Page 447 - SAIT Compendium 2016 Volume2

IN 45 (2) Income Tax acT: InTeRPReTaTIon noTes IN 45 (2)
4.3.3 Dual-purpose expenditure
The Act is not concerned with the method employed in advertising and promoting a taxpayer’s business or products. In this regard the courts have looked at the dominant purpose of the expenditure. If a contribution is made with a dual purpose, an apportionment under section 23(g) may be made between the expenditure incurred for business purposes and that which relates to philanthropy. Any method of apportionment must be logical, fair and reasonable and take into account the facts and circumstances of the particular case.
At the time the case of CIR v Pick ‘n Pay Wholesalers (Pty) Ltd* was heard, section 23(g) required deductible expenditure to be wholly or exclusively laid out for the purpose of trade. The court had to consider whether the taxpayer’s purpose was solely the promotion of its business or whether it was of a dual nature, including philanthropy.
The company made a series of donations to the Urban Foundation, an organisation concerned with the upgrading of housing and the provision of community facilities, as a means of ‘indirect advertising’ to secure valuable publicity. The announcement of the donations had a positive effect on its turnover. The majority of the Appellate Division of the Supreme Court found that, on the probabilities, the taxpayer failed to show that in making the donation it did not have a philanthropic purpose as well as a business purpose. As a result the company’s claim for a deduction was disallowed. However, based on the current wording of section 23(g) it is possible that the company may have been able to apportion the expenditure and claim the business-related part as a deduction.
In ITC 696† the taxpayer incurred expenditure for the purchase of footballs which it presented to school football clubs. The footballs were inscribed with words connecting them with articles in which the taxpayer traded. The court held that the expenditure was incurred for advertising purposes and thus quali ed as a deduction.
4.3.4 Costs incurred in providing security to employees
(a) Employer
Employers sometimes incur security costs in relation to their employees such as the following:
• The cost of an armed-response service at an employee’s home.
• The provision of bodyguards for employees.
• The supply of a guard to protect an employee’s home or family while the employee is away on business or on leave.
• The installation of a security system at an employee’s home.
From the employer’s perspective these costs are simply a cost of employment or a form of insurance and should qualify for deduction under section 11(a), unless they are of a capital nature, in which case the expenditure may qualify for deduction under section 11(e) (for example, when the employer retains ownership of the asset supplied to the employee). (b) Employee
Note: References under this heading to paragraphs are to paragraphs in the Seventh Schedule and references to an employee include a director.
Security costs incurred by an employer in relation to employees may give rise to a taxable bene t in the hands of the employees under the Seventh Schedule with attendant employees’ tax implications. A taxable bene t will arise, for instance, when –
• an asset is acquired by an employee from the employer or any associated institution in relation to the employer or from
any person by arrangement with the employer (for example, the employer arranges to have a security system installed
at an employee’s home and ownership of the system passes to the employee) [paragraph 2(a)];
• an employee is granted the right to use any asset for private or domestic purposes (for example, the employer installs a
security system at the employee’s home but retains ownership of it) [paragraph 2(b)];
• any service has at the expense of the employer been rendered to the employee (whether by the employer or by some
other person), and that service has been used by the employee for his or her private or domestic purposes (for example,
the employer pays the monthly cost of an armed-response service) [paragraph 2(e)]; or
• an interest-free or low-interest loan has been granted to an employee (for example, to enable the employee to erect a
wall or electric fence around the employee’s residence) [paragraph 2(f)].
4.3.5 Wear-and-tear or depreciation allowance
The cost or value of certain capital assets may qualify for a deduction by way of an allowance under section 11(e). In such cases the expense will usually be allowed over a number of years of assessment. For the purposes of section 11(e), individual items costing less than R7 000 which do not form part of a set may be written off in full in the year of assessment in which the expenditure is incurred. This threshold applies to all qualifying assets acquired on or after 1 March 2009.
Removable security systems may be written off over ve years of assessment. This write-off period as well as the threshold of qualifying assets can be found in the Annexure to Interpretation Note No. 47 (Issue 3) dated 2 November 2012 ‘Wear-and-Tear or Depreciation Allowance’.
Security expenditure comprising a structure or work of a permanent nature will not qualify for the wear-and-tear or depreciation allowance under section 11(e) [paragraph (ii) of the proviso to section 11(e)]. Examples of such structures include walls or electric fences around the perimeter of business premises. See, for example, ITC 773‡ in which the cost of erecting a partition in leased premises to protect trading stock was held to be a structure of a permanent nature, and ITC 225§ in which the court held that the cost of erecting fencing was a work of a permanent nature.
Farmers are entitled to claim the cost of fencing under paragraph 12(1)(e) of the First Schedule, but the deduction is limited under paragraph 12(3) to taxable income derived from farming operations, with any excess being carried forward to the succeeding year of assessment.
* 1987 (3) SA 453 (A), 49 SATC 132. † (1950) 17 SATC 86 (C).
‡ (1953) 19 SATC 308 (C).
§ (1931) 6 SATC 158 (U).
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