24th November 2022 By ravikumarsilva Off

Non Deductible Legal Fees South Africa

Based on the reasoning of the Cadac case, the court ruled in ITC 1677 that the taxpayer`s litigation was brought in order to preserve an asset and protect the taxpayer`s market. Legal fees are therefore capitalistic in nature and are not deductible. In general, interest expenses incurred to generate non-exempt income and for business purposes are deductible. However, interest accrued to earn exempt income is not allowed as a tax deduction. A special exemption applies to the deduction of interest on debts used for the acquisition of shares, provided that certain conditions are met. In Income Tax Court (CIR) Case 1837(2), for example, the taxpayer, a premier, made remarks at a press conference that resulted in him being successfully sued and ordered to pay damages for defamation. It was found that the claim for damages arose within the scope and extent of his employment as Prime Minister and was so closely related to his ordinary business transactions that the necessary causal link between those expenses and those business transactions could be established. As a result, the legal fees incurred to defend the claim were deductible under paragraph 11(c) of the Income Tax Act. The court therefore concluded that the legal costs incurred were not capital in nature and were deductible under Article 11(c) of the Law on income tax. In ITC, 1677(5), a party (D) sought a prohibition against the taxpayer, a publisher, on the ground that the taxpayer had published two textbooks that infringed D.`s copyright.

The court had to decide whether the legal costs incurred by the taxpayer constituted capital costs. Must relate to claims, disputes or suitsThe Income Tax Act does not define “claim, dispute or suit”. However, the importance of this penalty was taken into account in a case where the taxpayer incurred expenses to be represented by a lawyer before a commission of inquiry set up under section 417 of the Public Companies Act (61/1973). (1) The Commissioner of South African Revenue argued that the term “dispute” referred to a defined and easily identifiable dispute between the parties. Although the Court did not consider it necessary to decide the issue, since section 417 commissions are appointed by a court, it expressed the view that the word “dispute” includes “any disagreement on the basis of which the parties require legal assistance”. “The legal fees incurred did not create or enhance any assets, they did not provide any benefit to the lasting benefits of the negotiation, and they were closely linked to the transactions related to the complainant`s income rather than his income structure. [T]he applicant took a calculated risk and the expenses were in fact only part of the costs associated with carrying out the revenue-generating activities. » Defaults on borrowed money are deductible if it was lent as part of a money lending transaction. 15. In November 2019, the Cape Town Financial Court delivered its judgment in ITC24614.

This is another judgment that deals with the distinction between capital expenditure and income – arguably the issue on which there has been the most contentious issue in South African tax history. The importance of the distinction lies in the deductibility of the amount for income tax purposes – while expenses that are income are generally deductible, capital expenses are generally deductible. Must arise in the ordinary course of the taxpayer`s businessFor the purposes of paragraph 11(c) of the Income Tax Act, legal fees need not be incurred to generate income. It is sufficient that legal costs have been incurred during or as a result of the taxable person`s ordinary business transactions. For a taxpayer to be able to deduct legal fees (e.g. Attorneys` fees, costs of obtaining evidence or expert opinions, court costs, witness costs, tax fees, sheriff or courier fees and other procedural costs of a similar nature), special start-up (or pre-market) facilities are granted to allow deduction in the year in which the transaction begins. Expenses are only deductible if they would have been deductible if they had been incurred after the start of the negotiation. These expenses and any losses are affected and can only be deducted from the income of the business to which the start-up costs relate. The court rejected the taxpayer`s argument that the expenses did not result in an ongoing asset or benefit on the basis of Secretary for Inland Revenue v.

Cadac Engineering Works (Pty) Ltd.(6) Cadac had manufactured stoves under license from the patent holder and requested legal action against another company. Homegas, which had begun marketing Kocher in competition with Cadac. CADAC has undertaken to compensate patent holders for its legal costs. The court ruled that the legal fees were capital-intensive in nature, as they were intended to maintain and possibly extend the area in which the taxpayer`s business operated. That was also the case, since Cadac had incurred those expenses in order to eliminate competition from Homegas. It is therefore not deductible. The courts have interpreted the expression `resulting from or resulting from ordinary activities which he pursues in the exercise of his profession` as meaning that the deductibility of legal costs within the meaning of Article 11(c) does not depend on the destination of the expenditure, but on the causal link between the facts in question and the taxable person`s business. Bad debts are tax deductible if the debt relates to an amount included in the taxpayer`s taxable income in a taxation year if it is due at the end of the taxation year. A tax-free allowance is also provided for bad debts.

In light of the above, legal fees should be deductible provided that the requirements of Article 11(c) are met. However, it is important for taxpayers to keep in mind that such a deduction is limited if expenses: Fines or penalties imposed in connection with illegal activity in South Africa or any other country where they would be illegal in South Africa are not tax deductible. Donations to certain charities recognized as not-for-profit organizations are tax deductible up to 10% of taxable income. For the purpose of determining the taxable income of a party from the exercise of an activity, section 11(c) of the Income Tax Act (58/1962) provides for the deduction of legal fees incurred during or as a result of a taxpayer`s ordinary business transactions. In particular, legal costs incurred by a taxable person in respect of `claims, disputes or actions arising out of or arising out of ordinary activities carried out by the [taxable person] in the exercise of his professional activity` are deductible.