Page 445 - SAIT Compendium 2016 Volume2

IN 45 (2) Income Tax acT: InTeRPReTaTIon noTes IN 45 (2)
• Section 23(b) – prohibition on the deduction of domestic or private expenses
• Section 23(g) – prohibition on deduction of moneys not laid out or expended for the purposes of trade
• Section 24D – security expenditure
• Paragraphs 20 and 53 of the Eighth Schedule – the base cost of assets and the disregarding of capital gains and capital
losses on personal-use assets respectively for capital gains tax purposes
• Part II of the Ninth Schedule – public bene t activities for purposes of section 18A.
4. Application of the law
4.1 Expenditure of a domestic or private nature
Section 23(b) prohibits the deduction of domestic or private expenditure. In CIR v Hickson,* Beyers JA stated the following: ‘Domestic and private expenses’ are, I should say, without attempting an exhaustive de nition, expenses pertaining to the household, and to the taxpayer’s private life as opposed to his life as a trader.’
Thus the cost of securing an individual’s private residence does not qualify as a deduction. Examples include defensive walls, burglar alarms, electric fences, razor wire, guard dogs, insurance, 24-hour monitoring and armed-response services. In the event that part of a taxpayer’s private residence is used for purposes of trade, for example, a home of ce, an appropriate apportionment will have to be made for the security expenditure incurred (see 4.3.3).
Capital gains tax
Some security expenditure may qualify as part of the base cost of immovable property held for domestic or private purposes, such as a primary residence or holiday home. Paragraph 20(1)(e) of the Eighth Schedule includes in the base cost of an asset – ‘the expenditure actually incurred in effecting an improvement to or enhancement of the value of that asset, if that improvement
or enhancement is still re ected in the state or nature of that asset at the time of its disposal;’.
Examples of such improvement or enhancement expenditure include the cost of installing an electric fence or the cost of a burglar alarm system which is integrated into the fabric of a building. To qualify for inclusion in the base cost of an asset, the relevant improvement must still be on hand at the time of disposal of the property.
Owners of sectional title units have an undivided share in the common property. Sometimes they are required to pay a special levy for the purpose of effecting improvements to the common property, such as the installation of a security fence. Expenditure of this nature will normally be of a capital nature as it provides an enduring bene t. Since it enhances the value of the owner’s right in the common property it forms part of the base cost of the sectional title unit. The same principle applies to owners of share block units who enjoy a right of use in the common property since such expenditure will enhance the value of their right of use.
Movable assets, used by individuals mainly for non-trade purposes, such as rearms or private vehicle tracking or alarm systems are personal-use assets as contemplated in paragraph 53(2) of the Eighth Schedule, and capital gains and capital losses on the disposal of such assets must be disregarded.
4.2 Donations
Generally donations tend not to be deductible for income tax purposes because they will either be of a private or domestic nature or not be incurred for purposes of carrying on a trade. Despite section 23, section 18A(1) provides for the deduction of any bona de donations to–
• a public bene t organisation (PBO) contemplated in paragraph (a)(i) of the de nition of ‘public bene t organisation’
in section 30(1) approved by the Commissioner under section 30;
• an institution, board or body contemplated in section 10(1)(cA)(i) which carries on in South Africa any public bene t
activity contemplated in Part II of the Ninth Schedule or other activity determined by the Minister by notice in the
Government Gazette and meets certain other requirements;
• any PBO approved by the Commissioner under section 30 which provides funds or assets to any PBO, institution,
board or body contemplated in section 18A(1)(a);
• any agency contemplated in the de nition of ‘specialized agencies’ in section 1 of the Convention on the Privileges and
Immunities of the Specialized Agencies, 1947, set out in Schedule 4 to the Diplomatic Immunities and Privileges Act, 2001; or
• any department of government of South Africa in the national, provincial or local sphere as contemplated in section
10(1)(a) to be used for the purpose of any activity contemplated in Part II of the Ninth Schedule.
The protection of the safety of the general public is listed in paragraph 1(k) of Part II of the Ninth Schedule. The deduction for all qualifying bona de donations made by a person other than a portfolio of a collective investment scheme† is limited to 10% of the taxpayer’s taxable income (excluding any retirement fund lump sum bene t, retirement fund lump sum withdrawal bene t and severance bene t) as determined before allowing any deduction of donations under section 18A.‡ Any qualifying donations that exceed the 10% threshold are carried forward to the next succeeding year of assessment and deemed to be a donation actually paid or transferred in that year.
Donations must be supported by an of cial receipt issued under section 18A by the PBO, institution, board, body, agency or department concerned.§
* 1960 (1) SA 746 (A), 23 SATC 243 at 249.
† The deduction granted to a portfolio of a collective investment scheme is determined by using a formula.
‡ For years of assessment commencing before 1 March 2014, deductible donations were limited under section 18A(1)
(B) to 10% of the taxable income (excluding any retirement fund lump sum bene t and retirement fund lump sum withdrawal bene t) as calculated before allowing any deduction under section 18 or 18A.
§ For further information on deductible donations see paragraph 13 of the Tax Exemption Guide for Public Bene t Organisations in South Africa (Issue 3). For further information on the VAT consequences of donations and for PBO’s see the VAT 404 – Guide for Vendors and the VAT 414 – Guide for Associations not for Gain and Welfare Organisations. All these guides are available on the SARS website.
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