TXN 201 > 5. Allowable Deductions > Flashcards

5. Allowable Deductions Flashcards

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1
Q

What different kinds of deductions are there?

A
  1. General deductions

2. Specific deductions

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2
Q

Which deductions come first?

A

General before specific

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3
Q

What do general deductions relate to?

A

They relate to people carrying on a business.

So it doesn’t apply to people earning salaries

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4
Q

What happens where deductions are greater than income?

A

Assessed losses

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5
Q

When will a deduction be prohibited even if it meets the requirements of the general deduction formula?

A

If it is part of the negative requirements section 23

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6
Q

Are passive investments carrying on a trade?

A

No

Not deductible

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7
Q

What are passive investments?

A

Interest, dividends, pensions, annuities

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8
Q

How do you calculate TOTAL taxable income?

A

Add all incomes and losses from all trades together

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9
Q

When can a trades loss NOT be set off against other trade incomes?

A

If its a suspect trade

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10
Q

What is a prerequisite for carrying on a trade?

A

There must be a profit or reasonable expectation of profit

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11
Q

Is the letting of property or designs carrying on a trade?

A

Yes

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12
Q

Is speculating shares a trade?

A

Yes

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13
Q

When can you deduct interest expense?

A

Only the amount occurred in earning interest income, limited to interest income

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14
Q

What is a venture and is it deductible?

A

Risk taken to make profit

It is deductible

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15
Q

Does the absence of profit mean there is no trade?

A

No

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16
Q

What are the questions to ask if a loss can be set off against another trades income?

A
  1. Would they have paid maximum marginal rate?
  2. Suspect trade or loss in three of last five years including current year
  3. Does it qualify for exclusion rule
  4. Did the trade (excluding farming) have a loss for 6 of the last 10 years
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17
Q

Can the loss from a trade be set off against other income if it would have paid the maximum marginal rate ?

A

Yes, move one to next step

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18
Q

Can previous losses be accounted for when determining if trade made a loss?

A

No

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19
Q

Does income from a trade include recoupment and capital gains?

A

Yes

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20
Q

What are the suspect trades?

A
  1. Sports
  2. Dealing in collectibles
  3. Rental of residential accommodation unless 80% is to non-relatives and they rent at least 6 months
  4. Animal showing
  5. Farming or animal breeding unless full time
  6. Any form of art
  7. Gambling or betting
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21
Q

When will the limitation rule not be applied?

A

If the trade will make a reasonable profit in reasonable time

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22
Q

What happens if the limitation rule is applied?

A

Losses can not be set off against other income

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23
Q

What are the factors that should’ve be considered when determining if the exclusion rule applies?

A
  • proportion of gross income to allowable deductions
  • amount spent on advertising and promotion
  • commercial manner the trades carried on
  • number of years they’ve had a losses since commencement
  • business plans for future taxable income
  • extent to which trade asset is used for personal use
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24
Q

What are the two sides of general deduction formula?

A
  1. Positive

2. Negative

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25
Do ALL requirements have to met for the deduction formula?
Yes
26
What are the components of the general deduction formula?
1. Carrying on a trade 2. Expenses or losses 3. Actually incurred 4. In year of assessment 5. In production of income 6. Not of a capital nature 7. Expenses laid out for purpose of trade
27
Can people who only earn salary use deduction formula?
No | It's for trade
28
What is the difference between expenditures and loss?
A loss is involuntary
29
Does expenditure only include cash?
No, any amount in lieu of cash
30
Can value be placed on an assets labour at the hands of taxpayer?
No, only the value for components can used
31
What value will be used as deduction for donation?
Usually fair market value
32
What does actually incurred mean?
Amounts that are paid or owing
33
Can the value of a liability be deducted if there is a condition?
No, it must be unconditional
34
If there's a condition, when can it be deducted?
Only once the condition is met
35
Is there a difference between contingent liability and estimated Expediture?
Yes | Estimated amounts can be deducted
36
If the estimated amount is too much, what is done with the difference?
The excess will be included in taxable income next period
37
What happens if the estimated amount is too little?
The difference will not be allowed as deduction
38
When is the compensation date when a court case is not settled?
Only when case is settled
39
When is a contingent liability deductible?
At fair market value on date of disposal
40
When is they're of assessment for an individual?
From 1 march to end February
41
When can something be deducted?
Only in the year it occurred, if it wasn't claimed then it cannot be claimed
42
How are expenses deducted when concerning production of income?
When they are so closely related to producing that income they are considered an operating cost
43
Do expenses have to occur in the same year as income?
No
44
Should the be a reasonable hope for profit for deductions?
Yes
45
Is expenditure incurred in production of exempt income or capital income deductible?
No
46
What is the inevitable concomitant test?
1. Establish purpose of expense | 2. Ask whether the the tasks as necessary and risk attached
47
Is compensation paid deductible?
No, it's usually not necessary production of income
48
Can expenses be apportioned for deductible amounts?
Yes
49
Can you deduct bribes, fines or penalties?
No
50
Is theft deductible?
Look at nature of business
51
Are social responsibility expenses deductible?
Yes
52
What recurrent expenses are deductible even though they aren't in production of income?
1. Audit and accounting fees 2. Printing costs of reports 3. Publishing AFS 4. Annual JSE quotes 5. Fees of transfer of secretaries
53
How would you determine if expense is capital in nature or not?
Courts have laid down tests
54
What are the test court have laid down for determine capital or revenue in nature for deductions?
1. True nature of transaction 2. Closeness of connection between income-earning operation and income-earning structure 3. Does expense create asset or enduring benefit 4. Expense relate to fixed or floating capital? 5. Is the expenditure once and for all? 6. Nature of business being carried on?
55
When can an expense be deducted even if it is capital in nature?
If its a specific deduction
56
What are the specific deductions?
1. Pension fund contributions 2. Retirement annuity fund contributions 3. Donation to public benefit organizations 4. Medical expenses
57
Is there a difference money spent in creating a source of income and only spent in working it?
Yes Creating the source is capital Working it is revenue
58
Is recurrent rent paid capital of nature?
No | As long it is paid in production of income
59
When is interest expense deductible?
If its interest in a loan used for the production of income
60
Are royalty payments in terms of a licensing agreements deductible?
Yes
61
What is floating capital?
Where capital frequently charges its form to money. E.g. Trading stock etc.
62
If an expense is for trade and other purposes, can it be apportioned?
Yes
63
What is section 23(g)?
The negative side to the deduction formula | It is not allowed as deduction if not laid out in production of income
64
What are prohibited expenses?
Expenses that can not be deducted from income
65
What are the prohibited expenses?
1. Maintain taxpayer and family and establishment 2. Domestic or private expenses 3. Where trade is employment UNLESS majority earned from commission 4. Losses covered by insurance policies 5. Tax duty or levy 6. Income carried over to serve fund or capitalized 7. Expenses incurred regarding exempt income 8. If it meets the negative test 9. Interest made in capital 10. Costs claimed as deduction on retirement fun 11. Expenses incurred by labour broker or personal service provider 12. Expenses paid for restraint of trade 13. Expenses made from employment of office held 14. Bribes, penalties etc. 15. Insurance policies ceded to employee
66
When can a person deduct expenses when they earn remuneration through employment?
If they earn a salary of more than 50% of commission
67
When is advertising considered capital in nature?
If it creates an asset
68
Are general donations usually deductible?
No
69
When is education/training deductible?
Only for the purpose of maintaining skills or knowledge
70
When calculating how much someone earns in commission what is included?
Any awards or prizes
71
Is goodwill usually deductible?
No | Unless it is purchased to sale
72
Are insurance premiums deductible for trade?
Yes | Be careful for insurance on capital
73
Interest on loans for dividends, taxes, assets and exempt income deductible?
No
74
Are salaries and wages deductible?
Yes
75
Are bonuses deductible?
Yes
76
Are gratuities paid to retired employee deductible?
No | Unless it was part of the employment agreement
77
Are gratuities paid in terms of keeping staff happy deductible?
Yes
78
When can theft be deducted?
If it is an inevitable concomitant
79
Is expenditure on vacant or unproductive property deductible?
No
80
Is expenditure on wasting assets deductible?
No, they are still capital in nature
81
What are assessed losses?
Where deductions exceed income. | This is assessed losses instead of taxable income
82
What is done with assessed losses?
Carried forward to next period and used to reduce taxable income of that period
83
Is incentive to staff deductible?
Yes
84
Are meals deductible?
No, they are specifically prohibited in section 23
85
Does the accounting principle of matching apply for tax purposes?
No | It must be claimed in the period it occurred in
86
Are gifts deductible?
No
TXN 201
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