Page 292 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes
IN 18 (3)
Taxable income before retirement annuity fund contributions and donations to certain organisations Less: Retirement annuity fund contributions [section 11(n)] *
(XXX) Donations to certain organisations (section 18A) **
(XXX)
Taxable income from all sources
XXX
XXX
* When calculating retirement annuity fund contributions, the taxable capital gain must be excluded from the amount on which the 15% allowable deduction is calculated. The reason for this is that a taxable capital gain is part of taxable income and not income as required by section 11(n)(i)(aa)(A).
** The taxable capital gain forms part of taxable income as determined before the section 18A deduction is calculated. Thus, taxable capital gains must be taken into account in determining this deduction which is based on taxable income.
Examples relating to natural persons are included in Annexure B.
4.5.2 Deductibility of foreign taxes against income in determining taxable income
Under section 23(d) any tax imposed under the Act may not be deducted in determining taxable income. The fact that a deduction of foreign taxes on income is not speci cally denied under section 23(d) does not mean that foreign taxes automatically qualify for a deduction. In order to qualify for a deduction the foreign taxes must meet the requirements for deductibility under an appropriate section.
Section 11(a) read with section 23(g) is relevant in determining whether a foreign tax meets the requirements for deductibility and is therefore deductible in calculating taxable income. Section 6quat(1C) also provides a deduction for foreign taxes in limited circumstances – see 5 for a discussion on section 6quat(1C).
Section 11(a) provides a deduction for expenditure and losses, which are not of a capital nature, actually incurred in the production of the income. In context, the requirement which is of particular relevance is whether the foreign tax expenditure has been incurred in the production of income.
A tax, domestic or foreign, on pro ts is not an expense which has been incurred in the production of income but is instead an appropriation of pro ts already earned. In Port Elizabeth Electric Tramway Company Ltd v Commissioner for Inland Revenue,* which is supportive of the principle, Watermeyer AJP and Davis J held that:
‘There is certainly one type of expenditure which must be excluded, and that is expenditure payable out of income after it has been earned. An example is a tax upon pro ts. In a sense such expenditure might be said to be attendant upon business operations, but there is a real distinction between ‘charge against pro ts and an appropriation of pro ts after they have been earned.’ See Van Ryn Deep Ltd. v Commissioner for Inland Revenue (1922, W.L.D. 22).’
In Van Ryn Deep Ltd v CIR† the court held that provincial tax, which had been imposed upon the pro ts after the pro ts had been earned, could in no way be said to have been an expense incurred in earning the pro ts or connected in any way with the production of the pro ts and consequently was not deductible for the purposes of income tax, the liability for which was not affected by what was done either voluntarily or involuntarily with pro ts after they had been earned.
Some tax commentators are of the opinion that foreign taxes on income claimed as a rebate under section 6quat(1) or section 6quin also qualify for a deduction under section 11(a). The reason appears to be that the rebate is a deduction against normal tax payable while a section 11(a) deduction constitutes a deduction against income for purposes of determining taxable income. Consequently their argument is that there is no double deduction as prohibited under section 23B. It is not, however, necessary to consider whether section 23B prohibits any double deductions or only prohibits double deductions for the purposes of determining taxable income because there is simply no deduction under section 11(a). As stated, it is SARS’s view that the requirements of section 11(a) are not met as a foreign tax on pro ts is not an expense incurred in the production of income but is instead an appropriation of pro ts already earned. Accordingly, a taxpayer in those circumstances will not qualify for a deduction against income for the foreign taxes paid.
Similarly, taxes on income which are levied on a gross receipts basis, for example, a nal withholding tax, are incurred on income and not in the production of income and therefore do not qualify for a section 11(a) deduction.
Taxes which are a charge against pro ts,‡ may, depending on the detailed facts, be incurred in the production of income and qualify for a deduction under section 11(a) read with section 23(g) provided all the requirements of those sections are met. For example, a resident carrying on trading operations outside South Africa which yields taxable sales income and incurs foreign customs duties. The foreign customs duties are expenditure which is incurred in the production of income and assuming all the other requirements of section 11(a) and section 23(g) are met will qualify for a deduction. The customs duties are a charge against pro ts and are not an appropriation of pro ts already earned.
* 8 SATC 13 (1936) CPD 241.
† 33 SATC 101 1922 WLD 22.
‡ A tax is a charge on pro ts if it is incurred irrespective of whether the taxpayer is in a taxable pro t, taxable loss or
break even position.
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