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In Section 11 ( a ) Of Income Tax Action Act No 58 Of 1962 Essay, Research Paper

An Analysis of The Term Actually Incurred In Section 11 ( a ) of Income Tax Action

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Act No 58 of 1962

A TECHNICAL REPORT TO BE PRESENTED TO

THE DEPARTMENT OF ACCOUNTING

University OF CAPE TOWN

IN PARTIAL FULFILMENT OF

THE REQUIREMENTS FOR THE

BATCHELOR OF COMMERCE ( HONOURS )

DEGREE IN TAXATION

BY

PETER CRAWFORD

Student NO. CRWPET005

April 1996

I certify that the study is my ain work and all mentions used, are

accurately recorded.

1.SYNOPSIS

By and large Accepted Accounting Practice includes statement AC000: Model for

the readying and presentation of fiscal statements. This sets out wide

and unequivocal regulations regulating the acknowledgment of liabilities and income and

outgo in fiscal statements. Specifically the following paragraphs demand

to be considered:

Recognition of liabilities:

91. A liability is recognised in the balance sheet when it is likely

that an escape of resources incarnating economic benefits will

consequence from the colony of a present duty and the sum

at which the colony will take topographic point can be measured faithfully & # 8230 ;

Recognition of disbursals:

94. Expenses are recognised in the income statement when a lessening in

future economic benefits related to a lessening in an plus or

an addition of a liability has arisen that can be measured

faithfully. This means in consequence that acknowledgment of disbursals

occurs at the same time with the acknowledgment of an addition

or a lessening in assets

95. Expenses are recognised in the income statement on the footing

of a direct association between the costs incurred and the and the

earning of specific points of income. This procedure, normally

referred to as the matching of costs with grosss, involves the

coincident or combined acknowledgment of grosss and disbursals that

consequence straight and jointly from the same dealing or other

events ;

The fisc takes small notice of these regulations when it comes to the acknowledgment of

outgo for the intents of revenue enhancement. It is the portion of these regulations that

regulate the general tax write-off proviso that this study will analyze.

Section 11 ( a ) of the South African Income Tax Act No. 58 of 1962 ( as amended )

reads as follows:

11. General tax write-offs allowed in the finding of nonexempt income.-

For the intent of finding the nonexempt income derived by any

individual from the transporting on of any trade within the Republic, there

shall be allowed as tax write-offs from the income of such individual so

derived-

( a ) outgo and losingss really incurred in the Republic in the

production of the income, provided such outgo and losingss

are non of a capital nature.

The subdivision defines the conditions that must be met for outgo and losingss

to be allowed as tax write-offs from income. The outgo or losingss must hold

been: Actu

ssme

National Trust

In the Republic of South Africa.

In the production of the income.

Such outgo or losingss must non be of a capital nature.

The subdivision has to be read together with s23 ( g )

23. Tax write-offs non allowed in the finding of nonexempt income.-

No tax write-offs shall be made in regard of any moneys, claimed

as a tax write-off from trade, to the extent to which such monies

were non laid out or expended for the intents of trade. & # 8217 ;

This study will concentrate on the significance of the term & # 8220 ; really incurred & # 8221 ; ( as a

critical portion of the acknowledgment procedure ) and non on the other demands. It

will research the difference between the accounting demands for outgo

and liabilities to be recognised, and the demands for acknowledgment for

Income Tax intents. It will seek to better understand the significance and

deductions of this phrase, with a position to be able to better manage and control

its impact on the acknowledgment of outgo and losingss. It will besides research

some of the Grey countries that can and hold caused the taxpayer and the fisc

considerable jobs in the yesteryear. In concluding, some of the recent legislative

alterations will de discussed and considered.

2. ACTUALLY INCURRED IN THE CONTEXT OF SECTION 11 ( a ) .

Section 11 ( a ) of the South African Income Tax Act No. 58 of 1962 ( as amended ) ,

reads as follows:

11. General tax write-offs allowed in finding of nonexempt income.-

For the intent of finding the nonexempt income derived

by any individual from the transporting on of any trade within the

Republic, there shall be allowed as tax write-offs from the

income of such individual so derived-

( a ) outgo and losingss really incurred in the Republic in the

production of the income, provided that such outgo and

losingss are non of a capital nature.

Section 11 ( a ) is loosely referred to as the general tax write-off proviso. It is

intended to cover the demands for outgo and losingss to be deductible

in the finding of nonexempt income. Whilst the subdivision is comprehensive as

it stands, there is a farther critical demand that the outgo and

losingss have been incurred during the twelvemonth of appraisal. This is non expressly

stated in the subdivision, but it is considered to be inexplicit that outgo is

merely deductible for revenue enhancement intents, in the twelvemonth in which it is incurred.

Significant of import instance jurisprudence exists to back up this contention. Therefore, should

outgo, normally deductible under s11 ( a ) , non be claimed as a tax write-off in

the twelvemonth in which it is incurred, it may non be claimed in any other twelvemonth,

unless the Act provides otherwise.

The acknowledgment or deductibility of outgo, provided all the other

demands are met, is triggered by incurral. This study will concentrate on three

chief issues environing incurral:

a. Was outgo really incurred? To set up this, one needs to

understand and define

precisely what constitutes existent incurral.

B. When did incurral take topographic point? This will take to understanding precisely

when the action or

actions which triggered incurral, took topographic point. The timing of incurral will

find the twelvemonth of

appraisal in which the outgo or loss may be deductible in the

finding of nonexempt

income.

In the Caltex Oil instance Botha J.A. made the point that income revenue enhancement is

assessed on an one-year

footing, this lends support to the contention that outgo incurred in a

peculiar twelvemonth of

appraisal is merely deductible in that same twelvemonth. The finding of the

twelvemonth in which the

outgo or loss is really incurred, brings more jobs to be

resolved.

c. There is the job of outgo in regard of which the duty

to pay is, or during

the twelvemonth, becomes, unconditioned, but which can non be quantified until

after the expiration of

the twelvemonth of appraisal.

This once more leads to a overplus of jobs to decide. The 2nd twelvemonth

job being but merely

one.

All the issues give rise to thorny jobs. There are many more issues. The

tribunals and the legislative assembly have battled. Some of the jobs encountered have

been raised by the two most recent Committees of Inquiry such that statute law

has late been introduced to decide them in the hereafter. This will besides be

discussed and considered.

The primary aim of this study is to seek to assist to better understand this

basically critical country of the revenue enhancement jurisprudence.

Planing to avoid future jobs is easier so covering with a job

after it has arisen, because history can non be changed except in exceeding

fortunes To be able to be after so that the happening of incurral can be

planned instead so merely to be in the lap of the Gods. This is boundlessly

better so supporting past actions. It is both cheaper and the result much more

certain.

3. WHY IS & # 8220 ; ACTUALLY INCURRED & # 8221 ; SUCH A Critical Provision:

3.1 What does it intend to be really incurred.

In construing a financial legislative act,

It is of import to separate between the givens of statutory

reading and the

regulations or canons of building. The givens have obligatory force,

being legal regulations

derived from the common jurisprudence. They are intrinsic to the rule of

legality because they

measure up parliament s legislative passages and exist side by side

with the

commissariats of all legislative acts. The regulations or canons of building, on the

other manus, have no

position as legal regulations and are simply conceptual theoretical accounts applied ( or non

applied as the instance may

be ) by Judgess coping with the significance of peculiar legislative

commissariats.

The traditional attack to the reading of legislative acts, frequently

referred to as the

Cardinal regulation, holds that the actual significance of the diction of a

proviso must be

ascertained by the usage of ordinary grammatical regulations. If the significance of

the words is clear,

so this significance represents the purpose of Parliament, the object of

statutory

reading ever being to stomp a peculiar significance with the

Legislature s impramatur

by agencies of the fiction of parliamentary purpose.

Considerations of equity, adversity, or societal policy are irrelevant once

the purpose

of Parliament is unequivocally established. .

In Partington v Attorney General, Lord Cairns stated that

if a individual sought to be taxed comes within the missive of the

jurisprudence, he must be taxed, nevertheless great the adversity may look

to the judicial head to be. In other words, if there may be an

just building, surely such a building is non

admissible in a taxing legislative act.

In Cape Brandy Syndicate V IRC Rowlatt J. [ 71 ] said:

In a taxing Act 1 has to look simply at what is clearly

said. There is no room for any intendment. There is no

equity about a revenue enhancement. There is no given as to revenue enhancement.

Nothing is to be read in, nil is to be implied. One can

merely look reasonably at the linguistic communication used.

Given some of the regulations of reading above, it must be evident that great

attention must be taken when seeking to set up the significance of financial legislative acts. The

terminal consequence does non hold to be just or sensible. It is hence

critically of import to understand the jurisprudence so that the taxpayer is able at the

beginning to properly program his personal businesss so as to accomplish revenue enhancement efficiency, while at

all times maintaining within the jurisprudence. In IRC v Duke of Westminster Lord Tomlin said

at 19 TLR 472,

Every adult male is entitled, if he can, to order his personal businesss so

that the revenue enhancement attaching under the appropriate Acts is less

than it otherwise would be.

To hold been really incurred, means that an unconditioned legal liability to

wage now or at some other clip has arisen. Payment does non hold to hold been

effected for incurral to hold occurred. Once the events that constitute incurral

have taken topographic point, the outgo or loss has been really incurred, and the

disbursal or loss will be recognised in the finding of nonexempt income, given

the premise that all other demands have been met. Therefore incurral can be

seen to be that which triggers acknowledgment.

GAAP lays down really clearly that:

Recognition of liabilities A liability is recognised in the balance

sheet when it is likely that an escape of resources incarnating

economic benefits will ensue from the colony of a present

duty and the sum at which the colony will take topographic point

can be measured faithfully.

Therefore, chance can precipitate acknowledgment in the fiscal statements. This

is so brought to account by raising commissariats to provide for awaited

likely outgo. The Act really clearly in Section 11 ( a ) , requires existent

incurral, and as if that were non plenty, Section 23 ( vitamin E ) spells out the negative

trial loud and clear:

23. Tax write-offs non allowed in the finding of nonexempt

income.- No tax write-offs shall in any instance be made in regard

of any of the undermentioned affairs, namely- ( vitamin E ) income

carried to any modesty fund or capitalised in any manner.

The Tax Act requires that unconditioned legal liability exists before an disbursal

has been incurred. Probability nevertheless likely, does non run into the measure. An

disbursal or loss which is contingent upon the occurrence of an unsure hereafter

event is non really incurred. The liability therefor is non absolute and

unconditioned.

The Members Handbook of the Institute of Chartered Accountants besides spells out

that:

The sum of a contingent loss should be provided for by a charge

in the income statement if:

R / & gt ;

it is likely that future events will corroborate that, after taking

into history any related likely recovery, the value of an plus

has been impaired or a liability has been incurred at the balance

sheet day of the month, and a sensible estimation of the sum of the

ensuing loss can be made.

Again, here is the contrast between a contingent liability and one which, had

been encountered, run into or fallen upon.

In the Australian instance, FCT V James Flood ( Pty ) Ltd, the taxpayer sought to

deduct in the twelvemonth of income in inquiry, sums in regard of one-year leave

which were due for payment to employees merely in the undermentioned financial twelvemonth. In

footings of the applicable industrial understanding these sums were merely collectible to

employees at a hereafter day of the month, and under a assortment of fortunes an employee

who did non function his full period might non go entitled to anything. The

company sought to subtract a proportion, tantamount to the period of service in

the twelvemonth of appraisal, of the sum which would go collectible if the

employee in the class of the following twelvemonth, completed the needed 12 months

service. The tribunal accepted that a liability can be incurred although it may

non be due and collectible. In regard of the leave payment due to employees in the

following financial orchard held that there was no debitum in praesenti solvendum

in futuro ( a debt or duty complete when contracted, but of which

public presentation can non be required until some future period ) , because their period

of service had non yet qualified them for one-year leave. To measure up for tax write-off,

the liability must hold been incurred in the sense that it had been

encountered, run into or fallen upon. The taxpayer must hold wholly

subjected himself to the outgo although it need non be an immediate

duty enforceable at jurisprudence and it need non be indefeasible. The entreaty by the

Commissioner was allowed.

In Caltex Oil ( SA ) Ltd V SIR, the appellate company obtained supplies of petroleum

oil and other merchandises from Caltex ( UK ) Ltd and Caltex Services Ltd, both

located overseas. Bills would be rendered to the plaintiff in error in British

Sterling, instantly the goods were shipped. Upon reception of the bills, the

plaintiff in error would change over the purchase monetary value into SA Rands at the rate of exchange

governing on the day of the month of cargo. Entries were made in the appellate s books at

this clip. The value so recorded was ne’er altered despite fluctuations in the

Rand currency between the day of the month of purchase and the terminal of the appellate s

fiscal twelvemonth on 25 December of each twelvemonth.

On 19 November 1967, the rate of exchange between the Rand and the lb

sterling changed from R2 = ? 1, to R1.7207 = ? 1. As a consequence of this, the sums

owing to the abroad companies reduced. The debt due to Caltex Services Ltd

reduced by R14,031, and the debt due to Caltex ( UK ) Ltd reduced by R1,336,271.

The debt to Caltex Services was settled before the terminal of the fiscal twelvemonth.

The other debt remained outstanding.

The respondent added back the amount of the two sums in the finding of the

plaintiff in errors liability for revenue enhancement for 1967. The exclusive issue that was put before the

Appeal Court, was whether thee two amounts, which the plaintiff in error. by ground of the

devaluation of sterling, was non required to pay, could be said to be portion of

the outgo really incurred. Botha J.A. summed the consentaneous opinion up

as follows:

The appellate really discharged its liability to Caltex Services

Ltd after the devaluation and before the terminal of the 1967 revenue enhancement twelvemonth

by using R14,031 less than the sum of R98,217 entered in

its books of history. It seems rather impossible to state that simply

because the higher sum of R98,217 was entered in appellate s

books of history as the equivalent, as at the day of the month of the relevant

minutess, of? 48,925 sterling, the outgo really

incurred in connexion with the Caltex Services Ltd minutess,

was anything more than the sum really expended by the plaintiff in error.

He went on further:

the sum of outgo really incurred for the intent of

s11 ( a ) can merely be the sum required in rands to dispatch

that liability in the revenue enhancement twelvemonth in which it was incurred.

With respect to the 2nd larger liability which was still outstanding at the

terminal of 1967 ;

It was at the terminal of the 1967 revenue enhancement twelvemonth that the sum of the

outgo really incurred during the twelvemonth had to be determined

and brought into history The plaintiff in error ne’er incurred a liability

to pay an sum of R9,353,920 to Caltex UK Ltd, but was an sum

expressed in sterling which, for the intents of the Income Tax Act,

had to be reflected in the tantamount thereof in rands converted at

the day of the month at which the outgo really incurred is required

to be quantified and brought into history for the intents of

s11 ( a ) of the Act, or at the day of the month of the discharge of that

liability within that financial twelvemonth.

To sum it up merely, with respect to the debt paid during the twelvemonth, the sum

really incurred was the sum paid in colony thereof. In regard of the

liability unsettled at the twelvemonth terminal, merely the sum calculated as being collectible

at the terminal of the twelvemonth, was the sum really incurred. The balance of the

sum claimed was dependent upon an unsure future event, and had non been

really incurred.

In Nasionale Pers vs KBI the appellate undertook to pay its employees a 13th

check after the completion of a full twelvemonth of service, or pro rata thereof for

shorter service. The fillips were paid on 30 September of each twelvemonth. It was a

status of the payment thereof that the company was entitled to retrieve

fillips from employees non still in the employ of the company on the 31 October

following. The fiscal twelvemonth of the company ended on 31 March of each Earth

company sought to claim a pro rata part of the fillips ( 6/12 ) as a tax write-off

in the twelvemonth stoping March antecedently. The entreaty was based on two contentions:

I. The issue of fillips was a commercial world & # 8211 ; they would hold to be paid ;

the bulk of the work force would measure up.

two. The taxpayer s liability to pay a fillip for each month of service existed

capable merely to a resolutive status in the event of him/her go forthing the

employ of the taxpayer before 31 October. Thus the outgo had been really

incurred. Hoexter J.A. , held that:

The duties to employees were single and non corporate.

Therefore the liability to the employees as a group was no more than the

liability would be to each single employee. The hereafter

unsure event ( whether the employee would be in the plaintiff in errors

employ on 31 October ) which would give rise to the duty to

pay a vacation fillip, was an event which fell outside the revenue enhancement twelvemonth

of the applier.

In simple words, the decision drawn, was that at the terminal of March, there was

no unconditioned duty to pay a fillip to any employee. Whilst it was

likely that the company would be required to pay fillips of the quantum

calculated, to the bulk of the work force, there was no unconditioned

liability to pay any individual employee a fillip, in being at the terminal of the

fiscal twelvemonth in inquiry. Thus the outgo could non hold been really

incurred in the twelvemonth in inquiry.

The plaintiff in error in ITC 1531, had received R360,000, on 1 August 1983, being the

returns of a loan raised in Germany. The loan was repayable in Deutschemarks

( DM ) in the hereafter. Between 1 August 1983 and 31 December 1983, the Rand had

declined against the DM. The consequence of the devaluation was that the liability

to the loaner, expressed in SA Rands as at 31 December 1983, was R370,509.16.

During 1984 a farther loan was raised in Germany. The returns in SA Rands was

R200,000. The farther loan was besides repayable in DM.

On the last twenty-four hours of the 1984 twelvemonth of appraisal, the liability of the

plaintiff in error, based on the rate of exchange rate predominating amounted to,

R730,382.65. In consequence, the inauspicious motion in the exchange rates, the

appellate s liability had been increased in the 1984 twelvemonth by R159,873.49. No

farther loans were made. On the last twenty-four hours of appraisal for 1985, the sum,

owed by the plaintiff in error, harmonizing to the exchange rates so predominating, amounted

to R1,195,199.33. A farther autumn in the value of the Rand against the DM during

the 1985 twelvemonth had increased the liability of the plaintiff in error by R464,816.68. The

plaintiff in error claimed the R464,816.68 as a tax write-off from income in the 1985 twelvemonth.

The plaintiff in error contended that he was entitled as a affair of rule, to claim

a tax write-off in regard of an unfulfilled loss ensuing from a fluctuation in the

rates of exchange during the twelvemonth of appraisal in issue. No portion of the loan

was paid or discharged during the 1985 twelvemonth.

The Commissioner contended that the words really incurred in s11 ( a ) do non

mean that the outgo must be due and collectible at the terminal of the twelvemonth in

inquiry. There must be a clear liability to pay bing at the terminal of the twelvemonth

in inquiry, even though the payment thereof may merely fall due in ulterior old ages.

For such a liability to be incurred, it must non be capable to a eventuality, Internet Explorer

an unsure future event. It was contended that the foreign exchange losingss,

were fanciful losingss and were conditional upon the rate of exchange prevailing

at the clip of payment.

In the opinion handed down it was held that:

When a taxpayer owes an sum expressed in a foreign currency, the sum is

owed unconditionally and uncontingently. There is with certainty, an sum of

outgo incurred. Fluctuations in the rate of exchange can merely consequence the

sum or quantification of the certain liability. It is merely the quantification

that is contingent. The liability itself is absolute. The unfulfilled foreign

exchange loss incurred by the plaintiff in error was deductible from its income under

s11 ( a ) . The entreaty was allowed.

The instance was taken on entreaty. The issue before the tribunal depended on whether the

unfulfilled foreign exchange loss constituted an outgo or loss really

incurred in the Republic in the production of income as envisaged by s 11 ( a ) .

Corbett CJ pointed out that the existent inquiry was whether by ground of currency

fluctuations the taxpayer had really incurred in the Republic in the

production of the income, during the twelvemonth of appraisal concerned any surpassing

or liability in regard of its foreign loan that could be classed as either an

outgo or a loss in the production of the income.

It was held that the loss would merely be deductible in the twelvemonth in which the loan

was repaid, because merely so would such a loss have been really incurred. The

transition of the loan returns into local currency was simply portion of the

practical mechanics of giving consequence to the loan. The determination in the Caltex

instance was distinguished as being different because it was in regard of the

acquisition of stock in trade which had to be quantified at the terminal of the twelvemonth

of appraisal. The entreaty was allowed.

In ITC 1444 a maker of merchandises entered into understandings with abroad

providers of natural stuffs to provide fixed sums of natural stuffs at fixed or

determinable monetary values at future day of the months. This was done to protect the maker

against monetary value fluctuations and to vouch the handiness of supply. Payment

for the goods was to be hard currency against paperss.

The taxpayer deducted from its 1983 twelvemonth of appraisal sums in regard of

contracts concluded for the purchase of future supplies of stuffs. In the

opinion handed down, McCreath J. held that:

The inquiry to be determined in the instant instance is hence

whether it can be said that by reasoning the contracts to which

I have referred the taxpayer, during the twelvemonth of appraisal stoping

31 December 1983, incurred an absolute and unqualified legal

liability in regard of the outgo originating out of the said

contracts or whether such outgo was conditional upon the

occurrence of some future event.

the taxpayer was merely needed to pay the purchase monetary value of the

production stuffs organizing the capable affair of the said

contracts, against reception of the measures of ladling and bills

associating to the production stuffs to be supplied in footings thereof

the taxpayer was non required to consequence payment until the measures

of cargo and bills in regard of each measure of the

production stuffs had in fact been received by the taxpayers

agent abroad.

it is clear from the grounds of Mr A that no unconditioned legal

duty rested upon the taxpayer to consequence payment prior to

the reception of the said paperss.

In kernel the opinion took the position that the lone clip that an unconditioned

duty arose, was at T

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