Page 688 - SAIT Compendium 2016 Volume2

IN 80 Income Tax acT: InTeRPReTaTIon noTes IN 80
In order for an expense or loss to be deductible it must not be of a capital nature. The capital or revenue nature of an expense or loss will be determined by the facts of the particular case. The courts have developed a number of tests for distinguishing between capital and revenue expenditure. A useful test for distinguishing capital and revenue expenditure is the distinction between xed and oating capital. In CIR v George Forest Timber Co Ltd Innes CJ stated the following:*
‘Capital, it should be remembered, might be either xed or oating. The substantial difference was that oating capital was consumed and disappeared in the very process of production, while xed capital did not; though it produced fresh wealth it remained intact. The distinction was relative, for even xed capital, such as machinery, did gradually wear away and required to be renewed.’
In New State Areas Ltd v CIR† Watermeyer CJ stated the following:
‘When the capital employed in a business is frequently changing its form from money to goods and vice versa (e.g. the purchase and sale of stock by a merchant or the purchase of raw material by a manufacturer for the purpose of conversion to a manufactured article) and this is done for the purpose of making a pro t, then the capital so employed is oating capital.’
In the Lockie Bros case cited earlier Mason J did not nd it necessary to decide whether the loss resulting from embezzlement by a manager was of a capital nature, although he stated that there was much to be said for that view. De Waal J held that the loss was of a capital nature on the basis that once the company’s assets are converted into money it becomes portion of its capital for reinvestment, if so desired. De Waal J’s view, that the loss was of a capital nature, is not regarded as correctly re ecting the law as it is not in line with the xed versus oating capital distinction drawn in the George Forest Timber case.
The theft of cash from a banking institution will usually result in a loss of a revenue nature because it is likely to represent a loss of the bank’s oating capital.‡ Likewise, the theft of money from a current or similar transactional account with a bank, petty cash, safe or payroll in a non-banking business is also likely to represent a loss of oating capital and if such will give rise to a loss of a revenue nature.§ However, the facts of each case must be considered in determining whether the theft of cash from a bank account represents a loss of xed or oating capital. For example, the theft of a xed deposit would likely represent a loss of xed capital and give rise to a capital loss because of its non- circulating nature.
A deduction will not be available under section 11(a) if the expense or loss is of a capital nature. A capital loss may be available – see 4.2.
(e) During the year of assessment
Expenditure and losses must be claimed in the year of assessment in which they were incurred.¶ A revenue loss as a result of embezzlement, fraud or theft must be claimed in the year of assessment in which the embezzlement, fraud or theft occurs and not in the year of assessment in which it is discovered. Any amount so claimed under section 11(a) which is subsequently recovered from the thief must be brought to account as a recoupment under section 8(4)(a) in the year of recovery.
Under section 99 of the TA Act a reduced assessment may not be issued after the elapse of three years from the date of the assessment. Thus it will not be possible to claim an expense or loss omitted from a return of income for a year of assessment once the original assessment for that year has become nal.
4.1.2 The negative test [section 23(g)]
Section 23(g) denies a deduction for moneys claimed as a deduction from income derived from trade to the extent that the moneys are not laid out or expended for the purposes of trade. A taxpayer that meets the requirements of section 11(a) is likely to also meet the trade requirement. However, losses as a result of embezzlement, fraud or theft which are of a domestic or private nature will be denied as a deduction under section 23(g).
4.2 Losses of a capital nature
A deduction will not be available under section 11(a) if the expense or loss is of a capital nature. However, the loss of an asset as a result of an act of embezzlement, fraud or theft may give rise to a capital loss under the Eighth Schedule. The theft of notes and coins in current circulation cannot give rise to a capital loss because the de nition of an ‘asset’ in paragraph 1 of the Eighth Schedule excludes currency other than any coin made mainly from gold or platinum.
In contrast, a bank account is an asset for CGT purposes, being a debt claim against the bank. It follows that embezzlement, fraud or theft involving a bank account may give rise to a capital loss assuming that it does not represent a loss of oating capital allowable under section 11(a). To the extent that the expenditure on the bank account is allowable under section 11(a) it will result in the reduction in the base cost of the bank account under paragraph 20(3)(a) of the Eighth Schedule. Similarly, the expenditure on the bank account must be reduced under paragraph 20(3)(b) of the Eighth Schedule by any portion of that expenditure that has been recovered or has become recoverable from any other person (for example, the thief or an insurer).
Any amount recovered in a year of assessment subsequent to the year of disposal must be treated as a capital gain under paragraph 3(b)(ii) of the Eighth Schedule.
While capital gains and losses on the disposal of personal-use assets must be disregarded under paragraph 53 of the Eighth Schedule, funds on deposit with a nancial institution are not a personal-use asset and can accordingly give rise
* 1924AD 516, 1 SATC 20 at 23.
† 1946 AD 610, 14 SATC 155 at 163.
‡ In ITC 1383 (1978) 46 SATC 90 at 93 the court accepted the uncontested evidence of a bank manager that funds
stolen from the bank by an employee formed part of the bank’s oating capital.
§ See ITC 1242 (1975) 37 SATC 306 (C); ITC 1221 (1974) 36 SATC 233 (R) and ITC 1268 (1977) 40 SATC 57 (T). ¶ Sub-Nigel Ltd v CIR 1948 (4) SA 580 (A), 15 SATC 381 at 390 and ITC 1545 (1992) 54 SATC 464 (C) at 471.
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