Page 485 - SAIT Compendium 2016 Volume2

IN 51 (3)
4.4 4.5 4.6
4.7
5. Conclusion
Preamble
In this Note unless the context indicates otherwise –
• ’pre-tradeexpenses’meanexpenditureandlossesactuallyincurredbyapersonbeforethecommencementofandin
preparation for carrying on a trade;
• ‘post-trade expenses’ mean expenditure and losses actually incurred after the commencement of the trade;
• ‘section’ means a section of the Act;
• ‘the Act’ means the Income Tax Act 58 of 1962; and
• any word or expression bears the meaning ascribed to it in the Act.
1. Purpose
This Note provides guidance on the deduction of pre-trade expenses (sometimes also called start-up costs) under section 11A.
2. Background
New business formation is vital to the economy. Before the introduction of section 11A only certain pre-production interest [section 11(bA)] and certain nance charges [section 11(bB)] were permitted as a deduction for start-up costs incurred before the commencement of trade. Sections 11(bA)* and 11(bB)† have been deleted since the release of the rst issue of this Note. See also 4.7.
The trade requirement in section 11(a) read with section 23 (g)
The general deduction formula, contained in section 11(a) and section 23(g), reads as follows –
Income Tax acT: InTeRPReTaTIon noTes IN 51 (3)
Pre-trade expenses which would have quali ed under section 11, 11B, 11D or 24J had they been incurred after the trade had commenced [section 11A(1)(b)]
Pre-trade expenses which were not allowed as a deduction in the current or any previous year of assessment [section 11A(1)(c)]
Ring-fencing of the deduction for pre-trade expenses [section 11A(2)]
4.6.1 Limitation of pre-trade expenses to taxable income from the relevant trade 4.6.2 Impact of assessed loss brought forward on ring-fencing
4.6.3 Claiming of pre-trade expenses limited by section 11A(2)
Repeal of section 11(bA)
11. General deductions allowed in determination of taxable income.—For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall be allowed as deductions from the income of such person so derived—
(a) expenditure and losses actually incurred in the production of the income, provided such expenditure and losses
are not of a capital nature;
23. Deductions not allowed in determination of taxable income.—No deductions shall in any case be made in respect of the following matters, namely—
(a) to (f) . . .
(g) any moneys, claimed as a deduction from income derived from trade, to the extent to which such moneys were
not laid out or expended for the purposes of trade;
The opening words of section 11 contain a trade requirement while section 23(g) prohibits a deduction for monies not laid out or expended for the purposes of trade. Section 11(a) additionally requires that expenditure and losses be actually incurred in the production of income and not be of a capital nature in order to qualify as a deduction.
The trade requirement of section 24J(2)
Section 24J(2) does not draw a distinction between interest of a capital or revenue nature. It permits a deduction of the amount of interest which is deemed to have been incurred during a year of assessment, from the income derived from carrying on any trade of the ‘issuer’ in relation to an ‘instrument’,‡ if that amount was incurred in the production of the income.
The trade requirement of section 11D(2)
Section 11D(2) provides for a deduction of research and development expenditure actually incurred by a taxpayer, in the production of income and in the carrying on of any trade. Such expenditure must be directly and solely for research and development undertaken in the Republic.§
Pre-trade expenses of a capital nature
Pre-trade expenses often form part of the cost of creating a source of income. These expenses are therefore mostly of a capital nature. In ITC 697¶ the appellant company commenced on 1 December 1947 to demolish its old building after
* The deletion of section 11(bA) by section 30(1)(a) of the Taxation Laws Amendment Act No. 24 of 2011 applies to years of assessment commencing on or after 1 January 2012.
† The deletion of section 11(bB) by section 14(1)(a) of the Taxation Laws Amendment Act No. 17 of 2009 came into operation as from the commencement of years of assessment ending on or after 1 January 2010
‡ As de ned in section 24J(1).
§ The term ‘research and development’ is de ned in section 11D(1) ¶ (1950) 17 SATC 93 (t).
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