SPECIAL DEDUCTION

Special Deduction

In this module you will learn about those

deductions which are not permitted in terms of
the general deduction formula, but contained in
specific sections of the Income Tax Act
o (referred to as “special deductions”)

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 Special Deduction

1. Pre-trade expenditure and losses

2. Prepaid expenditure
3. Legal Expenses
4. Restraint of trade
5. Fund contributions by employers
6. Annuities paid to former employees, partners and their
dependants
7. Variable remuneration
8. Additional deduction in respect of learnership agreements
9. Bad debts and doubtful debts
10. Repayment of employee benefits
11. Donations
12. Credit agreements and debtors’ allowance s24
13. Allowance in respect of future expenditure on contracts
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Pre-trade expenditure and losses

Section 11A allows the deduction of pre-trade

expenses in the year of assessment in which
trade commences, subject to certain
requirements

S11A is subject to the limitation provisions of s

23H

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Pre-trade expenditure and losses

Requirements:
▪ Expenditure or loss
▪ actually incurred prior to the commencement of
and in preparation for
▪ carrying of that trade.
▪ Which would have been allowed in terms of s11
(excluding s11(x) and s11D) or s24J had the
taxpayer already commenced trading
▪ Which were not allowed when they were incurred.

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Pre-trade expenditure and losses

▪ s11A = accumulated pre trade expenditure

▪ Deduction is restricted to the income from
that trade.

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 Pre-trade expenditure and losses
▪ Assume that the following events took place within the year of
assessment ending on 31 December 2022.
▪ A vacant administration building was purchased on 25 January 2022.
Transfer costs amounted to R30 000. The building was renovated at a
cost of R250 000. The renovations were completed on 1 July 2022, the
same date on which the occupants moved in and became liable for rent
to the property owner. The property owner therefore commenced with
the carrying on of this rental trade on 1 July 2022. Rental income of
R50 000 and royalty income (not related to the rental trade) of R10 000
accrued to the property owner during the year of assessment.
▪ Rates and taxes in respect of the building amounted to the following:
▪ for the period 25 January 2022 to 30 June 2022 – R60 000
▪ in respect of the remainder of the year of assessment – R33 000.

What amounts will qualify for a deduction in terms of s 11A?

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Pre-trade expenditure and losses

▪ Transfer costs as well as renovation expenditure are

not deductible, because these are expenditures of a
capital nature. Both ss 11(a) and 11A do not allow for
a deduction of expenditure of a capital nature.

▪ The expenditure of R60 000 in respect of rates and

taxes was incurred before the rental trade was
carried on. It is for this reason that this expenditure
will not qualify as a deduction in terms of any
provision other than s 11A.

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Pre-trade expenditure and losses

A wear-and-tear (section 11(e)) allowance will qualify for

deduction under section 11A only if the specific asset:
o has a cost (therefore, an asset acquired by, for example,
a donation or inheritance, will not qualify); and
o was used during the pre-trade period.
▪ A section 11(e) allowance is not available if the asset is not
used for purposes of the taxpayer’s trade.
▪ Therefore, if the asset would not have qualified for an
allowance under section 11(e) (had the asset been acquired
after commencement of the carrying on of that trade), it will
not qualify for a deduction under section 11A.
▪ An example where a section 11A deduction is not available is
where the asset was acquired but kept in storage pending
the commencement of that trade.
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Pre-trade expenditure and losses

▪ Section 11A also applies to a small business

corporation.

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Prepaid expenditure (section 23H)

Section 23H seeks to match the timing of the

deduction in terms of sections 11(a), (c), (d), (w),
or 11A with the amount of goods supplied, the
period of service or the entitlement to other
benefits derived during that year of assessment

In other words, section 23H limits the deduction

allowable in terms of sections 11(a), (c), (d), (w),
or 11(A) even though the amount has actually
been incurred.
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Prepaid expenditure (section 23H)

There are four instances when section 23H will

not apply:
▪ Where all the goods or services are supplied, or all the
benefits are enjoyed within six months after year-end.
▪ Any expenditure actually paid in respect of any
unconditional liability to pay an amount imposed by
legislation.
▪ Any expenditure to which the provisions of s 24K (interest-
rate agreements) or 24L (option contracts) apply (proviso
(cc))
▪ if the aggregate of all the amounts of expenditure, which
may otherwise have been limited by section 23H, does not
exceed R100 000”.
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 Prepaid expenditure (section 23H)
Example

Full Prepaid
Expense portion
Rent paid (section 11(a)) 330,000 110,000
(prepaid for 4 months after Feb 2022)
Insurance (section 11(a)) 105,000 70,000
(prepaid for 8 months after Feb 2022)
Maintenance (section 11(d)) 40,500 33,750
(prepaid for 10 months after Feb 2022)

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Prepaid expenditure (section 23H)
Example
Note the following:
▪ The R330 000, R105 000 and R40 500 have
actually been incurred.
▪ The prepaid amount for rent relates to a period
of 4 months after year-end; therefore it will not
be subject to section 23H and the full amount
of R330 000 may be claimed in the 2022 year
of assessment even though the prepaid
portion is R110 000 (which is > R100 000).

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Prepaid expenditure (section 23H)
Example
Note the following:
▪ Both of the other prepaid amounts (R70 000
and R33 750) relate to a benefit, which will be
enjoyed over a period exceeding 6 months
after year-end.
▪ In terms of proviso (bb) to section 23H, the
deduction of the R105 000 in terms of section
11(a) and R40 500 in terms of section 11(d)
will be limited as the aggregate of the prepaid
amounts (not otherwise limited by the section)
exceeds R100 000, 15
Prepaid expenditure (section 23H)
Example
Note the following:
▪ R103 750 (R70 000 + R33 750). Only the
portion which was enjoyed during the 2022
year of assessment will be deductible in the
2022 year of assessment.

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Prepaid expenditure (section 23H)
Example
Note the following:
▪ Therefore, deductible for Income Tax purposes in
the 2022 year of assessment is the full amount of
rent paid (R330 000), R35 000 (i.e. R105 000 –
R70 000 or R105 000 x 4/12 months) in terms of
section 11(a) (insurance) and R6 750 (i.e. R40
500 – R33 750 or R40 500 x 2/12 months) in
terms of section 11(d) (maintenance).
▪ The prepaid portions of R70 000 and R33 750 will
be deductible in the following (2022) year of
assessment in terms of section 11(a) and 11(d),
respectively.
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 Section 11(c) – Legal expenses

Requirements:
▪ actually incurred
▪ i.r.o. any action, claim, dispute or action at law
▪ incurred in the course of, or by reason of, ordinary
operations in carrying on trade; and
▪ not of a capital nature
AND:
▪ If claimed by taxpayer – amount receivable would be
‘income’ if taxpayer was to win.
▪ If claimed against taxpayer – amount payable would
be deductible (i.t.o. section 11(a)) if taxpayer was to
lose. 18
 Section 11(c) – Legal expenses

E.g. legal costs incurred by a newspaper

company to resist a claim for damages for
liability would be deductible under section 11(c)
because any damages eventually paid would be
deductible under section 11(a) (risk of libel
actions are an inevitable concomitant of a
newspaper company).

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 Section 11(cA) – Restraint of
trade payments
Problem:
o Not deductible under s11(a) as capital in nature

BUT special deduction (for employer) i.t.o.

section 11(cA), in respect of:
o Any amount actually incurred by a person
o In the course of the carrying on of his trade
o As compensation i.r.o. any restraint of trade on natural
person, labour broker or personal service company
o To the extent that the amount constitutes ‘income’ for
recipient

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 Section 11(cA) – Restraint of
trade payments

LIMITATION - The restraint amount shall be

limited to the LESSER of:
o The amount incurred divided by the
number of years (or part thereof) during
which the restraint will apply; or
o One third of the amount incurred (e.g. if
restraint for 2 years, deduct over minimum
of 3 years)

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 Section 11(cA) – Restraint of
trade payments
Osama (Pty) Ltd made restraint of trade payments
to:
▪ Mr. Zakes – R550,000 for 4.5 years on 1/3/2021
▪ Mrs. Kasango – R230,000 for 2 years on
1/8/2021
▪ Mr. Faku – R400,000 for 1.5 years on 31/12/2021
Year-end = 28 February
Which amount(s) will be allowed as restraint
payment deductions in Osama (Pty) Ltd’s 2022 tax
year?

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 Section 11(cA) – Restraint of
trade payments
Section 11(cA) – payment to Mr. Zakes
• Lesser of:
• R550,000/4.5 = R122,222
• R550,000/3 = R183 333 (R122 222)

Section 11(cA) – payment to Mrs. Kasango

Lesser of
• R230,000/2 = R115 000
• R230,000/3 = R76 667 (R76,667)
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 Section 11(cA) – Restraint of
trade payments
Section 11(cA) – payment to Mr. Faku
Lesser of
• R400,000/2 = R200 000
• R400,000/3 = R133,333 (R133,333)

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 S11(j) – Doubtful debts

▪ From 01 January 2019, S11(j) has

totally been revised.
▪ The Commissioner’s discretion is
removed.
▪ The allowance now depends on
whether the taxpayer applies IFRS 9 or
not:

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 S11(j) – Doubtful debts

If taxpayer applies IFRS 9:

▪ The doubtful allowance of 40% may be claimed of:
o The loss allowance relating to impairment that
is measured at an amount equal to the lifetime
expected credit losses and
o Bad debts (written off for financial purposes)
not allowed under S11(i) if the debt was
included in income in the current or any
previous year
▪ Plus a deduction of 25% of the loss allowance
relating to impairment , in respect of other debt
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 S11(j) – Doubtful debts

If taxpayer does not apply IFRS 9:

▪ The doubtful allowance of 40% may be claimed
on debts of:
o 120 days or more in arrears

▪ Plus a deduction of 25% may be claimed on

debts of:
o 60 days or more in arrears but less than 120 days
Note:
▪ No allowance for debts less than 60 days
▪ The 40% or 25% allowance is claimable even if the debt is not
doubtful
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 S11(j) – Doubtful debts

The taxpayer (under either of the options above) can

make an application to the Commissioner to issue a
directive to increase the 40% inclusion to a maximum of
85%. The following factors will be considered:
o the history of the debt owed to the taxpayer (including the
number of repayments not met and the period of the debt)
o the steps taken to enforce repayment of the debt
o the likelihood of the debt being recovered
o any security available in respect of that debt
o the criteria applied by the taxpayer in classifying debt as
bad, and
o any other factors that the Commissioner may deem
relevant (proviso to the proviso of s 11(j)).
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 S11(j) – Doubtful debts
Example: Silke
During the 2021 year of assessment, SARS allowed
Chronicle Ltd to claim a doubtful debt allowance of R65 000.

During the 2022 year of assessment a total impairment loss

allowance (IFRS 9 loss allowance) of R200 000 was
determined by Chronicle Ltd in terms of IFRS 9. It consisted
of R75 000 measured at an amount equal to the lifetime
expected credit loss and R125 000 measured at an amount
equal to the 12-month expected credit loss. Chronicle Ltd
has never received any income from lease contracts.

Calculate the effect on taxable income in respect of the

doubtful debt allowance for Chronicle Ltd for the 2022 year of
assessment.
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 S11(j) – Doubtful debts
Example: Silke

SOLUTION
Year ended 31 December 2022
Add back: 2021 doubtful debt allowance......... R65 000
• (40% × R75 000 (measured at an amount equal to
the lifetime expected credit loss))
• + (25% × R125 000 (measured at an amount equal
to the 12-month expected credit loss)) – 2022
doubtful debt allowance (s 11(j)(i)) ..............( 61 250)

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 Donation s18A

▪ Note where in calculation of taxable income

▪ Deduction for bona fide donations to (certificate):
o Public Benefit Organisations (PBO’s)
o Institution/body that conducts research/ services to the
State/ promote certain activities
o Government/ provincial administration/ local authority
involved in public benefit activities
▪ Deduction limited to 10% of taxable income
▪ For employee giving (limit to 5% of the employees
salary)
NB! NB! NB!

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 Donation s18A

Documentary Evidence (Receipt)

The following details must be reflected on the receipt-
S18A(2):
- Ref number of PBO, institution,board, agency,etc,
- Date of receipt of donation,
- Name of PBO, institution, board, agency, etc,
- Name and address of the donor,
- Amount of the donation or nature (if not in cash),
- A certification that the receipt is issued for the purpose of
S18A and that the donation has been or will be used
exclusively for the object of the entity issuing the receipt.

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