Page 490 - SAIT Compendium 2016 Volume2

IN 51 (3) Income Tax acT: InTeRPReTaTIon noTes IN 51 (3)
certain recurring costs incurred in relation to assets used exclusively for business purposes because such expenses should also qualify for deduction under section 11A.*
It is a factual question whether a person is carrying on a single trade of letting property or whether each new property constitutes an independent or new trade. Having regard to the above background and the overall policy objective SARS is of the view that in a case such as the example described above it is highly likely that the letting of the new property will comprise an independent trade from the letting of the existing properties. Consequently pre-production expenses contemplated in section 11A will qualify for deduction notwithstanding that a person may be carrying on letting activities in relation to other properties.
4.3 Pre-trade expenses actually incurred before the commencement of and in preparation for carrying on a trade [section 11A(1)(a)]
The expenditure and losses must have been actually incurred by a taxpayer before the commencement of and in preparation for the carrying on of that speci c trade. For an expense to be ‘actually incurred’ there must be an accrued present obligation, whether absolute or defeasible.† In Edgars Stores Ltd v CIR Corbett JA (as he then was) stated the following:‡
‘Thus it is clear that only expenditure (otherwise qualifying for deduction) in respect of which the taxpayer has incurred an unconditional legal obligation during the year of assessment in question may be deducted in terms of s. 11(a) from income returned for that year. The obligation may be unconditional ab initio or, though initially conditional, may become unconditional by ful lment of the condition during the year of assessment; in either case the relative expenditure is deductible in that year. But if the obligation is initially incurred as a conditional one during a particular year of assessment and the condition is ful lled only in the following year of assessment, it is deductible only in the latter year of assessment (the other requirements of deductibility being satis ed).’
In order for preliminary expenditure to qualify as a deduction under section 11A(1) it must be incurred in preparation for the carrying on of a trade. The word ‘preparation’ requires an act of preparation, and there must be a close link between the expenditure and the trade to be undertaken. The expenditure incurred in the Reef Estates case discussed in 4.2.1 would, probably not have quali ed under section 11A(1), since it was not incurred in preparing for the trade of letting. Preparation for carrying on a trade involves an active step taken – something more than just passively holding a piece of land for many years until the conditions are conducive for preparatory activities to begin.
4.4 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)]
In order for any pre-trade expenditure and losses to qualify as a deduction under section 11A(1), a pre-trade expense must pass a ‘post-trade’ test under one of a number of speci ed sections, namely –
• section 11 (general deduction), excluding section 11(x);
• section 11B (deduction for research and development);
• section 11D (deduction for scienti c or technological research and development); or • section 24J (incurral and accrual of interest).
The relevant expense or loss will only qualify as a deduction under section 11A if actually incurred during any year of assessment ending on or after 1 January 2004.
The exclusion of section 11(x) from expenditure that would have quali ed under section 11 but for the trade requirement.
Section 11(x) provides for a deduction as follows:
The words ‘in this Part’ refer to Part I (Normal Tax) of Chapter II of the Act which consists of sections 5 to 37G.§ Section 11A(1)(b) has the effect that any pre-trade expenses falling outside sections 11(a) to (w), 11B, 11D and 24J do not qualify for a deduction under section 11A. Examples include the depreciation deduction granted under either section 12B or 12C which have their own ‘brought into use for the purposes of trade’ requirements.
The post-trade test
An amount will qualify for deduction under section 11A(1) if it would have been allowed as a deduction under sections 11 [but for section 11(x)], 11B, 11D or 24J had it been incurred after the commencement of the particular trade. Since this ‘post-trade test’ only focuses on the trade requirement of the speci ed sections, it becomes necessary to consider whether the test overcomes other requirements of these sections such as –
• the ‘production of income’ requirement of section 11(a);
• the bar on the deduction of expenditure of a capital nature, as for example, in sections 11(a) and (c); • the requirement that the deduction applies to ‘expenditure and losses’; and
• the ‘use’ requirement of, for example, section 11(e).
* The amendment to paragraph 20(1)(g) applies to disposals made on or after 1 January 2014.
† Hoexter JA in Nasionale Pers Bpk v KBI 1986 (3) SA 549 (a), 48 SATC 55 at 71.
‡ 1988 (3) SA 876 (a), 50 SATC 81 at 90.
§ Section 37H, which formed part of Part I of Chapter II, was repealed by section 67(1) of the Taxation Laws
Amendment Act No. 22 of 2012 with effect from the commencement of years of assessment commencing on or after 1 January 2013.
482 saIT comPendIum oF Tax LegIsLaTIon VoLume 2
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—
(x) any amounts which in terms of any other provision in this Part, are allowed to be deducted from the income of the
taxpayer.