Namibian Tax Law: Expenses and Deductions

• Taxable Income is calculated by subtracting exempt income and deductions from gross income

Definition - section 17(1)(a) and 24 (g)

• Before an amount can be deducted, requirements must be met
• Must be carrying on a trade in Namibia, for trade purposes
• There must be expenditure and/or losses
• The expenditure/losses occurred
• Expenditure must be in the production of income
• Must be during the year of assessment
• Must not be of a capital nature

Carrying on of any trade in Namibia

• "Trade" includes profession, business, employment, occupation, venture, letting of property, use of patent, etc.
• Interest on investment is typically not considered a real trade, however actively trading is the exception
• If "trade" status is unclear, the basic principle is to determine if an activity is a trade or not
• Factors to consider when determining if an activity is a trade
  • Continuity in the activities
  • Long term objective/ reasonable possibility of the trade to generate profits
• Passive activities do not constitute trade.
• Income requiring little effort to maintain is passive income, such as additional income from a rental property, the stock market, or a company that you are not actively involved in

Expenditure and losses

• Joffe & Co. v CIR determined that "losses" means involuntary expenditure
• Not only cash, but assets are also allowed as deductions
• CSARS v LABAT defined expenditure as the action of spending funds and includes disbursement of other assets with monetary value
• Issuing of shares doesn't constitute expenditure
• Depreciation is not expenditure

Actually incurred

• Incurred does not mean paid
• If a liability exists to pay the expense at a future date, the expense has been incurred and is deductible
• Amount taxpayer is legally liable to pay
• Time of payment is not important
• Advanced payments for future goods to be delivered are not deductible
• No deductions for future expenses as not 'actually incurred'
• Conditional payments are not deductible; the expense should be unconditional
• Nationale Pers BPK v KBI: A taxpayer can only deduct an expenditure which relates to unconditional legal liability
• Edgars Stores Ltd v CIR: Contingent liabilities cannot be deducted. Deductible in year in which condition is fulfilled

In the production of income

• Only expenditure incurred in the production of taxable income is deductible
• Expense on exempt income, such as dividends, will not qualify to be deducted
• Port Elizabeth Electric Tramway Co v CIR held that expenses should be incurred to earn income to be deductible
• Expenses should be closely connected to the operations of the business
• Expenses or losses from negligence/transgressing national laws do not qualify for deduction
• Consider if the activity which gave rise to the expenditure is to earn income?
• Review the relationship between activities causing the expenditure and the income earning business
• Sub-Nigel Ltd case established that the words "incurred in the production of income" do not necessarily require a particular item of expenditure to produce any part of the income for that Year of Assessment (YOA)
• WF Johnstone & Co ltd vs CIR: Payments were made for ex gratia on account of old age and honorable services previously rendered
• Ex gratia payments to employees purely as consideration for past services are not incurred in the production of income and are, therefore, not deductible

During the year of assessment

• Expenditure is only allowed during the year in which it was incurred
• Connector (Pty) Ltd v CIR, Caltex Oil (SA) Ltd v CIR
• Previous years expenses cannot be deducted in the current year

Not of a capital nature

• Capital nature is not taxable nor deductible
• Capital and revenue assets can be confusing
• New State Areas Ltd v CIR:
  • Does the expenditure form part of the costs of income earning operations?
  • Does the expenditure form part of the cost to establish, improve, or add to the income earning structure?
  • Does the expenditure fall under fixed or floating?
• Expenditure used to establish or improve income earning capacity = capital nature.
• Expenditure to bring an asset/enduring benefit into existence = capital
• Expenditure to operate a business more economically = revenue
• CIR V George Forest Timber Co Ltd: Money spent to yield profits in future or spent in working the concern for the present production of profit
• Loans written off are capital unless you are a money lender
• If someone lends money and the loan is written off, one cannot deduct the loss if not in the business of lending money
• Examples of capital
  • Fixed capital assets
  • Goodwill purchase
  • Obtaining share capital
  • Amount paid to extinguish competition
  • Transfer fees on property acquisition
  • Transfer fees on transfer of liquor license

In Namibia

• Section 17(1)(a) deals with expenditures in Namibia, including expenditure and losses actually incurred in Namibia in the production of income, provided such expenditure and losses are not of a capital nature
• Section 17(1)(b) deals with expenditures outside Namibia: the Minister may allow any expenditure and losses actually incurred outside Namibia in the production of the income, provided that such expenditure and losses are not of a capital nature

Specific Transactions

• Special court case 5857 involved a Landlord who paid tenants for damages resulting from a collapsed floor due to poor reconstruction work
• The negligent performance of the floor reconstruction is not an inevitable relation of the property being rented
• Reconstruction work is deemed a capital nature. Thus, being that the claim was also due to negligent reconstruction, the claim is also classified as of capital nature
• To be deductible:
  • Compensation must not be to replace an asset
  • The taxpayer has no control over the event, no negligence
  • The event should be connected to the production of Income
• Goodwill is a capital nature = not deductible

For the purposes of trade

• Section 24(g)
• Expenses not for trade purposes is are not deductible
• Dual purpose expense? If so:
• Trade and private expenses are proportioned

Deductions not allowed - section 24

• Expenses for maintenance of the taxpayer, family or establishment are not deductible
  • Section 24(a)
• Domestic or private expenses = not deductible
  • E.g., rent paid or any repairs made to a premises not occupied for trade
  • Section 24(b)
• Loss or expense that is recoverable under contract of insurance, guarantee, security or indemnity is not deductible
  • Section 24(c)
• Taxation levied on income = not deductible (tax penalties, fines interest)
  • Section 24(d)
• Retained Income transferred to an reserve fund or capitalised in any way is not deducted for tax
  • Section 24(e)
• Expenses to produce exempt income, that do not constitute income as defined.
  • Section 24(f)
• Non-trade expenditure are not deductible
  • Section 24(g)
• Interest that would have been earned on any capital employed in trade = not deductible
  • Section 24(h)
• Land tax paid iro the Agricultural Land Reform Act of 1995 is not deductible

Explore scenarios defining capital expenses under Namibian tax laws. Understand conditions for deducting expenses incurred outside Namibia, and the tax treatment of mixed-purpose expenses. Clarify non-deductible expenses and losses, plus rules for reserve fund transfers.