An Analysis of The Term Actually Incurred In Secti Essay Example
An Analysis of The Term Actually Incurred In Secti Essay Example

An Analysis of The Term Actually Incurred In Secti Essay Example

Available Only on StudyHippo
  • Pages: 12 (3232 words)
  • Published: April 9, 2019
  • Type: Analysis
View Entire Sample
Text preview


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: Paragraph 91 states that a liability is recognized in the balance sheet when there is a probable outflow of resources embodying economic benefits from settling a present obligation, and the amount can be measured reliably...

Recognition of expenses in the income statement is based on the decrease in future economic benefits related to a decrease in an asset or an increase of a liability that can be measured reliably. Expenses are recognized simultaneously with the recognition of an increase or decrease in assets. This recogn


ition is done on the basis of a direct association between the costs incurred and the earning of specific items of income. This process, known as matching costs with revenues, involves simultaneous or combined recognition of revenues and expenses resulting from the same transaction or events. However, the fisc does not pay much attention to these rules when it comes to recognizing expenditure for taxation purposes.

The focus of this report is on the rules related to the general deduction provision. According to Section 11(a) of the South African Income Tax Act No. 58 of 1962 (as amended), deductions are permitted for expenses and losses incurred within the Republic in generating income from a trade, provided they are not considered capital in nature.

To deduct expenditure and losses from income in the Republic of South Africa, certain conditions need to be met. Firstly, the expenditure or losses must

View entire sample
Join StudyHippo to see entire essay

undergo assessment. Secondly, they must be incurred during the production of income. Lastly, the expenditure or losses should not fall under capital nature.

The section must 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 incurred" (as a critical part of the recognition process) and not on the other requirements. It will explore the difference between the accounting requirements for expenditure and liabilities to be recognized and the requirements for recognition for Income Tax purposes. It will try to better understand the meaning and implications of this phrase, with a view to better manage and control its impact on the recognition of expenditure and losses. It will also explore some of the gray areas that can and have caused the taxpayer and the fisc considerable problems in the past.

In conclusion, this paragraph discusses some recent legislative changes that will be discussed and considered. The content focuses on Section 11(a) of the South African Income Tax Act No. 58 of 1962 (as amended). This section pertains to deductions allowed in determining taxable income for individuals conducting trade within the Republic. It allows for the deduction of expenditure and losses incurred in the Republic in the production of income, as long as they are not of a capital nature. Section 11(a) is commonly known as the general deduction provision.

This section covers the guidelines for deducting

expenses and losses when calculating taxable income. It is important to note that these expenses and losses must have been incurred in the year of assessment. Although not explicitly stated, it is understood that expenses can only be deducted for tax purposes in the same year they are incurred. Legal cases provide support for this assertion.

Incurring expenditure is crucial for claiming deductions under s11(a). If expenditure is not claimed as a deduction in the year of incurral, it cannot be claimed in any other year unless specified by the Act. Incurral triggers the recognition or deductibility of the expenditure, assuming all other requirements are met. This report will address three key issues related to incurral: a) determining if expenditure was actually incurred and understanding its definition; and b)

The question arises of when the incurral occurred, as this will determine the year of assessment for deducting the expenditure or loss in calculating taxable income. In the Caltex Oil case, Botha J.A. emphasized that income tax is evaluated on an annual basis, supporting the idea that expenditure incurred in a specific year of assessment is only deductible in that same year. However, determining the actual year of incurral leads to additional challenges.

c. One issue that arises is the expenditure for which the obligation to pay becomes unconditional during the year, but the precise amount cannot be determined until after the assessment year has ended. This creates multiple problems that need to be addressed, including the second year problem.

All the problems arising from the courts and legislature's ongoing battles create numerous complex issues. The two most recent Commissions of Inquiry have raised some of these problems, leading to

the introduction of legislation for their future resolution. This report seeks to enhance comprehension of this crucial aspect of tax law.

Planning ahead is easier and more effective than dealing with problems after they occur. History cannot be changed, so it's better to plan for expenses instead of relying on luck. This approach is both cost-effective and provides a certain outcome.

Importance of the "Actually Incurred" Provision:

3.1 Defining the meaning of "actually incurred." When interpreting fiscal statutes, it is crucial to distinguish between presumptions of statutory interpretation and rules or canons of construction.

The presumptions, derived from common law, are obligatory legal rules. They coexist with statutory provisions and play a vital role in interpreting parliamentary enactments. In contrast, the rules or canons of construction are conceptual models that judges may or may not apply when determining the meaning of specific legislative provisions. The traditional approach, known as the Cardinal rule, requires judges to ascertain the literal meaning of a provision using ordinary grammatical rules. If the words have a clear meaning, they represent Parliament's intention. The ultimate goal of statutory interpretation is to endorse a specific meaning attributed to a statute through the concept of parliamentary intent. Considerations such as equity, hardship, or social policy become irrelevant once Parliament's intention is unequivocally established.

In Partington v Attorney General, Lord Cairns emphasized that if a person seeking to be taxed fits the exact criteria stated in the law, they must be taxed regardless of any perceived hardships. This means that in a taxing statute, it is not acceptable to consider any equitable interpretations. Similarly, in Cape Brandy Syndicate vs IRC, Rowlatt J. stated that when dealing with a taxing

Act, one should only consider what is explicitly mentioned.

There is no space for any intention, fairness, or assumption regarding a tax. Nothing should be inferred or implied.

When interpreting fiscal statutes, it is crucial to carefully consider the language used and the rules of interpretation mentioned above. The interpretation may not necessarily result in an equitable or reasonable outcome. Therefore, it is essential for taxpayers to have a clear understanding of the law in order to plan their financial matters efficiently and remain compliant.

In IRC v Duke of Westminster Lord Tomlin stated in 19 TLR 472 that every individual has the right, if possible, to organize their financial matters in a way that reduces the tax obligations as prescribed by the relevant legislations. The phrase "to have been actually incurred" implies that a definite legal liability to pay either immediately or at a future date has arisen. It is not necessary for the payment to have been made in order for the incurral to have taken place. Once the events that constitute incurral have occurred, the expenditure or loss becomes a reality and will be recognized in calculating taxable income, assuming all other criteria have been fulfilled. Therefore, incurral can be viewed as the triggering factor for recognition.

The Generally Accepted Accounting Principles (GAAP) states that liabilities should be recognized in the balance sheet when it is likely that settling a present obligation will result in an outflow of resources that brings economic benefits, and the amount of the settlement can be reliably measured. Therefore, recognition in the financial statements can occur based on probability. To prepare for expected probable expenditures, provisions are established. The Act specifically

states in Section 11(a) that actual incurral is necessary. In addition, Section 23(e) explicitly states that no deductions are allowed for income transferred to reserve funds or capitalized in any way. The Tax Act requires that an expense must be incurred after an unconditional legal liability exists.

According to the text, it is emphasized that probability alone cannot fulfill the requirement. Even if an uncertain future event is highly likely to result in an expense or loss, it is not considered as incurred. This means that the liability is not absolute and unconditional. The Members Handbook of the Institute of Chartered Accountants also states that if there is a likelihood that future events will confirm the impairment of an asset value or the occurrence of a liability at the balance sheet date, after considering any potential recovery, a charge should be recorded in the income statement to account for the possible loss. Furthermore, it should be feasible to reasonably estimate the amount of the resulting loss.

The passage discusses the distinction between a contingent liability and one that has already occurred, using the FCT vs James Flood (Pty) Ltd case in Australia as an illustration. In this particular case, the taxpayer tried to deduct payments for annual leave in the present year, even though they were scheduled to be paid to employees in the subsequent fiscal year. As per the applicable industrial agreement, these payments would only be given to employees at a later date, and certain circumstances could result in no entitlement if an employee did not complete their full period of service. The company aimed to deduct a portion of the payment, corresponding to the

duration of service in the current year, based on assuming that the employee would serve 12 months as required in the following year. The court acknowledged that a liability can arise even if it is not immediately due and payable.

The fiscal orchard ruled that employees were not eligible for leave payment because they had not yet acquired the necessary period of service. To qualify for deduction, the liability must have been encountered or fallen upon. The taxpayer must have fully subjected themselves to the expenditure, although it does not need to be an immediate enforceable obligation and it does not need to be indefeasible. The Commissioner's appeal was successful. In the case of Caltex Oil (SA) Ltd vs SIR, the company obtained supplies from overseas subsidiaries located in the UK.

Upon shipment of the goods, the appellant would receive invoices in British Sterling. Upon receipt of these invoices, the appellant would convert the purchase price into SA Rands at the exchange rate on the date of shipment. At this time, entries would be made in the appellant's books. The recorded value would remain unchanged, regardless of fluctuations in the Rand currency until the end of the appellant's financial year on 25 December annually. On 19 November 1967, the exchange rate between the Rand and pound sterling changed from R2 = 1 to R1.7207 = 1. This led to a decrease in amounts owed to overseas companies.

The debt owed to Caltex Services Ltd was decreased by R14,031 and the debt owed to Caltex (UK) Ltd was decreased by R1,336,271. Caltex Services' debt was paid off before the end of the financial year, while the other debt remained

outstanding. When calculating the appellant's tax liability for 1967, the respondent included the combined total of these two amounts. The only matter brought before the Appeal Court was whether or not the appellant should be held accountable for repaying these two sums.

Due to the devaluation of sterling, it can be argued that the amount not required to be paid can be considered as part of the actual expenditure. Botha J.A. summarized the unanimous judgment by stating that the appellant effectively fulfilled its obligation to Caltex Services Ltd by spending R14,031 less than the R98,217 recorded in its accounting books before the end of the 1967 tax year. It is unreasonable to claim that the expenditure incurred in connection with the Caltex Services Ltd transactions exceeded the actual amount spent simply because R98,217 was entered into the appellant's books as equivalent to 48,925 sterling at transaction time. Furthermore, Botha J.A. added that for s11(a) purposes, only rands needed to settle liability within that tax year are considered as actually incurred expenditure.As for a larger unpaid liability at year-end 1967; determination and inclusion of actually incurred expenditure during 1967 tax year were necessary.The appellant did not have an actual liability of paying R9,353,920 to Caltex UK Ltd.Instead,the amount was expressed in sterling and had to be converted into equivalent rands on quantification date or payment date within fiscal year for s11(a) purposes.

In summary, the debt paid during the year was the amount incurred. The unpaid liability at year end was only the amount payable at the end of the year, not yet incurred. The remaining claimed amount was dependent on a future event and not yet incurred.

In the case of Nasionale Pers vs KBI, employees were promised a 13th cheque after a full year of service or pro rata for shorter service. Bonuses were paid on September 30th each year. The company had the right to recover bonuses from employees who were no longer employed by October 31st.

The company's financial year ends on March 31st every year. The company wanted to claim a portion of the bonuses (6/12) as a deduction in the previous year ending in March. The company's appeal was based on two arguments: I. The bonuses were a commercial reality - they were obligated to be paid, and most of the employees would qualify. ii.

The taxpayer had a liability to pay a monthly bonus to each employee, which would only be canceled if the employee left before 31 October. Therefore, the taxpayer had actually incurred the expenditure. According to Hoexter J.A., the obligations to the employees were personal and not shared. Thus, the liability towards the group of employees was no different than the liability towards each individual employee.

The applicant's tax year did not include the future uncertain event of whether the employee would still be employed on October 31. This event was necessary for the obligation to pay a holiday bonus to arise. Simply put, at the end of March, there was no absolute requirement to pay a bonus to any employee. Although it was likely that the company would have to pay bonuses as calculated to most of the workforce, there was no unconditional liability to pay any individual employee a bonus at the end of the relevant financial year. Therefore, the expenditure could not have

actually been made during that year.

ITC 1531 appellant received R360,000 on 1 August 1983 from a loan in Germany. The loan was to be repaid in Deutschemarks (DM) in the future. From 1 August 1983 to 31 December 1983, there was a decline in the Rand against the DM. This devaluation resulted in the debt to the lender being R370,509.16 in SA Rands as of 31 December 1983. In 1984, an additional loan was obtained in Germany, with the proceeds amounting to R200,000 in SA Rands.

The appellant had to repay the further loan in DM. As of the last day of the 1984 year of assessment, the appellant's indebtedness, based on the prevailing exchange rate, was R730,382.65. Due to the adverse movement in exchange rates, the appellant's liability increased by R159,873.49 in the 1984 year. No additional loans were given. By the last day of assessment for 1985, the appellant owed R1,195,199.33 according to the then prevailing exchange rates. The liability of the appellant was further increased by R464,816.68 due to a decline in the value of the Rand against the DM during the 1985 year.

The appellant sought to deduct R464,816.68 from their income in 1985. They argued that they should be allowed to claim a deduction for an unrealized loss caused by fluctuations in exchange rates during the assessment year in question. None of the loan was repaid in 1985. The Commissioner argued that the requirement in section 11(a) for "expenditure actually incurred" does not mean that the payment must be due and payable by the end of the relevant year. There must be a clear obligation to pay by the end of the

year, even if payment is only due in subsequent years. To meet this requirement, the liability must not be contingent upon an uncertain future event.

The argument was made that the foreign exchange losses were notional losses and depended on the prevailing rate of exchange at the time of payment. However, the judgment concluded that when a taxpayer owes an amount in a foreign currency, the amount is owed without any conditions or contingencies. There is definitely an amount of expenditure incurred. The fluctuations in the rate of exchange can only affect the amount or measurement of the definite liability. It is only the measurement that is contingent.

The liability is absolute. The appellant's unrealised foreign exchange loss was deductible under s11(a) from its income. The appeal was allowed and the case was taken to court. The court had to determine whether the unrealised foreign exchange loss qualified as an expenditure or loss actually incurred in the Republic in generating income as stated in s 11(a).

Corbett CJ emphasized that the crucial issue was whether the taxpayer had actually suffered any expense or loss in the production of income during the relevant assessment year due to currency fluctuations in relation to its foreign loan. It was determined that the loss could only be deducted in the year when the loan was repaid, as that would be the time when the loss was truly incurred. The conversion of the loan proceeds into local currency was merely a practical step in implementing the loan. The court made a distinction from the Caltex case, which involved quantifying stock in trade at the end of the assessment year. The appeal was successful.


1444 involved a manufacturer entering into agreements with overseas suppliers of raw materials. These agreements ensured the supply of fixed amounts of raw materials at fixed prices in the future. The purpose of these agreements was to protect the manufacturer from price fluctuations and ensure a guaranteed availability of supplies. The payment for the goods was expected to be made in cash against documents. In the year of assessment 1983, the taxpayer deducted amounts related to contracts for future material purchases. In the given judgement by McCreath J., it was questioned whether the taxpayer incurred an absolute and unconditional legal liability for the expenses arising from these contracts during the assessment year or if such expenses were contingent upon future events.

According to the contracts, the taxpayer only had to pay for the production materials when the bills of lading and invoices were received. The taxpayer's agent abroad would receive the documents for each quantity of materials before payment was required. Mr. A's evidence confirms that there was no obligation for the taxpayer to pay before receiving these documents.

Get an explanation on any task
Get unstuck with the help of our AI assistant in seconds