Page 446 - SAIT Compendium 2016 Volume2

IN 45 (2) Income Tax acT: InTeRPReTaTIon noTes IN 45 (2)
4.3 Business-related expenditure
4.3.1 Own business expenditure of a revenue nature
For an expense to be deductible under section 11(a), it must be – • actually incurred,
• during the year of assessment,
• in the production of income, and
• not of a capital nature.
Conversely, section 23(g) prohibits the deduction of any moneys against income derived from trade to the extent such moneys were not laid out or expended for the purposes of trade. Expenditure incurred in securing business premises will generally be incurred in the production of income since it is closely connected with the business operations.
Recurring costs which do not create an enduring bene t are likely to be of a revenue nature and will be deductible under section 11(a). Examples include the monthly service fees for a satellite tracking system for motor vehicles, monthly payments to an armed-response company, salary costs of security personnel and the cost of food and veterinary bills for a guard dog.
Capital expenditure is not deductible under section 11(a). Characteristically it is incurred ‘once and for all’ and creates an enduring bene t.* Examples of capital expenditure include the cost of installing an alarm system, an electric fence and in acquiring a guard dog.
While capital expenditure is not deductible under section 11(a), it may qualify for a deduction, albeit over a period, elsewhere under the Act, for example, under section 11(e) (wear-and-tear or depreciation allowance – see 4.3.5) or section 24D (security expenditure – see 4.3.6).
4.3.2 Contributions to anti-crime initiatives
Contributions to crime-prevention initiatives may take the form of –
• donations which are not deductible;
• donations which are deductible under section 18A (see 4.2); or
• advertising or sponsorship expenditure deductible under section 11(a).
The common law meaning of a donation was summed up by Trollip JA in Ovenstone v SIR† when he stated the following:
‘In a donation the donor disposes of the property gratuitously out of liberality or generosity, the donee being thereby enriched and the donor correspondingly impoverished, so much so that, if the donee gives any consideration at all therefor, it is not a donation... .’
Sponsorship on the other hand, generally involves the support or promotion of an activity such as a sporting event in return for advertising of the sponsor’s products or services. In terms of security expenditure, a company that, for example, provides an armed response service or installs security gates may offer to secure a certain premises in return for extensive advertising of such company’s logo at the premises or at a high-pro le event. The sponsorship may also take the form of the provision of products related to the advancement of crime-initiative projects.
From an income tax perspective, the question has been raised whether contributions to anti-crime initiatives are deductible under section 11(a) read with section 23(g). The contributions may take the form of cash, goods and products, or services rendered free of charge. In order for the contributions to qualify as a deduction under section 11(a) they must be incurred in the production of income in the carrying on of a trade, such as advertising a contributor’s business. The treatment of the contributions will be as follows:
(a) Cash contributions
The deduction will be limited to so much of the contributions as the taxpayer can prove produced commercial value for the business through exposure of its name or products.
(b) Contributions of trading stock
The cost of trading stock generally quali es for deduction under section 11(a) and is deductible in the year of assessment in which the trading stock was purchased. However, section 22(8) provides for a deemed inclusion in a taxpayer’s income when trading stock has been disposed of otherwise than in the ordinary course of trade for a consideration which is not market-related. The deemed inclusion applies, for example, when trading stock is –
• donated [section 22(8)(b)(i)];
• disposed of other than in the ordinary course of trade for less than its market value [section 22(8)(b)(ii)]; or
• applied for any other purpose other than the disposal thereof in the ordinary course of trade [section 22(8)(b)(iv)].
In these circumstances the taxpayer is deemed to have recovered or recouped an amount equal to the market value of the trading stock [section 22(8)(B)]. If, however, a donation of trading stock quali es for a deduction under section 18A, the inclusion in income is equal to the value of the trading stock that was taken into account during the year of assessment in question (that is, the cost price less any write-down for loss in value) [section 22(8)(C)].
A taxpayer who can prove that the contribution of trading stock produced commercial value for the business through exposure of the taxpayer’s name or services will be allowed a deemed deduction under paragraph (a) of the proviso to section 22(8). This could apply, for example, to the contribution of a car by a motor vehicle manufacturer as part of an anti-crime campaign.
(c) Provision of services
The deduction will be limited to so much of the actual cost of providing the services as the taxpayer can prove produced commercial value for the business through exposure of its name or services in any anti-crime campaign. Examples of such services include free airtime supplied by cell phone operators, daily newspapers carrying safety and security messages including theme-related pamphlets, and operating a data centre where the public can blow the whistle on criminals.
* For the tests applied in distinguishing capital and revenue expenditure, see Chapter 2 of the Comprehensive Guide to Capital Gains Tax (Issue 4) available on the SARS website.
† 1980 (2) SA 721 (A), 42 SATC 55 at 73
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