General Deduction Formula PDF

GENERAL DEDUCTION FORMULA CHAPTER 4 CALCULATION DEFINED AS ‘TAXABLE INCOME’ Steps to follow.. Gross income XXXX Less: Exempt income (XXX) Income XXXX Less: Deductions (XXX) Taxable Income XXXX  Definition – section 17(1)(a) and 24 (g) Requirement...

GENERAL DEDUCTION FORMULA CHAPTER 4 CALCULATION DEFINED AS ‘TAXABLE INCOME’ Steps to follow.. Gross income XXXX Less: Exempt income (XXX) Income XXXX Less: Deductions (XXX) Taxable Income XXXX  Definition – section 17(1)(a) and 24 (g) Requirements to be met before the amount may be deducted: Carrying on any trade in Namibia ( for the purpose of trade) Constitute Expenditure and losses Actually incurred In the production of income During the year of assessment Not of a capital nature Carrying on of any trade in Namibia What is defined as “Trade”? Profession, trade, business, employment, occupation, venture, letting of property, use of patent, etc. Exclude – interest on investment may not be considered as a real trade. Unless actively trading e.g bank. Definition is wide and can be misinterpreted, so the basic principle is to determine if an activity is a trade or not. Carrying on of any trade in Namibia FACTORS TO CONSIDER WHEN DETERMINING WHETHER IT IS A TRADE: IS THERE CONTINUITY IN THE ACTIVITIES? IS THERE A LONG TERM OBJECTIVE OR REASONABLE POSSIBILITY OF THE TRADE TO GENERATE PROFITS? EXCLUDED: PASSIVE ACTIVITIES DO NOT CONSTITUTE TRADE, Income that requires little effort to maintain is passive income. It can be 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 – “losses”  Losses means involuntary expenditures. Not only cash, assets are also allowed as deductions. CSARS v LABAT Expenditure refers to the action of spending funds. Expenditure include disbursement of other assets which have a monetary value. Issuing of shares does not 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 it is deductible. Amounts taxpayer is legally liable to pay Time of payment – NOT important Advanced payments for future goods to be delivered = NOT deductible No deductions for future expenses  as not ‘actually incurred’  Actually incurred CONDITIONAL PAYMENTS ARE NOT DEDUCTIBLE, THE EXPENSE SHOULD BE UNCONDITIONAL. NATIONALE PERS BPK V KBI THE COURT HELD THAT A TAXPAYER CAN ONLY DEDUCT AN EXPENDITURE WHICH RELATES TO AN UNCONDITIONAL LEGAL LIABILITY. THIS WAS ALSO CONFIRMED IN THE CASE: 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. Thus expense on exempt income (dividends) will NOT qualify to be deducted. Port Elizabeth Electric Tramway Co v CIR – The court held that the expense should be incurred for the purpose of earning income. Only then the expenditure will be deductible. Also the expenditure should be closely connected to the operations of the business. Any expenses or losses incurred as a result of negligence or transgressing national laws will not qualify for deduction. 1. The activity which gave rise to the expenditure  is the purpose to earn income? 2. Relationship between activities causing the expenditure and the income earning business  In the production of income Sub- Nigel Ltd case – established that the words incurred in the production of income do not mean that a particular item of expenditure has to have produced any part of the income for that YOA. As long as it has been incurred in the production of income. WF Johnstone & Co ltd vs CIR – Taxpayer made payments for ex gratia on account of old age and honourable 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 year’s expenses cannot be deducted in the current year, etc. Not of a capital nature Capital nature is not taxable NOR deductible. Capital and revenue assets can be very confusing (car rental). 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 the income earning structure Does the expenditure fall under fixed or floating All expenditure used to establish or improve income earning capacity = capital nature. Not of a 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: SPENT TO YIELD PROFITS IN FUTURE OR SPENT IN WORKING THE CONCERN FOR THE PRESENT PRODUCTION OF PROFIT  Not of a capital nature LOANS WRITTEN OFF- CAPITAL UNLESS IF YOU ARE A MONEY LENDER. E.G. LENDS MONEY TO SOMEONE AND THE LOAN IS WRITTEN OFF. CANNOT DEDUCT THE LOSS IF NOT IN THE BUSINESS OF LENDING MONEY. SEE PAGE 37  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 LICENCE In Namibia Section 17(1)(a) – deals with expenditures in Namibia - expenditure and losses actually incurred in Namibia in the production of the income, provided such expenditure and losses are not of a capital nature; Section 17(1)(b) – deals with expenditures outside Namibia - so much as the Minister may allow of any expenditure and losses actually incurred outside Namibia in the production of the income, provided such expenditure and losses are not of a capital nature;  *Specific Transactions* 1. Compensation Special court case 5857: a Landlord paid tenants for damages as a result of a collapsed floor (due to poorly reconstruction work)  Negligent performance of the reconstruction of floor is not an inevitable relation of letting of property.  The reconstruction work is seen as capital nature, thus the claim for compensation (due to negligent reconstruction) was also seen as capital nature To be deductible: Compensation must NOT be to replace an asset (then seen as capital) Taxpayer has no control over the happening of the event, no negligence. Event should be connected to the production of Income.  *Specific Transactions* 2. Goodwill Capital nature = not deductible. For the purposes of trade Section 24(g) Expenses not for trade purposes are NOT deductible. Dual purpose expense? Trade and private expense = proportioned. Deductions not allowed – section 24 1. Maintenance of the taxpayer Any expense for maintenance of taxpayer, his family or establishment = not deductible. Section 24(a) 2. Domestic expenses Domestic or private expenses = not deductible. E.g. rent paid or any repairs made to a premises not occupied for trade. Sections 24(b) Deductions not allowed – section 24 3. Recoverable losses Any loss or expense that is recoverable under contract of insurance, guarantee, security or indemnity. Section 24(c) 4. Taxes Any taxation levied on income = not deductible. i.e. tax penalties, fines interest. Section 24(d) Deductions not allowed – section 24 5. Transfer of Reserves Any retained Income transferred to an reserve fund or capitalised in any way are not deducted for tax purposes. Section 24(e) 6. Expenses to produce exempt income Iro of amounts which do not constitute income as defined. Section 24(f) Deductions not allowed – section 24 7. Non-trade expenditure Expenses not for the purposes of trade = not deductible. Section 24(g) 8. Notional expenditure Interest that would have been earned on any capital employed in trade = not deductible. Section 24(h) Deductions not allowed – section 24 9. Land tax Paid iro the Agricultural Land Reform Act of 1995.