Department of Accountancy

STX4000

General deduction formula (GDF)

Module guide

April 2022

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GENERAL DEDUCTIONS
OUTLINE:

REFERENCES
INCOME TAX ACT

WHERE TO FIND INFO

1. Introduction Section 11(a); 23(g)

2. Trade Section 1

3. Pre trade expenses Section 11A

4. Section 11(a) requirements (POSITIVE TEST) Section 11(a)

• Expenditure & losses
• Actually incurred
• During year of assessment
• In production of income
• Not capital in nature

5. Prepayments Section 23H

6. Deductions not allowed (NEGATIVE TEST) 11(a) read with 23(g)

7. Cost of Assets & VAT Section 23C

8. Specific expenses and losses (READ and UNDERSTAND and IDENTIFY)

See SAICA exam guide (on Moodle) to excluded sections

OBJECTIVES:
You must be able to:
Identify when amounts will be deductible in terms of Section 11(a)
Calculate taxable income by applying section 11(a), 23(g) and 23H

CASE LAW

Words or Phrase Considered Name of Case

Requirements of s11(a) in general and then if
Sub Nigel Ltd v CIR
income must be earned in the same year
Section 11(a)
Burgess v CIR
Carrying on a trade
PE Electric Tramway Co v CIR
Section 11(a) Joffe and Co v CIR
In the production of income CSARS v BP South Africa (Pty) Ltd
BPSA (Pty) Ltd v CSARS

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 Drakensberg Gardens Hotel (Pty) Ltd v CIR
Provider v COT
Section 11(a)
Nemojin (Pty) Ltd v CIR
Dual purpose
Edgars Stores Ltd v CIR
Section 11(a) Nasionale Pers Bpk v KBI
Actually incurred Golden Dumps (Pty) Ltd v CIR
CSARS v Labat (2011 SCA)
New State Areas Ltd v CIR
Section 11(a)
Rand Mines (Mining & Services) Ltd v CIR
Not of a capital nature
BPSA (Pty) Ltd v CSARS (2007 SCA 7 RSA)
Section 23(g) Warner Lambert SA (Pty) Ltd v CSARS

BACKGROUND

Framework for computation of normal tax

GROSS income Section 1 XXX

Less
EXEMPT income Section 10 (XX)
INCOME XXX
Less
Allowable deductions Section 11 -19 & 23 (XX)
Less
Allowable allowances Section 11 -19 & 23 (XX)
Add
Taxable capital gains Section 26A XX
TAXABLE INCOME /(LOSS) XXX

The next step in determining taxable income will be to deduct all amounts allowable in terms of the Act.

The main sections dealing with deductions are Section 11 – 19 and 23.

The general deduction formula comprises the following:

• S 11(a) – which MAY be deducted (POSITIVE TEST)
• S 23(g) – which may NOT be deducted (NEGATIVE TEST)
NB à The courts have laid down that 11(a) and 23(g) must always be read together when deciding if an
amount may be deducted or not.
TRADE
A DEDUCTION WILL NEVER BE ALLOWED IF THE TAXPAYER IS NOT ENGAGED IN THE CARRYING ON OF A
TRADE.

The definition of a “trade” is very wide, and the courts have decided that this definition cannot be exhaustive!
The term “trade” is defined in the Act but the Act requires that there must be CARRYING on of trade.

CARRYING ON OF TRADE:
• Is there continuity?
• Is the long-term objective of the trade to generate profit?

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 • The profit does not necessarily need to be made yet, but the intention to make profit must be there
(i.e. even if a loss is currently being made, as long as there is an intention to make a profit)

The above questions are not prerequisites – but merely a way to test.
Carrying on of trade involves an ACTIVE step.

Section 11(a) – POSITIVE TEST – What MAY be claimed

1. Expenditure and losses
2. Actually incurred
3. During YOA
4. In the production of income
5. Not of a capital nature

ALL the above must be met before a deduction may be claimed.

1. STUDY THE PRINCIPLES OF SECTION 11(A) WITH SPECIFIC REFERENCE TO CASE LAW ENSURE THAT
YOU WILL BE ABLE TO DISCUSS AND CALCULATE DEDUCTIONS ALLOWABLE.

Section 23H – PRE-PAID EXPENSES

S 23H limits deductions that may be claimed for pre-paid expenses during any YOA.

S 23H applies to:

• Expenses allowable as deduction in terms of s 11(a), (c), (d), 11D(1) and s28
• Goods/services if not supplied/rendered in full during YOA
• Other benefits if period of expense relates to beyond the YOA

The deduction allowed under s 23H in year and subsequent years will be limited as follows:
• In respect of goods supplied à deduct in specific YOA when goods are actually supplied
• In respect of services rendered à (Months (in YOA) services rendered / total months of services to
be rendered) x expense
Total expenditure x Months during which service is rendered/Total number of months service is
rendered

THEREFORE the requirement of s 23H is to MATCH the deductions with the year in which the benefits will be
derived

NB à S 23H does not apply to expenses incurred in respect of acquisition of trading stock
If the following apply - s23H will also NOT be applicable (thus deduct in full in current YOA)
1. Goods/services to be supplied within 6 months after YOA
2. Aggregate of ALL amounts of expenses incurred which may otherwise have been limited by
s23H does not exceed R100 000
3. Expenses paid in respect of unconditional liabilities imposed by legislation

Remember that exceptions 1 and 3 must be considered first and then all the amounts not subject to them will
be taken into account for the purposes of the R100 000 exception in 2.

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2. STUDY SECTION 23H AND ENSURE THAT YOU WILL KNOW WHICH AMOUNTS WILL BE DEDUCTIBLE
IN THE CURRENT YOA AND WHICH MUST BE POSTPONED.

Section 23 – NEGATIVE TEST – What CANNOT be claimed

S23 provides that no deduction may be made in respect of the following:

23(a) Private maintenance expenses

23(b) Domestic & private expenses
23(c) Recoverable expenses
23(d) Interest, penalties, taxes
23(e) Provisions & reserves
23(f) Expenses to produce EXEMPT income
23(g) Non trade expenses
23(h) Notional interest
23(k) Expenses of labour brokers, personal service companies and personal service trusts
23(l) Restraint of trade (excl 11cA)
23(m) Expenses relating to employment/holding an office
23(n) Government grants
23(o) Unlawful activities
23(p) Cession of a policy
23(q) Expenditure incurred in the production of income in the form of foreign dividends
23(r) Premium paid ito insurance policies for illness, injury, disability, unemployment and death

3. STUDY ALL EXPENSES WHICH ARE NOT ALLOWABLE AS DEDUCTION, AND ENSURE THAT YOU WILL
BE ABLE TO RECOGNISE WHEN AN AMOUNT IS DEDUCTIBLE OR NOT.

Section 23B – prohibition of DOUBLE deductions

When an amount qualifies for deduction or allowance in terms of more than one provision of the Act, s 23B
will not allow that it can be deducted more than once. Deductions can only be deducted ONCE.

Section 11A – Pre-trade expenditure

Costs incurred prior to trading cannot be deducted under s(11)(a) as the ‘trade’ requirement has not been
met and so all 5 requirements have not been met.
Once the trade begins, SARS will allow the taxpayer to deduct the pre-trade expenses in full under s11A as
long as they meet the other requirements for s(11)(a).