stiglingh et al. page 125, Taxation of Individuals Simplified 2018 -
K.L. De Hart et al. page 102 & Notes on South African Income Tax - 2023 P & E Haupt pages 109 - 111.
❑ Carrying on a trade:
Case Principle
CSARS v Carrying on a trade includes borrowing money and re-lending it
Scribante at an increased interest rate (which results in profit).
Construction
(Pty) Ltd
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Lecture focus areas

Lecture focus areas
4 Discuss the section 11A requirements that need to be met for pre-trade
expenditure incurred by a taxpayer to qualify for a section 11A deduction.
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Pre-trade expenditure - Section 11A

▪ Generally, only expenditure and losses incurred after trade commenced is
deductible.
▪ In preparation for the carrying on a trade various expenses are incurred

e.g., salaries and rental expenses.
▪ In terms of section 11A, 3 requirements need to be met for pre-trade expenditure to

be deductible in the year that trade commences:
❑ The expenditure and losses need to have been actually incurred by the taxpayer
before commencement AND in preparation of carrying on of that trade.
❑ The expenditure and losses would have qualified for a deduction in terms of
➢ section 11 (other than section 11(x)),
➢ section 11D (research and development) and
➢ section 24J (Interest incurred))
if the taxpayer had already commenced carrying on a trade.
❑ The expenditure and losses were not previously claimed as a deduction.
Sources:
A Student’s Approach to Income Tax - Natural Persons - 2023 - K Coetzee et al. page 113; Notes on South African
Income Tax 2023 - P Haupt & E Haupt page 112; Silke: First Touch to Tax 2023 - M. Stiglingh et al.
page 126
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Pre-trade expenditure – Section 11A

▪ If the pre-trade expenditure and losses that qualified for a section 11A deduction
exceeded the income from that trade, the excess may not be set off against income
from another trade (section 11A(2)). The excess will be carried forward to the next
year and will then be set off against income from the same trade (section 11A(1)(c)).
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Example:
▪ Ignore VAT for this example.
▪ Assume:
❑ ABC (Pty) Ltd (‘ABC’) is a South African resident; and
❑ All events below took place during ABC’s year of assessment that ended on
31 December 2023.
▪ On 25 January 2023, a vacant administration building was purchased by ABC.
▪ ABC renovated the building at a cost of R250 000. On 30 June 2023, the renovations
were completed.
▪ ABC commenced carrying on a rental trade from 1 July 2023
▪ On 1 July 2023, the occupants moved in and became liable for the rent from this date.
▪ For the 2023 year of assessment, ABC earned rental income of R50 000.
▪ For the 2023 year of assessment, ABC earned royalty income of R10 000 (which is not
related to the rental trade).
21 Source: Silke: First Touch to Tax - 2023 - M. Stiglingh et al. page 126
21
Example:
▪ The rates and taxes incurred by ABC (Pty) Ltd in respect of the building amounted to
R60 000 for the period 25 January 2023 to 30 June 2023.
▪ The rates and taxes incurred by ABC (Pty) Ltd in respect of the building amounted to
R33 000 for the period 1 July 2023 to 31 December 2023.
REQUIRED:
Calculate the taxable income of ABC (Pty) Ltd for the year of assessment ended
31 December 2023.
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Section 11A - Pre-trade expenditure

Year of assessment (1 Jan 2023 to 31 Dec 2023)
1 July 2023
TRADE
COMMENCES
1 Jan 2023 31 Dec 2023
Rental income - R50 000
Operating expenses - R33 000
Start-up costs incurred:

S 11A qualifying expenses
Renovations & rates and taxes
© School of Accountancy, University of the Witwatersrand
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Solution:
Taxable income of the rental trade for the 2023 year of assessment:
Description Reason Amount
(R)
Rental earned Section 1(1): General Gross income definition 50 000
Renovations completed These renovations are of a capital nature and, -
on 30/06/2023 - therefore, not deductible.
Expenditure incurred
PRIOR to trade
For purposes of completeness:
In terms of section 11A, expenditure incurred
prior to trade, which is of a capital nature, is not
deductible as pre-trade expenditure.
Rates and taxes incurred Section 11(a) (33 000)
for the period 01/07/2023 OR
to 31/12/2023 –
General Deduction Formula
AFTER commencement
of trade
24 Source: Silke: First Touch to Tax - 2023 - M. Stiglingh et.al page 127
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Solution:
Taxable income of the rental trade for the 2023 year of assessment:
(R)
Rates and taxes incurred Pre-trade expenditure (17 000)
for the period 25/01/2023 OR
to 30/06/2023 –
Section 11A
PRIOR to
commencement of trade For purposes of completeness
The pre-trade expenditure incurred of R60 000
is limited to R17 000 (R50 000 - R33 000).
The excess of R43 000 (R60 000 – R17 000) is

carried forward to the next year of assessment.
It will be claimed as deduction against the rental
trade taxable income (section 11A(1)(c)).
Taxable income -
25 Source: Silke: First Touch to Tax - 2023 - M. Stiglingh et.al page 127
25
Solution:
Taxable income of non-rental trade for the 2023 year of assessment:
(R)
Royalty income Section 1(1): General Gross income definition 10 000
Taxable income 10 000
NB!
▪ ABC (Pty) Ltd is subject to normal tax at 27% on the royalty income of R10 000.
(ABC (Pty) Ltd’s year of assessment ends after 31 March 2023 - tax rate 27%)
▪ In terms of section 11A(2), the excess of the pre-trade expenditure that amounted to
R43 000 may not be set-off against income from another existing trade (i.e. the
royalty trade).
26 Source: Silke: First Touch to Tax – 2023 – M. Stiglingh et.al page 127
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Lecture focus areas

Lecture focus areas
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General Deduction Formula (GDF) –

Section 11(a) and Section 23(g)
▪ Prerequisite for section 11(a): Taxpayer carrying on a trade
▪ The General Deduction Formula (GDF) comprises of:

❑ Section 11(a) - the positive test, AND
❑ Section 23(g) - the negative test.
Source: A Student’s Approach to Income Tax - Natural Persons - 2022 - K Coetzee et al. page 113 & 114 &
Notes on South African Income Tax 2023 - P Haupt & E Haupt page 108.
▪ The 6 elements of the General Deduction Formula (sections 11(a) and 23(g)) are:
❑ Expenditure and losses
❑ Actually incurred
❑ During the year of assessment (from case law)
❑ In the production of income
❑ Not of a capital nature
❑ To the extent that it is laid out or expended for the purposes of trade - section 23(g)
▪ All the above elements need to be met for an amount to be deducted in terms of
the General Deduction Formula.
▪ In terms of section 102 of the Tax Administration Act, the onus of proof rests
upon the taxpayer to prove that an amount is deductible.
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Positive test - Section 11(a)

11. General deductions allowed in determination of taxable income. —For the
purpose of determining the taxable income derived by any person from carrying on any
trade, there shall be allowed as deductions from the income of such person so derived —
(a) expenditure and losses actually incurred in the production of the income,
provided such expenditure and losses are not of a capital nature
▪ Section 11(a) indicates what may be deducted (the positive test).

Source: A Student’s Approach to Income Tax - Natural Persons - 2023 - K Coetzee et al. page 113
▪ Prerequisite for section 11(a): Taxpayer carrying on a trade
▪ The 5 requirements of the section 11(a) are:

❑ expenditure and losses
❑ actually incurred
❑ during the year of assessment
❑ in the production of income
❑ not of a capital nature.
▪ As the requirements of section 11(a) are not defined in the Income Tax, case law is
referred to determine its meaning.
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Negative test - Non-trade expenditure -

Section 23(g)
23. Deductions not allowed in determination of taxable income —
No deductions shall in any case be made in respect of the following matters, namely—
(g) any moneys, claimed as a deduction from income derived from trade, to the extent
to which such moneys were not laid out or expended for the purposes of trade;
▪ Section 23(g) indicates what may not be deducted (the negative test). Expenditure
that is not laid out or expended for the purposes of trade is not deductible (i.e., non-
trade expenditure).
Source: A Student’s Approach to Income Tax - Natural Persons - 2023 - K Coetzee et al. page 113 & 114
▪ The words ‘to the extent’ in section 23(g) indicates that it is possible to apportion
expenditure and claim the trade portion of the expenditure as a deduction.
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‘Expenditure and losses’
Case Principle
CSARS v Labat Meaning of ‘expenditure’ -
▪ ‘Expenditure’ refers to the action of spending funds,

disbursements or consumption. Hence, the amount of money
spent.
▪ Expenditure would also include the disbursement of other

assets with a monetary value (that is, a non-cash item with a
monetary value)
▪ Expenditure, accordingly, requires a diminution OR, at the very

least, movement of assets of the person who expends.
Joffe & Co (Pty) Meaning of a ‘loss’ -

Ltd v CIR
A ‘loss’ is usually an involuntary deprivation suffered, whereas
‘expenditure’ usually means a voluntary payment of money.
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‘Actually incurred’
▪ ‘Actually incurred’ vs. ‘necessarily incurred’
❑ The use of the words ‘actually incurred’ instead of ‘necessarily incurred’

broadens the scope of deductible expenditure.
❑ Example:
A taxpayer conducts its business inefficiently. Such expenditure is not ‘necessary’,
but ‘actually incurred’ and consequently deductible.
Source: Silke: First Touch to Tax - 2023 - M. Stiglingh et al. page 127
▪ The term ‘actually incurred’ does NOT ONLY refer to an amount actually paid. It
also includes an amount for which an unconditional legal liability was incurred to
pay such amount.
Source: Tax Workbook 2015 - LD Mitchell et al. page 63 & 69
NB!
An expense is ‘actually incurred’ when an unconditional legal liability was
incurred to pay such amount, UNLESS it was paid earlier (e.g., prepaid expenses).
Source: Introductory Questions on SA Tax with Selected Solutions -2021 - S Parsons et al. page 47
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Case Principle
Caltex Oil (SA) Expenditure ‘actually incurred’ does not mean expenditure
Ltd ‘actually paid’ during the year of assessment. It means all
expenditure for which a liability has been incurred during the year,
whether the liability has been discharged during that year or not.
It is in the tax year in which the liability for the expenditure is incurred,
and not in the tax year in which it is actually paid (if paid in a
subsequent year), that the expenditure is actually incurred.
Source: Silke: First Touch to Tax 2023 - M. Stiglingh et al. page 128
Edgars Stores There must be an unconditional legal obligation on a taxpayer to

Ltd v CIR pay an expense before it will be ‘actually incurred’ for the purposes of
section 11(a) of the Income Tax Act.
Nasionale Pers If there is no definite and absolute liability during the year of
Bpk v KBI assessment to pay an amount, expenditure has not been ‘actually
incurred’.
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NB!
▪ The words ‘actually incurred’, therefore, excludes provisions raised for anticipated
losses and expenditure, as no loss or expenditure has ‘actually been incurred’.
Provisions raised are, therefore, not deductible in terms of section 11(a).
▪ The deduction of a provision is also specifically prohibited by section 23(e).
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Case Principle
CIR v Golden A liability to pay a claim is not unconditional where the validity of a
Dumps (Pty) claim is genuinely disputed AND if at the end of the relevant tax year
Ltd). the dispute is unresolved. The liability will be conditional and any
such claim will, therefore, not be actually incurred for the purposes of
section 11(a) of the Income Tax Act in that year of assessment.
CSARS v Labat An allotment or issuing of shares does not in any way reduce the
2011 SCA assets of a company and, therefore, does not qualify as ‘expenditure’
OR an amount ‘actually incurred’.
Sources: Notes on South African Income Tax 2022 - P Haupt & E Haupt page 114 &
Silke: First Touch to Tax 2023 - M. Stiglingh et al. page 129
NB!
Sections 24BA and 40CA stipulate the tax implications of transactions
for where assets are acquired in exchange for shares - Tax IV
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Example: Unquantified amounts:

Acquisition of ASSET (Section 24M)
▪ If a person acquires an ASSET for a consideration that cannot be quantified in
that year of assessment, the part of the consideration that cannot be quantified is
deemed not to be incurred by that person in that year of assessment.
Source: SARS Comprehensive Guide to Capital Gains Tax (Issue 9) - page 438 - Adapted
▪ The unquantified portion is deemed to be incurred only in the year of assessment

in which it can be quantified.
Source: SARS Comprehensive Guide to Capital Gains Tax (Issue 9) - page 438 - Adapted
NB!
Section 23M only refers to the acquisition of an ASSET. It will, therefore, only be
applicable to the acquisition of trading stock for purposes of section 11(a).
Source: Notes on South African Income Tax 2023 - P Haupt & E Haupt page 137
36 Source for the above: SARS Comprehensive Guide to Capital Gains Tax (Issue 9) - page 438 - Adapted
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Example: Unquantified amounts:

Acquisition of assets (Section 24M)
▪ On 1 March 2022, Lulu purchased a capital asset (non-allowance) from Kyle.
▪ The purchase price of the capital asset was calculated as follows:

❑ A cash payment of R90 000 on 1 March 2022; and
❑ 10% of the turnover generated by the asset in respect of 2024 and 2025 year of
assessment.
▪ For the 2024 and 2025 year of assessment, 10% of turnover amounted to R40 000
and R250 000, respectively.
REQUIRED:
Determine the amount ‘actually incurred’ for each year of assessment.
37 Source: SARS Comprehensive Guide to Capital Gains Tax (Issue 9) - page 438 - Adapted
37
Solution: Unquantified amounts:

Acquisition of assets (Section 24M)
Description 2023 2024 2025
Cost ‘actually incurred’ 90 000 40 000 250 000
as amount became
quantifiable
Cost price of asset 90 000 130 000 380 000

purchased - (90 000 + 40 000) (130 000 + 250 000)
(quantifiable)
38 Source: SARS Comprehensive Guide to CGT - Issue 9 - page 438 - Adapted
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‘During the year of assessment’
▪ Although section 11(a) does not specifically require it, the courts have held that
expenditure can only be deducted in the year of assessment in which it was
incurred.
Case Principle
Sub-Nigel Ltd Deductible expenditure can only be deducted in the year of
v CIR assessment in which it was incurred.
▪ Expenditure may, therefore, not be carried back to a previous year of assessment

or carried forward to a subsequent year of assessment.
NB!
An exception to this rule is section 23H (Prepaid expenditure). Section 23H, in
certain instances, permits a deduction of expenditure in the current year of
assessment which was incurred in a previous year of assessment.
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Section 23H - Prepaid expenditure

▪ For certain allowable deductions incurred during the year of assessment (for example,
(section 11(a), section 11(c) etc.)), section 23H MAY limit the deduction of the
prepaid portion of such expense. Moreover, the deductibility is of the prepaid portion
is postponed (deferred) to a future year or spread over future years when such
benefits will be received or enjoyed.
Sources: Tax Workbook 2015 L.D. Mitchell et al. pg 69 & Silke: First Touch to Tax 2023 M. Stiglingh et al. pg 133
Notes on South African Income Tax 2023 - P Haupt & E Haupt page 135
▪ Section 23H should be considered if 2 requirements are met:
1. The expenditure incurred qualified for a deduction in terms of -

❑ Section 11(a): General Deductions; OR
❑ Section 11(c): Legal fees; OR
❑ Section 11(d): Repairs; OR
❑ Section 11(w): Insurance premiums in respect of key-man policies; OR
❑ Section 11A: Pre-trade expenditure and losses
NB!
Section 23H does not apply to expenditure incurred to purchase trading stock.
40 Sources: Taxation of Individuals Simplified 2018 - K.L. De Hart et al. page 106, Silke: First Touch to Tax 2023
M. Stiglingh et al. page 133 & A Student’s Approach to Income Tax - Natural Persons - 2023 - K Coetzee et al. pg 544
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2. The expenditure relates to –
❑ Goods or services that will NOT all be supplied or rendered during the
year of assessment; OR
❑ Any benefits and the period to which the benefits relate EXTENDS beyond
the year of assessment
NB!
The above refers to the prepaid portion at the end of the year of assessment.
41 Sources: Taxation of Individuals Simplified 2018 - K.L. De Hart et al. page 106, Silke: First Touch to Tax 2023
M. Stiglingh et al. page 133 & A Student’s Approach to Income Tax - Natural Persons - 2023 - K Coetzee et al. pg 544
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▪ For certain allowable deductions incurred during the year of assessment (e.g., section
11(a)), section 23H limits the deduction of the prepaid portion of such expense,
UNLESS any of the following 4 exceptions (as set out in the provisos to section 23H)
applies, in which case, the full amount of the expenditure is deductible (not limited):
❑ All the goods, services or benefits were supplied, rendered or enjoyed within
6 months after the year of assessment (proviso (aa)); OR
❑ The total of all prepaid expenditure, which would otherwise have been limited by
section 23H, does not exceed R100 000 (proviso (bb)); OR
❑ Any expenditure to which the provisions of section 24K (interest-rate
agreements) or section 24L (option contracts) apply (proviso (cc)); OR
❑ The expenditure is paid in terms of an unconditional liability imposed by
legislation to pay an amount (proviso (dd)).
NB!
First consider the exceptions in provisos (aa), (cc), (dd), as these exceptions are
measured separately. Thereafter, only amounts NOT subject to provisos (aa), (cc) or
(dd) will then be considered (IN TOTAL) for the R100 000 exemption in proviso (bb).
Sources for the above: Tax Workbook 2015 - L.D. Mitchell et al. page 69, Silke: First Touch to Tax 2022 M. Stiglingh et
al. page 133 – 134, Taxation of Individuals Simplified 2018 - K.L. De Hart et al page 106 & Notes on South African
Income Tax 2023 - P Haupt & E Haupt page 132 & 133 & Student’s Approach to Income Tax - Natural Persons - 2023 -
K Coetzee et al. pg 545
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Example: Section 23H - Prepaid expenditure

▪ ABC Ltd (ABC) is a South African resident.
▪ ABC has a financial year that ends on the last day of May of each year.
▪ ABC pays its insurance premiums annually, on the first day of January.
▪ On 1 January 2023, ABC paid its annual insurance premium of R 1 200 000.
REQUIRED:
Determine how much of the annual insurance premium paid of R1 200 000 will be claimed
by the ABC Limited during the 2023 year of assessment.
43 Sources: Adapted from: Silke: First Touch to Tax 2023 - M. Stiglingh et al. page 135 &
Tax Workbook 2015 - L.D. Mitchell et al. page 69
43
Example: Section 23H - Prepaid expenditure
Paid annual
insurance premium
of R1 200 000
R500 000
5 months 7 months
1 June 2022 1 January 2023 31 May 2023 31 December 2023
2023 Year of
assessment
Insurance premium paid of R1 200 000:

▪ Current year - R1 200 000 x 5/12 = R500 000
▪ Prepaid portion (at end of year of assessment) - R1 200 000 x 7/12 = R700 000
44
22
01 May 2023
Solution: Section 23H – Prepaid expenditure

▪ Section 23H should be considered as:
❑ The total insurance premium of R1 200 000 is deductible in terms of section 11(a)
read with section 23(g). Section 11(a) is an allowable deduction for purposes of
section 23H in terms of section 23H(a); and
❑ The company’s 2023 year of assessment ends on 31 May 2023. The insurance
premium covers the period 1 January 2023 to 31 December 2023. The period of
the benefits (of the insurance premium expenditure) extends beyond the year
of assessment, namely, for 7 months, as required in terms of section 23H(b).
❑ Section 23H does not apply to expenditure incurred in respect of the

acquisition of trading stock. The payment of the annual insurance premium of
R1 200 000 does not relate to the acquisition of trading stock.
▪ For section 23H purposes, determine the prepaid portion of the insurance expense as
at 31 May 2023 (the end of the year of assessment) - R700 000.
45

▪ The current year portion and the prepaid portion of the insurance expense are as
follows:
Description Current year Prepaid portion
Insurance premiums R500 000
R1 200 000 / 12 x 5
Insurance premiums R700 000
R1 200 000 / 12 x 7
▪ Section 23H will limit the deduction of the prepaid portion of R700 000 of the
section 11(a) expense incurred of R1 200 000, UNLESS one the 4 provisos would
render section 23H inapplicable.
▪ Proviso (aa):
The insurance premium covers the period 1 January 2023 to 31 December 2023. The
period extends 7 months after the end of the company’s year of assessment of
31 May 2023 . All the benefits from the insurance premium expenditure will not be
enjoyed within 6 months after the end of the year of assessment. Section 23H may
apply, as proviso (aa) does not apply.
46
23
01 May 2023

▪ Proviso (bb):
The total of all prepaid expenditure incurred by the taxpayer (the company), which
would otherwise be limited by section 23H, amounted to R700 000. This amount
exceeds R100 000. Section 23H applies, as the amount exceeds R100 000.
▪ As the section 23H limitation, therefore, applies, the annual insurance premium paid
on 1 January 2023 of R1 200 000 is not deductible in full in the 2023 year of
assessment. Only the current year portion of the insurance premium paid that
amounted to R500 000, will be deducted during the 2023 year of assessment. The
prepaid portion of the insurance premium paid that amounted to R700 000 will be
only be deducted during the 2024 year of assessment.

Insurance premiums Section 11(a) R500 000
Insurance premiums – Section 23H applies. The prepaid portion of -
Prepaid portion of R700 000 will only be deducted during the
R700 000 2024 year of assessment.
47

Case Principle
Telkom SA SOC Case facts:
Limited v The ▪ Telkom paid a cash incentive bonus (commission) to Velociti (Pty) Ltd
Commissioner for connecting it to subscribers.
for the South
African ▪ Velociti (Pty) Ltd made these connections on behalf of Telkom.
Revenue ▪ The full cash incentive bonus of R178 788 421 was claimed by
Service Telkom during the 2012 year of assessment.
▪ SARS was of the view that no benefit was derived by Telkom until the
connection turns into fee income and should, therefore, be spread
over the 24-month contract period when subscription fees are paid.
▪ The court agreed with SARS. Section 23H, therefore, needed to be
applied to the cash incentive bonus paid.
48
24
01 May 2023

Case Principle
Telkom SA SOC Principle of the case:
Limited v The The principle established is that, where the expense resulted in 2
Commissioner benefits to the taxpayer (1) the conclusion of the contract, and (2) the
for the South monthly subscriber payments (which was over 24 months), the
African taxpayer did not incur the incentive bonus solely to establish a new
Revenue connection with the customer, but also to receive the subscription fees
Service (over a fixed period beyond the year during which the commission was
incurred). The taxpayer should, therefore, spread the deduction of cash
incentive bonus (commission) over the subscription fee period.
Sources:
https://www.pwc.co.za/en/assets/pdf/synopsis/synopsis-may-2020.pdf page 6 &
Notes on South African Income Tax 2023 - P Haupt & E Haupt page 135
49

‘In the production of income’
▪ The use of the word ‘income’ in the phrase ‘in the production of income’, refers to
‘income’ as defined, namely, gross income less exempt income.
50
25
01 May 2023
Example: ‘In the production of income’

▪ ABC Ltd (ABC) is a South African resident.
▪ ABC has a financial year that ends on the last day of February of each year.
▪ ABC Ltd incurred expenditure of R3 000 of in order to obtain local (South African)
gross dividends of R5 000.
REQUIRED:
Discuss whether the expense incurred of R3 000 could be claimed as a deduction in
terms of section 11(a).
51 Source: Adapted from: Silke: First Touch to Tax 2022 M. Stiglingh et al. page 130
51
Solution: ‘In the production of income’

▪ The local dividends of R5 000 are included in gross income in term of paragraph (k)
of the gross income definition.
▪ Local dividends of R5 000 are fully exempt in terms of section 10(1)(k).
▪ The local dividends will, therefore, not constitute ‘income’ as defined.
▪ The expenditure incurred of R3 000 is, therefore, not incurred in the production of
‘income’, as defined.
▪ No section 11(a) deduction will, therefore, be claimed.
52
26
01 May 2023

Case Principle
Sub-Nigel Ltd v An expense actually incurred would meet the requirement of ‘in the
CIR production of income’, if the expense was incurred for the PURPOSE
of producing (or earning) income. It then is irrelevant if no income
was, in actual fact produced, in the year incurred, or ever.
NB!
An expense:
▪ needs to be incurred for the PURPOSE of producing income.
▪ need NOT lead to income for it to be deducted.
Source: A Student’s Approach to Income Tax - Natural Persons - 2022 - K Coetzee et al.pg 130
CSARS v BP Factually, there was no need for the taxpayer to borrow money to pay
South Africa the dividends. As the loan was obtained for the purpose of carrying on
(Pty) Ltd [2006] of the taxpayer’s income-earning activities, the interest paid was in the
production of income. The principle that was confirmed is that for
an expense to be incurred in the production of income, the
PURPOSE of the expense must be to produce income.
53

Case Principle
Port Elizabeth To determine whether the expenditure was incurred in the production
Electric of income, two questions must be asked:
Tramway Co 1. What action gave rise to the expenditure?
Ltd vs CIR 2. Is this action so closely connected with (or a necessary
concomitant of) the income-earning activities from which the
expenditure arose as to form part of the cost of performing it?
OR
Expenditure must be closely connected to the income-earning

activities of an entity (or a necessary concomitant of the income
earning activities) in order for it to be considered to be in the
production of income. The expenditure must be so closely linked to
the income-earning activities as to be regarded as part of the cost of
performing them.
54
27
01 May 2023
Example: ‘In the production of income’

▪ ABC Limited (ABC) is a South African resident and has a financial year that ends on
the last day of February each year
▪ ABC carries on a transport business (transport passengers).
▪ John, one of its drivers of ABC, was involved in an accident on 1 February 2023.
▪ John suffered severe injuries and passed on on 5 February 2023.
▪ On 20 February 2023, ABC paid compensation of R100 000 to John’s dependents.
REQUIRED:
Discuss whether the compensation paid of R100 000 by ABC Limited to John’s
dependents are incurred ‘in the production of income’ for purposes of the General
Deduction Formula for the 2023 year of assessment.
& Taxation of Individuals Simplified 2018 K.L. De Hart et al page 104 & 306
55

▪ To determine whether the expenditure was in the production of income, two questions
must be asked:
1. What action gave rise to the expenditure and what was the purpose of the action?
2. Is this action so closely connected with (or a necessary concomitant of) the
income-earning activities from which the expenditure arose as to form part of the
cost of performing it?
(Port Elizabeth Electric Tramway Co Ltd vs CIR)
OR
▪ Expenditure must be closely connected to the income-earning activities of an

entity (or a necessary concomitant of the income earning activities) in order for it
to be considered to be in the production of income. The expenditure must be so
closely linked to the income-earning activities as to be regarded as part of the cost of
performing them (Port Elizabeth Electric Tramway Co Ltd vs CIR)
56 Sources: Adapted from: Silke: First Touch to Tax 2022 M. Stiglingh et al. page 130, Taxation of Individuals
Simplified 2018 K.L. De Hart et al page 104 & 306, Tax Workbook 2015 - L.D. Mitchell et al. page 70
56
28
01 May 2023

▪ Question 1: What action gave rise to the expenditure and what is purpose of the
action?
❑ The compensation expense incurred by ABC Ltd due to the death of John arises
from the EMPLOYMENT of John (the action) as a driver. John’s death occurred
while preforming his duties.
❑ The employment of John as a driver enables ABC Ltd TO EARN INCOME by him
transporting passengers for consideration.
▪ Is this action so closely connected with the income-earning activities (OR a

necessary concomitant of the income-earning activities) from which the
expenditure arose as to form part of the cost of performing it?
❑ ABC Ltd is in the TRANSPORT BUSINESS (income-earning activity) that

transports passengers for consideration. The EMPLOYMENT OF DRIVERS
(the action) to transport passengers is CLOSELY LINKED TO THE OPERATIONS
OF THIS TYPE OF BUSINESS carried on by ABC Ltd.
❑ Furthermore, the EMPLOYMENT OF DRIVERS (the action) also has an

INHERENT RISK (an unavoidable risk or expected risk ) that the driver may be
57

Involved and injured in an accident, which is an inevitable concomitant (unavoidable
outcome) of this type of business. The consequential compensation expense
incurred by ABC Ltd of R100 000 is, therefore, a necessary concomitant of ABC
Ltd’s income-earning activities of transporting passengers for consideration and
so closely connected to it to be regarded as part of the cost of performing it.
▪ Conclusion:
The compensation expense incurred of R100 000 incurred ABC Ltd during the
2023 year of assessment is, therefore, incurred ‘in the production of income’.
Sources of this example (question) and solution:

Silke: First Touch to Tax 2023 - M. Stiglingh et al. page 130 - 131, Taxation of Individuals Simplified - 2018 K.L. De Hart
et al. page 104 & 306, Tax Workbook 2015 - L.D. Mitchell et al. page 70 & A Student’s Approach to Income Tax - Natural
Persons - 2023 - K Coetzee et al. page 121
58
29
01 May 2023

Case Principle
Joffe & Co (Pty) ▪ If an expense is not an inevitable concomitant (or necessary
Ltd v CIR concomitant) of the taxpayer’s income-earning operations, it is not in
the production of income
▪ Payment for damages or compensation resulting from negligence

will only be deductible if the negligence constitutes an inevitable
concomitant of the taxpayer’s income-earning operations.
59

Case Principle
BP Southern Recurrent costs incurred in respect of the use of something of
Africa (Pty) Ltd another person is generally of a revenue nature (in the production
v CSARS of income and not of capital nature). For example, annual royal
(2007) payments for use of intellectual property.
Source:
Income Tax in South Africa: Cases and Materials - RC Williams - Fourth Edition page 569
CSARS v MTN When expenditure is incurred for a mixed or dual purpose, only a fair
Holdings (Pty) and reasonable portion of the expenditure will be considered to be in
Ltd the production of income, and, therefore, allowed as a deduction.
NB!
Expense incurred for dual purposes.
60
30
01 May 2023

Case Principle
Provider v COT If expenditure is 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.
NB!
Voluntary expenditure to induce an employee to enter and remain in
service of the taxpayer is also incurred ‘in the production of income’.
Not only amounts that the taxpayer is obliged to pay.
Source: Income Tax in South Africa: Cases and Materials - RC Williams - Fourth Edition pg 450
61

‘Not of a capital nature’
▪ ‘Capital’ is not defined in the Income Tax Act, case law is, therefore, referred to
determine its meaning.
▪ Generally, capital expenditure is incurred once-off, while revenue expenditure is of

a recurring nature.
Source: A Student’s Approach to Income Tax - Natural Persons - 2023 - K Coetzee et al. page 136
62
31
01 May 2023

Case Principle
New State ▪ Expenditure incurred to perform the income-earning operations is
Areas Ltd v CIR income in nature.
case: ▪ Expenditure incurred to establish, improve or add to the income-
earning structure is capital in nature.
NB!
Operations vs. structure test
63

Case Principle
Rand Mines Expenditure that is more closely related to the cost of acquiring,
(Mining & adding to or enhancing the income-earning structure of a business
Services) Ltd v THAN to the cost of performing its income-earning operations is
CIR capital in nature.
Therefore, cost incurred to acquire a right or contract to perform

income-earning activities is capital in nature - e.g., a management
contract - Source:Notes on South African Income Tax 2023 - P Haupt & E Haupt page 137
NB!
▪ Money spent to acquire or create a source of profit is capital in a
nature. Money spent in working it is revenue in nature.
Source:Notes on South African Income Tax 2023 - P Haupt & E Haupt page 137
▪ In this case, the R30 million spent by the taxpayer to enter into a
management contract with the mine, did not in itself generate any
income. It merely gave the taxpayer the opportunity to earn income
in future from providing management services for a fee in terms of
this contract. The cost incurred was merely a ‘source of profit’.
Source: A Student’s Approach to Income Tax - Natural Persons - 2023 - K Coetzee et al.
page 134
64
32
01 May 2023

Case Principle
BP Southern Where no new capital asset for the enduring benefit of the taxpayer
Africa (Pty) Ltd has been created (enduring in the way that fixed capital endures), the
v C:SARS expenditure naturally tends to assume more of a revenue character.
[2007] SCA
OR
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.
NB!
▪ Enduring benefit test - capital in nature
▪ Royalties paid for use of intellectual property is revenue in nature.
▪ Royalties paid for the acquistion of intellectual property is capital in
nature.
Source: A Student’s Approach to Income Tax - Natural Persons 2023 - K Coetzee et al. page
132 & page 133
65

Case Principle
CSARS v BP Prepaid rent incurred with the purpose to obtain a long-term
South Africa advantage or benefit that will stenghten the taxpayer’s income
(Pty) Ltd [2006] earning-structure is of a capital nature.
NB!
In this case, the benefit derived by the taxapyer in respect of the
prepaid rent ’went beyond the mere right to use the premises’.
Source for the above principle and comment: Income Tax in South Africa: Cases and Materials -
RC Williams - Fourth Edition page 493 & 486
66
33
01 May 2023
Lecture focus areas

Lecture focus areas
67
Prohibited deductions
▪ Section 23 prohibits certain deductions, irrespective of the fact the amount may
qualified for a section 11(a) deduction.
▪ Prohibited deductions:
❑ Section 23(a) - Private maintenance expenditure
❑ Section 23(b) - Domestic or private expenditure
❑ Section 23(c) - Recoverable expenditure
❑ Section 23(d) - Interest, penalties and taxes
❑ Section 23(e) - Provisions and reserves
❑ Section 23(f) - Expenditure to incurred to produce exempt income
❑ Section 23(g) - Non-trade expenditure
❑ Section 23(h) - Notional interest
❑ Section 23(i) - Deductions claimed against any retirement fund lump sum benefits &
retirement lumpsum withdrawal benefits
❑ Section 23(k) - Expenditure incurred by labour brokers & personal service providers
❑ Section 23(l) - Restraint of trade
❑ Section 23(m) - Expenditure relating to employment or an office held
❑ Section 23(o) - Unlawful activities
❑ Section 23(q) - Expenditure incurred in the production of foreign dividends
❑ Section 23(r) - Premiums in respect of insurance policies against illness, injury,
disability, unemployment or death of a person
68
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01 May 2023
Section Description Detail
Section 23(a) Private maintenance The cost incurred in the maintenance of any
expendutre taxpayer, his family, or his establishment
(his private home) is not allowed as a
deduction.
NB!
Maintenance refers to feeding and clothing of
the taxpayer and his family and, keeping up
his establishment.
Section 23(b) Domestic and private Domestic or private expenses, including the
expenditure rent of, cost of repairs, or expenditure in
connection with any private home is not
allowed as a deduction, EXCEPT for any
part occupied for the purposes of trade
(deduction usually based on floor space).
The requirements of the exception are set

out in proviso (a) and (b) to section 23(b).
69
Section 23(b) –
Domestic and private expenditure
Section 23(b) does not apply to the PART of a private home occupied for purposes
of trade if certain requirements are met (by the respective taxpayers):
Requirements Taxpayer is Taxpayer is Taxpayer is
(Proviso (a) & (b) to NOT employed employed
section 23(b)) employed & &
(any other income mainly income NOT
trade) (> 50%) from mainly from
commission commission
The part of the private home is a a a
specifically equipped for the
purposes of the taxpayer’s trade
The part of the private home is a a a
regularly AND exclusively
used for trade
The taxpayer’s duties are a
mainly performed otherwise
than in an office provided to him
by his or her employer
70 Sources: Silke: First Touch to Tax - 2023 - M. Stiglingh et al. page 135 & A Student’s Approach to Income Tax
- Natural Persons 2023 - K Coetzee et al. page 137
70
35
01 May 2023
Section 23(b) –
Domestic and private expenditure
Section 23(b) does not apply to the PART of a private home occupied for purposes
of trade if certain requirements are met (by the respective taxpayers):
Requirements Taxpayer NOT Taxpayer Taxpayer
(subparagraph (a) and (b) of employed employed employed
the proviso to section 23(b)) (any other & &
trade) income mainly income NOT
(> 50%) from mainly from
commission commission
The taxpayer’s duties are a
performed mainly in the
qualifying part of the private
home.
NB!
▪ If all these requirements are met, a portion of the taxpayer’s relevant domestic
and private expenditure (e.g., electricity, rent) will be allowed as deduction.
▪ Section 23(b) must be read together with section 23(m). Section 23(m) only
allows the deduction of section 11(a) expenses, if incurred in connection
with a home office.
71 Sources: Silke: First Touch to Tax - 2023 - M. Stiglingh et al. page 135 & A Student’s Approach to Income Tax
- Natural Persons 2023 - K Coetzee et al. page 137
71
Section 23(c) Recoverable Any loss or expenditure that is recoverable
expenditure under any contract of insurance, guarantee,
security or indemnity is not allowed as a
deduction.
Section 23(d) Interest, penalties and The deduction of any tax (or penalty)
taxes imposed under the ITA or any interest or
penalty imposed in terms of any other Act
administered by SARS is disallowed.
Section 23(e) Provisions and reserves Income carried to any reserve fund OR
capitalised in any way is denied as a
deduction (e.g., provisions are not deductible)
Section 23(f) Expenditure incurred to Expenditure incurred to produce exempt
produce exempt income income (gross income less exempt income)
will not qualify.
Section 23(g) Non-trade expenditure Prohibits the deduction of amounts to the
EXTENT that such were not laid out or
expended for the purposes of trade.
72 Source: Silke: First Touch to Tax - 2023 - M. Stiglingh et al. page 136 - 138
72
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01 May 2023
Section 23(g) cases

Case Principle
Warner The social responsibility expenditure was bona fide incurred for the
Lambert SA performance of the taxpayer’s income-producing operation and
(Pty) Ltd v formed part of the cost of performing it. The social responsibility
C:SARS expenditure was, therefore, incurred for the purposes of trade and
for no other. It was, therefore, incurred in the production of income.
CSARS v Interest incurred on loans relating to dividends declared will be

Scribante allowed as a deduction in terms of section 11(a) and section 23(g),
Construction ❑ if a company had sufficient funds to pay the dividends (without
(Pty) Ltd borrowing); and
❑ the purpose of the borrowing was to enable the taxpayer to
earn income (by using the available funds (the borrowing or loans)
for trade purposes*).
In such instances, the interest will be considered as expended for the

purposes of the taxpayer’s trade and will not be prohibited by
section 23(g).
73 Sources: * Income Tax in South Africa: Case and Materials – Fourth Edition – RC Williams – page 482
73
Section 23(h) Notional interest A taxpayer cannot claim a deduction for
hypothetical interest forfeited due to the
taxpayer employing his capital in his trade
rather than investing in a bank (notional
interest).
Section 23(i) Deductions claimed Paragraphs 5 and 6 of the Second Schedule
against any retirement allow certain unclaimed contributions made
fund lump sum benefits by the taxpayer to a retirement fund as
and retirement lumpsum deductions in the calculation of the taxable
withdrawal benefits portion of lump sum benefits. Section 23(i)
prohibits a deduction in terms of section 11F
of the same contributions allowed in terms
of the aforementioned paragraphs.
Section 23(k) Expenditure incurred by Certain expenses incurred by labour brokers
labour brokers and (without an exemption certificate) or personal
personal service service providers (PSPs) are prohibited.
providers (PSP) These types of taxpayers are dealt with in
Tax III.
74
37
01 May 2023
▪ Deductible expenses for labour brokers:
❑ Remuneration paid or payable to
employees for services rendered is
deductible
▪ Deductible expenses for PSPs:

❑ Sections 11(c) - Legal expenditure
❑ Section 11(i) - Bad debts
❑ Section 11(l) - Fund contributions by
employers
❑ Section 11(nA) - Refund of amounts
received in respect of services or any
employment or the holding of any
office.
❑ Section 11(nB) - Refund of amounts
received as a restraint of trade
payments.
❑ Expenditure in respect of premises,
75
finance charges, insurance, repairs, fuel
and maintenance in respect of such
assets, if such premises or assets are
wholly or exclusively used for trade.
Section 23(l) Restraint of trade Section 23(l) prohibits the deduction of
restraint of trade payments, EXCEPT those
allowable in terms of section 11(cA).
Section 23(m) Expenditure relating to Prohibits the deduction of expenditure that
employment or holding relates to any employment or holding of
of an office office held in respect of which remuneration
is earned, OTHER than the specific amounts
listed below.
NB!
This prohibition does not apply to any agent
or representative whose remuneration is
derived mainly (> 50%) in the form of
commission based on sales or turnover.
76
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01 May 2023
Section 23(m) Expenditure relating to Only the following expenses MAY be claimed
employment or holding as a deduction per section 23(m):
of an office ▪ Section 11F - Any contributions to any
retirement fund
NB! ▪ Sections 11(c) - Legal expenditure
Salaried-employees ▪ Section 11(e) - Wear &tear allowance
▪ Section 11(i) - Bad debts
may only claim the ▪ Section 11(j) - Provision in respect of
expenses listed in doubtful debts
section 23(m). ▪ Section 11(nA) - Refund of amounts
received in respect of services or any
Also read pages 139 to employment or the holding of any office.
141 in Silke: First Touch ▪ Section 11(nB) - Refund of amounts
to Tax - 2023 - received as a restraint of trade payments.
M Stiglingh et. al ▪ Qualifying rent, repairs or expenditure (in
terms of sections 11(a) or (d)) in
connection with any private home to the
extent that the deduction is not prohibited
in terms of section 23(b) as being
domestic or private expenditure.
77
Section 23(o) Unlawful activities The deduction of any expenditure that
constitutes an unlaw activity (e.g., payment
of a bribe) OR a fine or a penalty levied due
to unlaw activities (even if carried on in
another country) is prohibited.
Section 23(q) Expenditure incurred in The deduction of any expenditure incurred
the production of foreign in the production of income in the form of
dividends foreign dividends is prohibited,
Section 23(r) Premiums in respect of The deduction of premiums paid by a
insurance policies person in terms of a policy of insurance,
against illness, injury, which covers a person against illness,
disability, injury, disability, unemployment or death
unemployment or death of that person is prohibited (i.e., income-
of that person protection policies).
78
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01 May 2023
Excessive expenditure
▪ Expenditure can be excessive if:
❑ It is not actually incurred ‘in the production’ of the income, as required by
section 11(a); OR
❑ It is not actually laid out or expended for the purposes of trade, as required by
section 23(g).
BUT is inspired by some other motive (e.g., the desire to evade tax).
▪ Example:
An excessive salary paid to an employee in respect of the services rendered by the
employee. The excessive portion of the salary paid to an employee is not incurred
‘in the production of income’ and will, therefore, not be deductible. The full salary
earned by the employee will, however, be taxed hands of the employee.
Source: Notes on South African Income Tax 2023 - P Haupt & E Haupt page 137 & 138
79
Lecture focus areas

Lecture focus areas
8 Discuss the section 23C normal tax implications for a taxpayer.
▪ Advertising
▪ Goodwill
▪ Legal fees
▪ Loyalty points
80
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01 May 2023
Prohibitions against double deductions

Section 23B(1) The double deduction Even though an amount may qualify for a
of an expense is not deduction under more than one provision of
permitted the Act, no amount may reduce the taxable
income of a taxpayer more than once.
Section 23B(2) Specific double A specific double deduction is allowed, if a
deductions section permits a deduction on condition that
the amount is also deductible in terms of
another section.
NB!
The Act has no specific double deductions.
Section 23B(3) Specific deductions Specific deductions take precedence over
overrides the general the general deduction formula. If a specific
deduction formula deduction is allowed, no deduction in terms of
the general deduction formula is available,
even if there is a limitation on the amount of
the specific deduction or allowance, or if it is
available in a different year of assessment.
81
Prohibitions against double deductions

Section 23B(5) Certain insurance An employer (as policy holder) can claim no
premiums paid by an deduction in terms of the general deduction
employer in respect formula for premiums paid under a policy
of an employee is not of insurance where the policy relates to
deductible. the death, disablement, or illness of an
employee or director, or former employee
or director of the employer.
If the policy relates to death, disablement or

illness arising solely from and in the
course of EMPLOYMENT of the employee
or director, the employer may deduct such
premiums paid.
(e.g., travel insurance and general work-
related disability insurance)
82
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01 May 2023
Lecture focus areas

Lecture focus areas
8 Discuss the section 23C normal tax implications for a taxpayer
▪ Advertising
▪ Goodwill
▪ Legal fees
▪ Loyalty points
83
Cost of asset or expenses and VAT

Section 23C
▪ The VAT portion of the cost of an asset or an expenditure incurred has the following
impact:
❑ If the taxpayer is a ‘vendor’ and an input tax is claimed, the amount of the actual
input tax must be excluded from the cost (or the market value) of the asset or the
amount of expenditure (section 23C(1)).
❑ If the taxpayer is a non-vendor and no input tax is claimed, the VAT portion must
be included in the cost (or the market value) of the asset or the amount of the
expenditure.
Claim input tax

Registered on expenses
VAT vendor incurred OR
cost of asset
VAT
Not a
registered Cannot claim
VAT vendor input tax
(non-vendor)
84
42
01 May 2023
Example: Cost of asset or expenses and

VAT - Section 23C
▪ PC Ltd, a registered VAT vendor, specialises in the sale of high-end computers.
▪ PC Ltd’s financial year ends on the last day of March.
▪ During the 2023 year of assessment, PC Ltd purchased R115 000 (including VAT)
worth of computers as trading stock.
REQUIRED:
Calculate, with brief reasons or reference to legislation, PC Ltd's taxable income for the
2023 year of assessment.
85
Solution: Cost of asset or expenses and VAT

- Section 23C
Description Reason OR Calculation Amount
Legislation reference
GROSS INCOME
LESS: DEDUCTIONS AND ALLOWANCES

Purchases of Section 11(a) 115 000 x 100/115 (100 000)
trading stock OR
general deduction formula
TAXABLE INCOME
86
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01 May 2023
Lecture focus areas

Lecture focus areas
8 Discuss the section 23C normal tax implications for a taxpayer
▪ Advertising
▪ Goodwill
▪ Legal fees
▪ Loyalty points
87
Advertising expenditure
▪ Advertising expenditure incurred by a business already in existence (therefore,
already trading) qualifies as a deduction in terms of section 11(a) (the most important
requirements in this regard are the ‘in the production of income’ and ‘not of a capital
nature’ requirements).
▪ When advertising costs result in the acquisition of an asset of a permanent nature

(a direct enduring benefit), such expenditure is of a capital nature. For example, a
model house constructed by a furniture retailer to exhibit its goods.
▪ A donation made for moral reasons (to support a good cause), without any
business purpose, will not be claimed as a deduction, as the expense is not incurred
‘in the production of income’.
▪ A sponsorship generally supports an event in return for advertising of the products

and services of the sponsor. A deduction can be claimed for the commercial value
obtained through exposure of the taxpayer’s name and products.
88
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Copyright, inventions, patents, trademarks

and know-how
▪ The cost of taking out a patent is capital expenditure, UNLESS a dealer in patent
rights incurs it. Similarly, a manufacturer’s costs of registering a trademark or trade
name constitute capital expenditure.
▪ The cost incurred for the outright acquisition of a patent or trademark is capital
expenditure, UNLESS it is acquired for the purpose of speculation. In these
circumstances, the taxpayer expends an amount to obtain an enduring right to use
(and own) an asset.
▪ Although the deduction of the aforementioned costs of a capital nature will not be
deductible in terms of section 11(a), other specific deductions are allowed in respect of
these costs. This will be covered in Tax III.
▪ Royalty payments for the use of a patent or trademark are deductible. The
expenditure is for the use of the asset and not to obtain ownership.
▪ BP Southern Africa (Pty) Ltd v C:SARS [2007] SCA: 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.
89
Damages and compensation

▪ Payments for damages or compensation resulting from negligence will only be
deductible if the negligence constitutes an ‘inevitable concomitant’ (or necessary
concomitant) of the taxpayer’s income-earning operations.
▪ Joffe & Co (Pty) Ltd v CIR
❑ Payment for damages or compensation resulting from negligence will only be

deductible if the negligence constitutes an inevitable concomitant of the
taxpayer’s income-earning operations.
❑ If an expense is not an inevitable concomitant (or necessary concomitant) of the

taxpayer’s income-earning operations, it is not in the production of income.
90
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Education and continuing education

▪ Expenditure incurred to improve the knowledge or education of the taxpayer are
not deductible, as it of capital nature or not ‘incurred in the production of income’
or (both.)
▪ Expenditure incurred to maintain the taxpayer’s knowledge or expertise are

deductible, as it is not of a capital nature (e.g., attending SAICA courses in its
continuing education programme)
Source:
A Student’s Approach to Income Tax - Natural Persons 2023 - K Coetzee et al. page 132 & page 141
91
Employment and service rendered

▪ ALL amounts payable by an employer to an employee in terms of a service
agreement are deductible from the employer’s income, if all the requirements of
section 11(a) are met (e.g., salary expense).
▪ If the amount payable is excessive in relation to the services performed by the

employee, SARS is entitled to disallow such excessive portion as being incurred
for some other purpose than ‘in the production of income’ or for purposes other
than ‘trade’.
▪ The deductibility of voluntary awards (not provided for in a service contract) made
by an employer to an employee will depend on the circumstances surrounding the
payment. For example:
❑ Reasonable annual staff bonusses will be deductible, as its purpose is generally
to ensure happy and content staff and to encourage greater efforts in future
(resulting ‘in the production of income’ in future).
❑ Bonusses paid to staff for services rendered in the past, is not deductible.
▪ Termination lump sums paid by employer to an employee:

❑ In terms of a service agreement, is deductible in terms of section 11(a).
❑ In terms of a general policy applicable to employees, is deductible in terms of
section 11(a).
92
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Employment and service rendered

❑ For past services (not in production of income), is not deductible in terms of
section 11(a).
Source: Notes on South African Income Tax 2023 - P Haupt & E Haupt page 138
93
Goodwill
▪ An amount paid for the acquisition of the goodwill of a business is expenditure of a
capital nature and is not deductible from income. This is the case if the business is
purchased in order to derive an income and not for the purpose of resale at a profit.
▪ If the purpose is a profitable resale of the business, the cost of acquisition is

properly deductible from the proceeds derived from a resale of the goodwill.
94
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Legal expenditure - ‘in the production of

income’
‘In the production of income’:
▪ It was held in Port Elizabeth Electric Tramway Co Ltd v CIR that for legal expenditure
to be deductible under section 11(a), the taxpayer must demonstrate that the legal
expenditure is:
❑ linked to an operation undertaken with the object of producing income and
❑ NOT linked to an operation that merely serve to PROTECT an existing source
of income.
▪ Examples of legal expenditure not deductible in terms of section 11(a):

❑ Legal fees incurred to protect the taxpayer’s income (i.e., legal costs incurred
to prevent the extinction (in full or partially) or abolishment of the taxpayer’s
business) - not in the production of income
❑ Legal fees incurred to protect the taxpayer’s good name - not in the production
of income
Source: Silke: First Touch to Tax 2023 M. Stiglingh et al. page 146
NB!
❑ First consider the deductibility under section 11(c) - Special deductions. If legal
expenditure is not deductible under section 11(c), it may nevertheless be still
deductible under section 11(a), the general provision.
95
Legal expenditure - ‘of a capital nature’

‘Of a capital nature’:
▪ Both section 11(a) and section 11(c) require that the legal expenditure should not be of
a capital nature.
▪ Examples of legal expenditure not deductible in terms of section 11(a):

❑ Legal fees incurred to protect a design or trademark (capital asset)
❑ Legal expenses incurred to acquire a capital asset.
❑ Legal fees incurred to eliminate competition.
NB!
❑ Legal fees incurred to purchase trading stock (not a capital asset) is revenue in
nature.
❑ Legal fees incurred to obtain a right to receive income is capital in nature.
❑ Legal fees incurred to actually earn income is revenue in nature.
96
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Loss: Fire, theft and embezzlement

▪ Trading stock:
SARS will allow a loss from the theft or destruction of stock only to the extent to
which it exceeds the amount recoverable under an insurance policy.
NB!
Recoverable expenditure is not deductible (section 23(c)).
▪ Fixed assets:
Loss is of a capital nature, not deductible under section 11(a).
▪ Cash
If the loss is due to defalcations (misappropriation of funds by a person trusted with
its charge) by the:
❑ Managing Director or owner of business - Not deductible
❑ Subordinate employees: Deductible
97
Losses: Loans, advances and guarantees -

amounts advanced to a third party
▪ Amounts advanced to a third party (invested amounts)
❑ If it is the custom of a trade or business to make loans or advances to customers

as an integral part of the business carried on for securing business, any losses of
moneys lent to someone will be deductible.
❑ A loss sustained by an employer on a loan or an advance made to an employee

that proves to be irrecoverable is one of a capital nature and not deductible.
❑ When it is the custom of an employer to make advances to employees to meet

expenditure necessarily incurred by them in the course of carrying out their duties,
any consequential irrecoverable losses are deductible in terms of section 11(a).
❑ Losses sustained by lending or advancing money may be refused a deduction

when the moneys are recoverable from some other person under a guarantee or
arrangement of suretyship. A loss that would otherwise be allowable as a
deduction, to the extent to which it is recoverable under a contract of insurance,
guarantee, security or indemnity is prohibited (section 23(c)).
98
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Losses: Loans, advances and guarantees –

amounts borrowed from a third party
▪ Amounts borrowed from a third party
❑ Where losses arise on amounts borrowed from a third party, the purpose of the
borrowing must be taken into account.
❑ The purpose could be one of the following:
➢ To hold the amounts on revenue account - loss is deductible.
For example:
Foreign exchange losses incurred in respect of the purchase of trading stock on
credit.
➢ To hold the amounts as fixed capital - loss not deductible.
99
Losses: Sale of debts

▪ When a person sells his business, ceases trading and incurs a loss on the sale of
the debts due to him, the loss is not deductible from his income, as this loss is
not incurred in the production of income but after the income has been earned.
▪ If a taxpayer sells debt due to a it, at discount, to a finance house to obtain cash,
the loss will be deductible in terms of section 11(a), as it is incurred ‘in the
production of income’.
▪ If a taxpayer buys debt to sell or make a profit on its collection, any losses
realised would be allowed as a deduction.
100
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Loyalty points:
(E.g., eBucks or ThankU points)
▪ Need to determine the correct year of assessment in which the expense is ‘actually
incurred’.
▪ Deductible expenditure can only be deducted in the year of assessment in which it

was incurred. (Sub-Nigel Ltd v CIR)
▪ The expression ‘expenditure actually incurred’ means all expenditure for which a
liability has been incurred during the year, whether the liability has been
discharged during that year or not. It is in the tax year in which the liability for the
expenditure is incurred, and not in the tax year in which it is actually paid (if paid in a
subsequent year), that the expenditure is actually incurred (Caltex Oil (SA) Pty Ltd v
SIR).
▪ It, therefore, needs to determine when the expenditure is actually incurred or when
the liability arises.
▪ There must be an unconditional legal obligation on a taxpayer to pay an expense

before it will be actually incurred for the purposes of section 11(a) of the Income Tax
Act. (Edgars Stores Ltd v CIR)
101
Loyalty points:
▪ At the date that the customer is awarded the loyalty points, the liability of the
taxpayer is not yet unconditional, as it is still dependant on the customer redeeming
or utilising the points awarded.
▪ If there is no definite and absolute liability during the year of assessment to pay an
amount, expenditure has not been actually incurred. (Nasionale Pers Bpk v KBI)
▪ Even though the loyalty points have been awarded to the customer, the taxpayer is
not certain as to how many will eventually be redeemed or utilised by the customer,
as some customers may never redeem their loyalty points.
▪ The ordinary meaning of ‘expenditure’ refers to the action of spending funds;

disbursements or consumption; and hence the amount of money spent. In the context
of the Act, it would also include the disbursement of other assets with a monetary
value. Expenditure, accordingly, requires a diminution or at the very least
movement of assets of the person who expends. (C:SARS v Labat 2011 SCA).
▪ The taxpayer did not expend any money or assets on the date when the loyalty points
were awarded to the customer. Therefore, there is no ‘expenditure’ at this point in
time, as there has not been any diminution in the taxpayer’s assets. The
‘expenditure’ is still conditional upon customers with sufficient points redeeming or
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Loyalty points:
utilising the awarded points.
▪ Date that expenditure is ‘actually incurred’ or liability arises:
❑ For cash back rewards:

Whether subject to expiry or not: Expenditure is ‘actually incurred’ or liability arises
when cash back reward is redeemed by the client (not when it is issued to
client).
❑ For point or mile rewards:

Whether subject to expiry or not: Expenditure is ‘actually incurred’ or liability arises
when points or miles are utilised by the client (not when the points or miles are
granted to the client).
103
Exam technique
Items to be discussed Detail of items to be discussed
Applicability of ▪ Any special deductions apply?

section 11(a) and ▪ If not, state that as there are no specific deductions, one
section 23(g) would need to consider the general deduction formula OR
section 11(a) read together with section 23(g).
▪ Discuss whether the taxpayer is ‘carrying on a trade’.
Requirements of ▪ List all 5 the requirements of section 11(a).
section 11(a) and ▪ List the requirement of section 23(g).
section 23(g)
Identify the issue ▪ All requirements have been met except for: …………
▪ Link the issue to a specific requirement of section 11(a).
The issue will never be whether the amount is deductible.
Onus of proof ▪ State that in terms of section 102 of the Tax Administration
Act, the onus of proof is on taxpayer to prove that an
amount is deductible.
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Exam technique
Items to be discussed Detail of items to be discussed
Requirements not ▪ Once the issue has been identified, it needs to be stated that
specifically defined in the specific requirement is not defined in the Income Tax
the Income Tax Act Act and case law is, therefore, referred to for guidance.
Case law ▪ State the relevant case name and principle
Application ▪ Apply the relevant principle to the scenario.
Conclusion ▪ Always conclude whether the specific requirement of

section 11(a) was met or not. Further, conclude whether
the amount is, therefore, deductible or not.
▪ The conclusion provided should be consistent with
arguments provided.
NB!
When answering General Deduction Formula (GDF) questions always be guided by the
information in the scenario, the required and the mark allocation.
105
References for these slides

▪ Silke: First Touch to Tax 2023 (M. Stiglingh et al.)
▪ Notes on South African Income Tax 2023 (Phillip Haupt & Elke Haupt)
▪ Graded Questions on Income Tax in South Africa 2015 (Kevin and Lindsay Mitchell)
▪ Income Tax in South Africa Cases and Material (Fourth Edition) (RC Williams)
▪ SAICA Student Handbook Volume 3 2022/2023
▪ A Student’s Approach to Income Tax - Natural person 2023 - (K. Coetzee et al.)
▪ Taxation of Individual Simplified 2018 (K.L .de Hart et al.)
106
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Module 6 - GDF v13 (Video) - 2023

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01 May 2023

3 © School of Accountancy, University of the Witwatersrand

4 © School of Accountancy, University of the Witwatersrand

Lecture focus areas

5 © School of Accountancy, University of the Witwatersrand

Lecture focus areas

Lecture focus areas

7 © School of Accountancy, University of the Witwatersrand

Deductions: GDF & Special deductions

Income Tax Act (ITA) permits

Framework – Normal tax payable

28% or 27% of taxable income XXX

9 © School of Accountancy, University of the Witwatersrand

Framework – Normal tax payable

Framework – Normal tax payable

11 © School of Accountancy, University of the Witwatersrand

Lecture focus areas

12 © School of Accountancy, University of the Witwatersrand

General Deduction Formula (GDF): overview

General Deduction Formula (GDF)

Section 11(a) Section 23(g)

NB! Also consider the following:

Lecture focus areas

14 © School of Accountancy, University of the Witwatersrand

Meaning of ‘carrying on trade’

▪ The implication of the above is that pre-trade expenditure is not deductible in

15 © School of Accountancy, University of the Witwatersrand

Meaning of ‘carrying on trade’

❑ In respect of continuity of activities - a single venture undertaken by a taxpayer

❑ In respect of a profit motive - if a taxpayer carries on a non-profit-making trade

16 © School of Accountancy, University of the Witwatersrand

Meaning of ‘carrying on trade’

17 © School of Accountancy, University of the Witwatersrand

Lecture focus areas

18 © School of Accountancy, University of the Witwatersrand

Pre-trade expenditure - Section 11A

▪ In preparation for the carrying on a trade various expenses are incurred

▪ In terms of section 11A, 3 requirements need to be met for pre-trade expenditure to

19 © School of Accountancy, University of the Witwatersrand

Pre-trade expenditure – Section 11A

20 © School of Accountancy, University of the Witwatersrand

▪ On 25 January 2023, a vacant administration building was purchased by ABC.

▪ ABC commenced carrying on a rental trade from 1 July 2023

Section 11A - Pre-trade expenditure

1 Jan 2023 31 Dec 2023

Rental income - R50 000

Operating expenses - R33 000

Start-up costs incurred:

© School of Accountancy, University of the Witwatersrand

The excess of R43 000 (R60 000 – R17 000) is

Taxable income 10 000

Lecture focus areas

27 © School of Accountancy, University of the Witwatersrand

General Deduction Formula (GDF) –

▪ The General Deduction Formula (GDF) comprises of:

Positive test - Section 11(a)

▪ Section 11(a) indicates what may be deducted (the positive test).

▪ Prerequisite for section 11(a): Taxpayer carrying on a trade

▪ The 5 requirements of the section 11(a) are:

Negative test - Non-trade expenditure -

30 © School of Accountancy, University of the Witwatersrand

General Deduction Formula (GDF) –