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
STUDENT NO. CRWPET005
I certify that the report is my own work and all references used, are accurately recorded.
Generally Accepted Accounting Practice includes statement AC000: Framework for the preparation and presentation of financial statements. This sets out broad and definitive rules governing the recognition of liabilities and income and expenditure in financial statements. Specifically the following paragraphs need to be considered:
Recognition of liabilities:
91. A liability is recognised in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably...
Recognition of expenses:
94. Expenses are recognised in the income statement when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. This means in effect that recognition of expenses occurs simultaneously with the recognition of an increase or a decrease in assets
95. Expenses are recognised in the income statement on the basis of a direct association between the costs incurred and the and the earning of specific items of income. This process, commonly referred to as the matching of costs with revenues, involves the simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same transaction or other events;
The fisc takes little notice of these rules when it comes to the recognition of expenditure for the purposes of taxation. It is the part of these rules that govern the general deduction provision that this report will examine.
Section 11(a) of the South African Income Tax Act No. 58 of 1962 (as amended) reads as follows:
11. General deductions allowed in the determination of taxable income.- For the purpose of determining the taxable income derived by any person from the carrying on of any trade within the Republic, there shall be allowed as deductions from the income of such person so derived-
(a) expenditure and losses actually incurred in the Republic in the production of the income, provided such expenditure and losses are not of a capital nature.
The section defines the conditions that must be met for expenditure and losses to be allowed as deductions from income. The expenditure or losses must have been: Actu
In the Republic of South Africa.
In the production of the income.
Such expenditure or losses must not be of a capital nature.
The section has to be read together with s23(g)
23. Deductions not allowed in the determination of taxable income.- No deductions shall be made in respect of any moneys, claimed as a deduction from trade, to the extent to which such monies were not laid out or expended for the purposes of trade.'
This report will focus on the meaning of the term "actually...