Unit 5: General Deductions [Sec 17]

ATP3781 Taxation 1A

Bachelor of Accounting [NQF Level 7]

By

Dr Eukeria Wealth
Department of Auditing & Tax
School of Accounting
Learning outcomes

Define Define Identify Determine

Define the Identify Identify relevant Determine the
general allowable case law & amount that
deductions deductions prohibited constitutes
formular deductions general
deductions
Computation of Taxable Income

Gross Taxable
Exemptions Deductions
income income
 Deductions

General Specific
Sec 17 (1)(a) Sec 17, 21 & 25
Definition – section 17(1)(a) and 24 (g)

• Result from carrying on a trade

• Expenditure and losses
• Actually incurred
• In Namibia
• During year of assessment
• In the production of income
• Not of a capital nature
• For the purposes of trade.
Carrying on of any trade in Namibia

• What is “Trade”?
• Profession, trade, business, employment, occupation, venture, letting of
property, use of patent, trademark, copyright etc.
• Excludes income from passive activities e.g dividends, pensions, interest,
annuities [SA Bazaars (Pty) Ltd v CIR 1952 (4) SA 505 (A)
• Carrying on of trade suggests continuity & profit motive, but are not
prerequisites
• Timberfellers (Pty) Ltd v CIR (1994) 59 SATC 153 and ITC 777 19 SATC 320.
The taxpayer contended that the principle outlined in this case was that it
was irrelevant whether or not a taxpayer earned income, but rather that
the taxpayer should have traded to be able to retain and carry forward an
assessed loss.
 Example 1

James King owns a house in Swakopmund that he lets for the

equivalent of N$40 000 a month. Since he lives in Windhoek, he
appointed an agent in Swakopmund to collect his rental from this
house and to deposit it into his FNB Bank account on his behalf. He
pays this agent the equivalent of N$4 000 a month.

• Required:
Determine whether the expense incurred is deductible in the
determination of the relevant taxpayer’s taxable income for the 2023
year of assessment under the general deductions formula.
SOLUTION
The letting of property is included in the definition of ‘trade’ in section
1 of the ITA. The N$4 000 incurred by James King is deductible since it
satisfies the ‘in the production of income’ requirement.
His gross rental is included in gross income.
CASE: SA Bazaars (Pty) Ltd v CIR.

• In 1941 the appellant company closed down its general dealer’s

business. From 1941 to 1947 it did not trade, but kept itself alive by
maintaining a bank account, paying its annual duty and complying with
the Companies Act and Income Tax Act applicable at the time. In 1948
the company resumed trading and sought to set off the assessed loss
from earlier years. The court refused to allow the company to set off its
assessed loss.
• Centlivres CJ (SATC 245) stated the following:
• “The mere fact that it kept itself alive during that and subsequent
periods does not mean that during those periods it was carrying on a
trade. It is clear from the stated case that it closed down its business and
as long as it kept its business closed it cannot be said to have been
carrying on a trade, despite any intention it might have had to resume its
trading activities at a future date.”
 Example 2

Anele Kalunga successfully passed a swimming instructor’s course on

25 February 2023. She can now ‘officially’ give swimming lessons. From
25 to 28 February 2023, she advertised her services. Her first lesson
was, however, only given on 3 March 2023. she incurred N$15 800 on
the swimming instructor’s course and N$4 250 on her advertisements.
• Required:
Determine whether the expense incurred is deductible in the
determination of the relevant taxpayer’s taxable income for the 2023
year of assessment under the general deductions formula.
SOLUTION
The N$15 800 paid by Anele for the swimming instructor course does
not qualify for a deduction since it is an expense of a capital nature.
She created an income-producing asset when incurring this expense.
The N$4 250 paid by Anele for the advertisement qualifies for a
deduction since it complies with all the requirements of the general
deductions formula and specifically with the in production of income
requirement.
An expense is not deductible only when income is earned. Her trade
commenced on 26 February 2023 or even earlier when she started
advertising her services and not when she started earning income.
CASE: ITC 1292 41 SATC 163

• The taxpayer built himself a holiday home in the close vicinity of his
relatives. Initially the taxpayer occupied the house during vacations, but
subsequently he occasionally let it when he himself did not occupy it.
Subsequently he entered into a 2-year, fixed-lease period for a lease of
R1 100 per annum. However, his expenses in the form of interest on the
mortgage bond and assessment rates far exceeded the rental income.
The question before the tax court was whether he could deduct the loss
incurred or whether a deduction of the expenditure was prohibited,
which provided at the time that expenses on any premises or dwelling
house were not deductible unless it was occupied for the purposes of
trade.
• The court assumed that a trade could only be conducted if:
• “the real hope to make a profit [existed]. Such hope must not be based
on fanciful expectations but on a reasonable possibility”. Despite the
fact that the taxpayer testified that the renting activities might
generate a profit at some future date, the court decided that no
reasonable prospect to make a profit existed in the years in which
the loss was generated.
• As a result the loss could not be deducted, as the expenditure was
not incurred for the purposes of trade. The mere intention of a
taxpayer to conduct a trade is not sufficient.
CASE: CIR v Smith 65 SATC 6

• A medical practitioner, purchased a farm in 1982 with the intention to

farm stock on weekends, in particular angora goats. In 1987 he converted
to game farming as he envisaged a viable income from hunting. However,
in 1990 he sold a portion of the farm after establishing that the farm was
not suitable for game farming and, due to ill-health and an opportunity
offered by an unsolicited buyer, he sold the remainder of the farm in
1993. His health improved, however, and he bought another farm shortly
after he sold the first farm. Although this 2nd farm was already well
stocked with trophy animals, he bought additional springbuck. He also
improved the roads, dams, kraal and accommodation. However, a dispute
with his neighbour forced him to sell the farm in 1996.
• The taxpayer incurred a substantial loss on both farms, which he
attempted to deduct for income tax purposes. As the South African
Revenue Service (“SARS”) was of the opinion that, objectively speaking,
the land was not suitable to use for farming purposes and that no
reasonable possibility of a profit existed, the taxpayer did not conduct
farming operations and as a result the losses were not deductible. In
particular, SARS argued that the taxpayer did not carry on bona fide
farming activities as required under s 26(1).
Carrying on Trade

• Assessed tax losses can be carried forward indefinitely on the

condition that:
• there is continued trade
• that produces income
• When trade ceases, tax losses from prior years are forfeited
Expenditure and losses

• Not defined in the Act

• Losses means involuntary spending of funds.
• Assets can also be allowed as deductions.

• Joffe & Co. v CIR – “losses”

CASE: SARS v Labat Africa Ltd [2011]
JOL 27986 (SCA)
• Labat Africa Limited, the company purchased a trade mark from the seller
and instead of paying cash, the company entered a sale of business
agreement, where it issued a part of its own authorised share capital.
• The question was whether the authorised capital was expenditure actually
incurred.
• It was held that expenditure incurred means that the taxpayer’s estate must
have been impoverished or diminished to some extent for an expenditure to
have been expended. That means that the allotment and issuing of a
company’s own shares does not impoverish the company as such. Where the
purchase price for a thing is settled by virtue of the allotment and issuing of a
company’s own shares, no amount was expended and would subsequently
not qualify fora deduction.
CASE: Edgars Stores Ltd v CIR 1988
(3) SA 876 (A)
• The court held that the expenditure must be unconditional and not
contingent.
CASE: Joffe & Co (Pty) Ltd v CIR 1946
AD 157

• The court held that the payment of damages was not

deductible. In brief, the facts of the case were as follows:
the taxpayer, an engineering firm, paid damages to the
dependants of a workman who had been killed by the
collapse of the cantilever hood erected by the taxpayer. The
accident was caused by the company’s negligence in failing
to take proper precautions to prevent the structure from
collapsing.
• The issue which came before the court was whether the
damages paid by the taxpayer to the workman’s
dependants were deductible. The court held that the
negligence which caused the damages was not an
‘’inevitable concomitant’’ of the taxpayer’s business.
Therefore the expenditure was not deductible.
Actually incurred
• Amounts actually paid, or
• Amounts taxpayer is liable to pay (unconditional liability)
• If the amount cannot be determined in the YOA – NOT deductible
• Time of payment – NOT important
• Prepaid expenditure = NOT deductible
• No deductions for contingent liabilities as not ‘actually incurred’
• * If an expense is unpaid, it is incurred when the taxpayer has
received the goods or services
CASE: Caltex Oil (SA) Ltd v SIR

• The court dealt with the situation where the appellant company
imported certain products from companies in the United Kingdom,
the purchase price of which was to be settled in pounds sterling. The
appellant received the invoices in pounds sterling and translated the
amount into rands at the rate of exchange prevailing on the day of
the shipment, and recorded that amount in its books. The pound
sterling devalued and the liability to the overseas companies was
reduced, however, the amount reflected in the books of the
appellant remained unchanged. The Secretary for Inland Revenue
sought to include the difference between the amount actually paid
to the United Kingdom companies and the amount reflected in the
appellant’s books, in the appellant’s gross income as a ‘profit on the
devaluation of the sterling’.
• The appellant objected to the Secretary’s assessment and the court
determined that the real issue in dispute was whether the amount
actually incurred by the appellant should have been reduced by the
difference between the actual price paid and the amount reflected
in the books as the cost of the products.
• *Expenditure actually incurred does not mean expenditure paid
during the YOA
CASE: Edgars Stores Ltd v CIR
• It was held that it is clear that only expenditure
(otherwise qualifying for deduction) iro which the
taxpayer has incurred an unconditional legal
obligation during the YOA may be deducted ….if the
obligation is initially incurred as a conditional one
during a particular YOA and the condition is fulfilled
only in the following YOA it is deductible only in the
latter YOA.
 Example 3

• ABC Ltd has a June financial year-end. Due to an expected price

increase, trading stock amounting to N$780 000 was bought on 25
June 2022. The invoice was issued on 26 June 2022 but delivery only
occurred on 3 July 2022.
• Discuss in which year of assessment the amount is actually incurred
and deductible.
Solution

• ABC ltd did not actually incur the N$780 000 in the 2021 year of
assessment since an unconditional legal obligation to pay was not
incurred. The expenditure is only actually incurred when the trading
stock delivered in the 2022 YOA and will only be deductible in that
YOA.
In Namibia

• Section 17(1)(a) – deals with expenditures in Namibia

• Section 17(1)(b) – deals with expenditures outside Namibia
During YOA

• Expenditure is ONLY allowed during the year in which it was incurred.

• CIR v Peoples Stores (Walvis Bay) Ltd 1990 (2) SA 353(A), 52 SATC
9:22)

• Future & previous year’s expenses cannot be deducted in the current

year.
 CASE: (CIR v Peoples Stores (Walvis Bay)
Ltd 1990 (2) SA 353(A), 52 SATC 9:22)
• The expenditure is actually incurred in
the tax year in which the liability for the
expenditure is incurred and not in the
year in which it is paid
 Example 4

• The payment of directors’ fees was authorised but not paid during the
2022 YOA. The company only claimed as a deduction i.r.o this
expenditure in the following YOA, during which the directors’ fees
were paid in the 2023 YOA.

Required:
• Discuss whether the deduction will be allowed in the 2023 YOA.
Solution

• The expenditure was actually incurred in year 2022 after being

authorised, the deduction should have been claimed in 2022. The
deduction will not be allowed in 2023.
In the production of income
• Income means – Gross income less exemptions
• Expenses incurred on exempt income (e.g dividends) - NOT
deductible [CIR v Standard Bank of SA Ltd 1985A]
• Joffe & Co (Pty) Ltd v CIR)- Inevitable concomitent
• Sub-Nigel Ltd v CIR 15 SATC 381- does not require that the income
must have been produced in the same YOA
• 1. The activity which gave rise to the expenditure & what is the
purpose to earn income?
• 2. Is the expenditure closely related to the income earning business?
CASE: (Port Elizabeth Electric Tramway
Co Ltd v CIR 1936 CPD 241, 8 SATC 13:15)
• Port Elizabeth Electric Tramway Company Limited – a company that
carried on the business of transporting fare-paying passengers in and
around Port Elizabeth. That morning, Piet was the driver of a tramcar on
the Russell Road route to the city centre but just after 6 o’clock that
morning, with only a few passengers on board, Piet lost control of the
tramcar while descending the steep Russell Road hill. The tramcar, after a
harrowing trip down the hill, finally derailed at the bottom of the hill and
ploughed into the Masonic Hotel and the jewellery business next door. It
must have been a terrifying experience for those passengers on board.
Fortunately, it appeared as if no one was seriously injured in the accident.
• Piet’s claim for damages under the Workmen’s Compensation against his
employer as a result of the tramcar accident helped with the
interpretation of the phrase “in the production of the income”.
• After SARS had denied them the legal expenses and damage claims by
Piet’s widow, the court held that this was expenditure in the production
of income.
• Inherent risks give rise to an ‘inevitable concomitant’
CASE:CSARS v Mobile Telephone Networks
Holdings (Pty) Ltd (966/12) [2014] ZASCA 4
(7 March 2014)
• Expenditure and losses actually incurred in the
production of the income, provided such
expenditure and losses are not of a capital
nature.
• And expenditure incurred for dual purposes
should be apportioned
CASE:Warner Lambert SA (Pty) Ltd v
C:SARS 2003 (5) SA 344 (SCA)

• The taxpayer was required to incur social responsibility

expenditure, as the subsidiary of an American parent company, in
order to avoid sanctions in the United States of America, in terms
of the Sullivan Code. SARS argued that the expenditure was of a
capital nature and not tax deductible.
• However, the Supreme Court of Appeal disagreed, and held that
the social responsibility expenditure was incurred in order to
protect the taxpayer’s income earning structure and was
therefore deductible.
 Example 5

BuildIt Ltd is a construction company carrying on business as engineers

in reinforced concrete. BuildIt had to pay damages to the dependents
of deceased employees who were killed when the roof of a building
under construction collapsed. The accident was caused by the
negligence of the company in carrying out one of its contracts.

Required:
Discuss whether the damages will be allowed as a deduction.
Solution

• 1. The activity which gave rise to the expenditure & what is the
purpose to earn income?
• The activity is the erection of a roof by employees as builders by a
construction company. This activity is performed to earn income by
completing contracts
• 2. Is the expenditure closely related to the income earning business?
• Erecting roofs is connected to the construction business, but erecting
defective roofs due to negligence is not a necessary concomitant but
an avoidable expenditure, and thus not closely related to the
business. The damages are non-deductible as in Joffe & Co v CIR
Not of a capital nature

• Capital nature is not taxable nor deductible.

• Income generating asset vs income earning operation
• -if incurred to create an enduring income generating asset – capital
• Non-recurring expenditure is normally capital while recurring
expenditure is revenue and is deductible
• New State Areas Ltd v CIR 1946 AD- floating capital is deductible
• Fixed capital is non-deductible

• * Capital allowances are deductible

 Example 6

Willow and Jaden, the managing director and production director of

Willoden Ltd travelled to America in November 2023 for the purpose of
buying new machinery for its factory. They found that the machinery
was unsuitable. They then returned to Namibia without having made a
purchase. Willoden Ltd incurred N$60 000 in this regard.
Willoden Ltd’s year of assessment ends on the last day of February.

Required:
Discuss the deduction of the above amount in the determination of the
relevant taxpayer’s taxable income.
Solution
• No portion of the travelling expenses ‘actually incurred’ by Willowden
Ltd is deductible in the determination of its taxable income. The
travelling expenses were incurred for the purpose of purchasing a
capital asset. The expense is of a capital nature and consequently, not
deductible in the determination of its taxable income.
For the purposes of trade [Sec24(g)]

• Expenses not for trade purposes are non- deductible

• Dual purpose expense (business vs private) are apportioned

• E.g - It relates to the business transactions and the acquisition of
capital.
• - It is incurred to produce taxable and exempt income.
• - It is incurred for business and private purposes.

• SIR v Guardian Assurance Holdings (SA) Ltd 38 SATC 111

 Example 7

Jimmy operates a catering business from home. She does catering for
office parties and meetings. During June, she calculated that 80%
(N$60 000) of her grocery purchases related to her catering business.
During the same month, she paid her domestic worker an extra N$6
000 for her help in the preparation of the food.

• Required:
Discuss the deductibility of the above amounts for the current YOA.
Solution
• The activity was catering services and both the groceries and labour
expenses were for purposes of earning income from the catering
business

• Both amounts N$60 000 and the N$6 000 are deductible as they
relate to her trading activities and were incurred in the production of
income of her catering business.
Prohibited Deductions
• Sec 24 forbids the deduction of certain expenses despite the expense
passing the tests as set out by the GDF e.g
• Personal/ Maintenance expenses e.g family related expenses [CIR v Hickson
(1960A)]
• Recoverable expenses/ losses e.g insurance
• Tax levied on income
• Transfer to reserves
• Notional expenditure- interest that would have been earned but forfeited =
non-deductible
• Fines/ bribes
• Non-trade expenditure
• Domestic expenditure
• Expenses to produce exempt income
 Example 8

Muggy Bean, a recently divorced mother of two young children, needs

to work. She obtained employment as a typist. She now pays fees of
N$18 000 a year to the Baby Bee Creche for the care of her two young
children while she is at work.

• Required:
Determine whether the expense incurred is deductible in the
determination of the relevant taxpayer’s taxable income for the 2023
year of assessment under the general deductions formula.
Solution
• Although the fees of N$18 000 paid by Muggy Bean to the Baby Bee
Creche comply with all the requirements of general deductions. The
deduction of domestic expenses is prohibited by section
 Example 9

Sammy Hooks operates a business making deliveries between

Windhoek and Mariental. A driver of one of his delivery vehicles
committed a speeding traffic offence, and on 1 May 2023, Sammy
Hooks paid the resulting fine of N$1 000.
Sammy Hooks also neglected to submit his skills development levy
return. He had to pay a penalty of N$200 on 31 October 2023.
• Required:
Discuss the deduction of the above amounts in the determination of
the relevant taxpayer’s taxable income for the 2023 year of assessment
under the general deductions formula. Give brief reasons for your
answers.
Solution
Although the fine paid towards the speeding traffic offence may be
closely connected to Sammy’s income producing operations, no
deduction is permitted for fines, bribes or penalties arising from
unlawful activities. He may not deduct the fine of N$1 000 in the
determination of his taxable income.
The penalty of N$200 is similarly not deductible.
Example 10