Income Tax Special Court

• Jurisdiction: South Africa
• Judge: Labe J
• Judgment Date: 11 March 1997
• Docket Number: 9845
• Court: Transvaal Income Tax Special Court
• Hearing Date: 10 February 1997
• Citation: 1998 JDR 0238 (TSpCrt)

Labe J :

The appellant in this matter is a professional person who at all times material hereto, was employed by a professional firm and received an income from it by way of salary.

While so employed the appellant developed a township. The appellant underestimated the cost of developing the township and in order to facilitate the development thereof borrowed moneys.

The loans were not fully paid off by the time the last stand in the township had been sold either by private treaty or in execution for the payment of the appellant's debts and the appellant continued to pay off the loans and interest thereon after such time.

The appellant contends that as long as he is servicing the loans the interest paid on the loans must be set off against the income earned by him as and by way of salary.

1998 JDR 0238 p2

Labe J

It is common cause between the Commissioner and the appellant that the loans were actually incurred; not of a capital nature; incurred wholly or exclusively in the production of income; raised for the purpose of earning income; and closely linked to the township development costs so as to form part of the production of income.

The Commissioner allowed expenditure on interest after the township development and sale of township phases had been completed up to 1989. However in the 1990, 1991 and 1992 tax years the Commissioner changed his position and disallowed the deduction of expenditure, claiming that the interest payments could only be allowed as a deduction against township income and not against the appellant's salary.

This appeal raises the question as to whether the expenses incurred in the production of income and therefore deductible in terms of section 11 (a) of the Income Tax Act read with section 23 (g) thereof continue deductible if not fully paid by the time when active trading has ceased.

In ITC 1029 (1963) 26 SATC 54 decided in the Special Court of the Federation of Rhodesia and Nyasaland, an architect who had retired from active practice was allowed to deduct an amount paid tinder a guarantee given by him while still in active practice.

The President of the Special Court said the following at page 58:-

"It seems to me, with respect, that in this decision the Court put too restricted a meaning upon the phrase 'in the production of income' and that the conclusion arrived at is not reconcilable with the view which is now generally accepted and to which 1 have already referred, that losses are incurred in the production of income if they are incurred 'in the course of and by reason of the ordinary operations undertaken for the purpose of conducting the business.' As I see the position, it is not necessary for a taxpayer to establish a connection between the expense incurred and any income for the year of assessment under review.

In Income Tax Case No. 490, reference was to the Australian case of

1998 JDR 0238 p3

Labe J

Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxes (1935) 54 C.L.R. 295. In that case it was decided that expenditure incurred by a taxpayer as a result of operations which it had ceased to carry on after it had so ceased to carry on the operations, could not be regarded as 'losses and outgoings incurred in gaining or producing the assessable income.' Since the decision turned upon the meaning of these particular words as used in the relevant Australian legislation, I think it can be distinguished from the position that arises under our legislation.

Accordingly, I consider that if expenditure is deductible by a taxpayer while he carries on business, the fact that he ceases to carry on that business does not render such expenditure non-deductible provided that it arises out of the taxpayer's activities prior to the cessation of his business operations."

In ITC 729 (1953) 18 SAT 96 at 100-101 the following was said:-

"An employer, as part of the wages to an employee, gives him an undertaking that when he retires he will be paid a pension. That undertaking amounts to a laying out of moneys for the purpose of trade. Nor does paragraph (g) state that the moneys must be laid out or expended for...