Page 685 - SAIT Compendium 2016 Volume2

IN 80 Income Tax acT: InTeRPReTaTIon noTes IN 80 4. The victim
4.1 Deduction for stolen money
4.1.1 The positive test [section 11(a)]
The general deduction formula consists of a positive test [section 11(a)] and a negative test [section 23(g)]. These two sections must be read together in order to determine whether a taxpayer will be entitled to a general deduction. In determining a person’s taxable income derived from carrying on any trade, section 11(a) provides a deduction for –
• expenditure and losses,
• actually incurred,
• in the production of the income, • which are not of a capital nature.
In accordance with the opening words of section 11, any expenditure and losses from embezzlement, fraud or theft must also have been incurred in carrying on a trade. This trade requirement is also addressed by section 23(g) – see 4.1.2.
In addition, expenditure and losses must be claimed during the year of assessment in which they are actually incurred. The facts and circumstances of each case must be considered when applying the principles discussed in this Note.
(a) Expenditure and losses
The words ‘expenditure’ and ‘losses’ referred to in section 11(a) are not de ned in the Act.* In Joffe & Co (Pty) Ltd v CIR Watermeyer CJ explained the distinction between the words ‘loss’ and ‘expenditure’ as follows:†
‘In relation to trading operations the word [loss] is sometimes used to signify a deprivation suffered by the loser, usually an involuntary deprivation, whereas expenditure usually means a voluntary payment of money.’
A similar distinction was drawn between ‘disbursements’ or ‘expenses’ on the one hand and ‘losses’ on the other in the English case of Allen (HM Inspector of Taxes) v Farquharson Brothers and Co, in which Findlay J explained that the word ‘disbursements’ –‡
‘means something or other which the trader pays out; I think some sort of volition is indicated. He chooses to pay out some disbursement; it is an expense; it is something which comes out of his pocket. A loss is something different. That is not a thing which he expends or disburses. That is a thing which, so to speak, comes upon him ab extra’.
In COT v Rendle Beadle CJ distinguished designed and fortuitous expenditure as follows:§
‘For the purposes of this case, expenditure incurred for the purpose of trade may be grouped broadly under two heads. First, money voluntarily and designedly spent by the taxpayer for the purpose of his trade; and second, money which is what I might call involuntarily spent because of some mischance or misfortune which has overtaken the taxpayer. For the sake of convenience, I will refer to the rst type of expenditure as ‘designed expenditure’, and to the second as ‘fortuitous expenditure’.’
Other court cases have expressed similar views on the meaning of expenditure.¶ Applying these principles to stolen money, the term ‘loss’ would cover the embezzlement, fraud or theft of a taxpayer’s own money, while the term ‘expenditure’ would be more appropriate in describing a reimbursement of trust monies which have been stolen.
(b) Actually incurred
For an expense or a loss to be deductible, it must be actually incurred. ‘Actually incurred’ means that the taxpayer must have a de nite and absolute liability to pay an amount** or must have suffered the loss. Anticipated expenditure and losses are not actually incurred. A liability that is conditional or contingent in any way will not be deductible.††
(c) In the production of the income
Expenditure and losses must have been incurred in the production of income in order to be deductible. The meaning of the words ‘in the production of the income’ was considered by Watermeyer AJP (as he then was) in Port Elizabeth Electric Tramway Company v CIR in which he stated the following:‡‡
‘The other question is, what attendant expenses can be deducted? How closely must they be linked to the business operation? Here, in my opinion, all expenses attached to the performance of a business operation bona de performed for the purpose of earning income are deductible whether such expenses are necessary for its performance or attached to it by chance or are bona de incurred for the more ef cient performance of such operation provided they are so closely connected with it that they may be regarded as part of the cost of performing it.’
Although this case dealt with expenses, the same principle applies to losses. This test was, with slight alteration in the wording, subsequently approved and applied by the Supreme Court of Appeal in a number of cases.§§ In COT v Rendle¶¶ the taxpayer was a partner in a rm of Chartered Accountants which had collected certain monies from the sale
* Collins Essential English Dictionary (1988) William Collins Sons & Co Ltd de nes ‘expenditure’ as ‘the total amount of money that is spent on something’ and ‘loss’ as ‘the fact of no longer having something or of having less of it than you had before’.
† 1946 AD 157, 13 SATC 354 at 360.
‡ 17 TC 59 at 64.
§ 1965 (1) SA 59 (SRAD), 26 SATC 326 at 329.
¶ ITC 1783 (2004) 66 SATC 373 (G); C: SARS v Labat Africa Ltd 2013 (2) SA 33 (SCA), 74 SATC 1; Ackermans Ltd
v C: SARS 2011 (1) SA 1 (SCA), 73 SATC 1. 7 ITC 1545 (1992) 54 SATC 464 (C) at 466. ** ITC 1545 (1992) 54 SATC 464 (C) at 466.
†† Nasionale Pers Bpk v KBI 1986 (3) SA 549 (A), 48 SATC 55.
‡‡ 1936 CPD 241, 8 SATC 13 at 17.
§§ CIR v Genn & Co 1955 (3) SA 293 (A), 20 SATC 113, CIR v African Oxygen Ltd 1963 (1) SA 681 (A), 25 SATC 67and CIR v Allied Building Society 1963 (4) SA 1 (A), 25 SATC 343.
¶¶ Above.
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