The origins and development of the general deduction formula in income tax legislation of the Cape Colony
| Jurisdiction | South Africa |
| Published date | 25 May 2019 |
| Pages | 92-127 |
| Author | Enelia Jansen van Rensburg |
| Citation | (2015) 27 SA Merc JL 92 |
| Date | 25 May 2019 |
THE ORIGINS AND DEVELOPMENT OF THE
GENERAL DEDUCTION FORMULA IN
INCOME TAX LEGISLATION OF THE CAPE
COLONY*
ENELIA JANSEN VAN RENSBURG
†
Senior Lecturer, Department of Mercantile Law, Stellenbosch University
I INTRODUCTION
‘Much of the machinery of the British property and income tax has no
doubt been imported into the bill now before us. But are our legal
draftsmen always to be slavish copyists? Are we always to be called upon
to take up the reproach against them, ‘‘Alas: Master, it is borrowed?’’ Are
we never to look for the exercise of any ingenuity on their parts, however
urgent the necessity?’
1
In 2014 comprehensive income tax legislation is a hundred years old
in South Africa. In light of this milestone, the origins of one of the
important cornerstones of this legislation, the general deduction for-
mula, is reflected upon here.
The general deduction formula plays a prominent role in the calcula-
tion of a taxpayer’s liability for income tax.
2
Currently, this calculation
requires from the taxpayer to deduct certain expenditure and losses
from his ‘income’ (which refers to his gross receipts or accruals, from
which certain amounts are exempt).
3
However, only those expenses and
losses provided for in the act, and not under, for example, accounting
* This article is based on a paper presented at the Inaugural Annual International
Mercantile Law Conference hosted by the University of the Free State in Bloemfontein from
5–8 November 2013.
†
BA (Law), LLB (Stellenbosch), LLM (Tax) (UCT). Senior lecturer, Department of
Mercantile Law, Stellenbosch University.
1
The Mercury 24 August 1866 quoted in Harris, Metamorphosis of the Australasian Income
Tax: 1866 to 1922 (Australian Tax Research Foundation 2002) at 28–29 and written in relation
to an 1866 Bill proposed in Tasmania.
2
The term ‘income tax’ in the context of South African income tax legislation in this article
refers to ‘normal tax’, as currently levied in terms of s 5 of the Income Tax Act 58 of 1962 (‘the
1962 Act’). (The term ‘normal tax’ was introduced by s 1(1) of the Income Tax Act 35 of 1916
(‘the 1916 Act’) in order to distinguish it from another form of income tax (‘supertax’), which
was introduced by s 4 of the same act and which only applied to individuals.)
3
See the definitions of ‘gross income’, ‘income’ and ‘taxable income’ respectively in s 1 of
the 1962 Act.
92
(2015) 27 SA Merc LJ 92
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principles, may be so deducted.
4
Some of these deductible expenses and
losses are specifically listed in the act itself, whereas others, although not
specifically listed, are deductible if they meet a set of general require-
ments set out in ss 11(a) and 23(g).
5
These sections are collectively
known as ‘the general deduction formula’,
6
with s 11(a) often being
referred to as the ‘positive leg’ (since it sets out the criteria which, if met,
will allow for a deduction) and s 23(g) as the ‘negative leg’ (since it places
prohibitions against the deduction of certain expenses) of the formula.
7
This article considers the origins of the wording of the general
deduction formula as incorporated in legislation promulgated by the
Colony of the Cape of Good Hope (‘the Cape’) before the Union of
South Africa was formed, as well as the role that case law played in the
understanding of the formula during these early years.
8
This Cape
legislation would later form the basis of the Union’s first comprehensive
income tax act, promulgated in 1914 (‘the 1914 Act’)
9
;
10
and, since all
subsequent South African income tax acts
11
were substantially based on
the preceding one, the general deduction formula found in the current
income tax legislation of South Africa can be traced back to the Cape
legislation. Understanding the heritage of the formula in the Cape
legislation thus also gives insight into the current formula.
4
One of the earliest cases in which this was recognised, is Van Rhyn Deep Limited v
Commissioner of Taxes 1922 WLD 22 at 24. Sub-Nigel Ltd v CIR 15 SATC 381 at 389 is a more
recent example.
5
The interaction between the general deduction formula and these other specific deduc-
tions is mainly regulated by s 23B(3) of the 1962 Act.
6
See for example Commissioner for Inland Revenue v Nemojim (Pty) Ltd 45 SATC 241 at
254–255. From early on, commentators regarded the two legs of the general deduction
formula as a unity, which had to be read together. See for example Barnes, Income Tax Practice
in South Africa (Hortors Limited 1919) at 36. S 23(f) is sometimes included in the general
deduction formula, as indicated in Nemojim at 255.
7
Commissioner for Inland Revenue v Nemojim (Pty) Ltd 45 SATC 241 at 254–255. See also,
for example, Port Elizabeth Electric Tramway Company Ltd v Commissioner for Inland Revenue
8 SATC 13 at 14 and Blann, Principles of South African Income Tax (Butterworths 1955) at 93.
8
From time to time, case law dealing with legislation promulgated after 1910 will be
referred to, where no case law in respect of the Cape legislation could be found.
9
Income Tax Act 28 of 1914.
10
When comprehensive income tax was proposed to the Union parliament in 1914, the bill
was not yet drafted. The Minister of Finance (and Defence), Jan Christiaan Smuts, merely
indicated at the time that the bill would be based on pre-unification legislation of the Cape.
Broomberg, ‘Legacy of UK tax law’ 2008 British Tax Review 291 at 291.
11
The 1914 Act (which was reinstated by the Income Tax Act 23 of 1915 (‘the 1915 Act’)
and the 1916 Act) was succeeded by the Income Tax (Consolidation) Act 41 of 1917 (‘the 1917
Act’). The comprehensive income tax acts that followed were the Income Tax Act 40 of 1925
(‘the 1925 Act’), the Income Tax Act 31 of 1941 and the 1962 Act. For a historical overview of
developments in income tax legislation and case law during the early years of the Union, see
Surtees, An Historical Perspective of Income Tax Legislation in South Africa 1910 to 1925
(unpublished Masters of Commmerce thesis, Rhodes University, 1985).
THE ORIGINS AND DEVELOPMENT OF THE GENERAL DEDUCTION FORMULA 93
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The article uses as a starting point legislation promulgated in the
United Kingdom (‘the UK’) at the end of the 1700’s and during the first
half of the 1800’s.
12
Income tax legislation that was in force in the Cape
during this same period is then briefly mentioned, before considering
acts promulgated in the Australian colonies of South Australia and New
South Wales (‘NSW’) during the second half of the century. To
conclude, the influence of these acts on income tax legislation of the
Cape is considered and some adaptations made to the general deduction
formula by legislation of the Colony of Natal (‘Natal’) mentioned.
Although many issues relating to the general deduction formula were
raised during the period covered in this article, the article will focus on
only three issues, identified by NSW courts. The first issue concerns the
question as to whether expenses were deductible under the general
deduction formula against income from any source, or only against the
income to which they related. The other two issues concern the
deductibility of expenses of a capital nature and those incurred to earn
exempt amounts.
II COMPREHENSIVE INCOME TAX IN THE UK
(a) The UK’s first comprehensive income tax legislation
The UK passed its first comprehensive income tax act in 1799
13
(‘the
1799 UK Act’).
14
This act levied tax under four heads of income.
15
This
scheduler way of defining ‘income’ under different heads could be
12
It is acknowledged that legislation passed before this time, and in countries other than
those discussed in this article, could also have influenced the general deduction formula, but is
beyond the scope of this article. For an in-depth discussion of the development of the income
tax in the UK and its colonies before 1820, see Harris, Income Tax in Common Law
Jurisdictions From the Origins to 1820 (Cambridge University Press 2006).
13
Act 39 Geo. III c. 13 of 1799.
14
The 1799 UK Act is usually recognised as the UK’s first comprehensive income tax act,
although it is noteworthy that an act of the year before, Act 38 Geo. III c. 16 of 1798 (‘the 1789
UK Tripple Assessment Act’), had granted relief from taxation under that act if a person’s
‘income’ was below a certain threshold. As pointed out by Harris, Income Tax at 407, this act
strongly influenced the drafting of the 1799 UK Act. For a discussion of the 1789 UK Tripple
Assessment Act, see, for example, Harris, Income Tax at 384–404, Meade, ‘The early English
income tax: A heritage for the contemporary’ (1965) 9 American Journal for Legal History 286
at 292–297 and Seligman, The Income Tax A study of the History, Theory, and Practice of
Income Taxation at Home and Abroad 3 ed (1921) at 65–72.
15
S II, read with Schedule A. The first head dealt with income from land, the third with
income of residents arising outside the UK and the fourth with income not arising under any
of the foregoing. The second head is discussed in the main text. The schedules to the act were
replaced by Act 39 Geo. II c. 22 of 1799. References in this article to the 1799 UK Act are to the
act before amendment.
(2015) 27 SA MERC LJ94
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