Abstract:
The Income Tax Act 58 of 1962 (“Act”) entitles taxpayers to deduct certain losses
and expenses incurred by them from their taxable income if such losses and
expenses comply with the requirements of section 11(a) of the Act. One of the
requirements of section 11(a) is that, in order to be eligible for a deduction, the
losses and expenses must have been “actually incurred” by the taxpayer.
The area of tax deductions in our tax law represents the frontline in the continuous
and inevitable war between the taxpayer (almost always desperately trying to
maximise her deductions) and the revenue authorities (as often times desperately
trying to minimise the deductions to which the taxpayer is entitled). The stage on
which the various battles which make up this mighty war between citizen and state
are fought is the court and the arsenal with which each party comes armed is the Act
and, more specifically, the absolute belief of each party in the correctness of their
interpretation of the Act, which, each party hopes, will be ably demonstrated by their
able (and often extremely expensive) counsel. Such is the determination of the
taxpayer and the tax authorities alike that the body of case law relating to this
specific area of our law is, especially when one considers that it essentially involves
on only one section of the Act, relatively voluminous.
The author’s intention is to consider only one of the requirements with which the
taxpayer must comply in order to be eligible for a deduction, namely, the requirement
that the relevant loss or expenditure must have been “actually incurred” by the
taxpayer. Despite the fact that the meaning of the phrase “actually incurred” has
been considered extensively by our courts, significant uncertainty still exists as to its
exact meaning. The author will deal with three specific contexts in which the
meaning of this phrase remains a subject of uncertainty, namely, share-based
payments, contingent liabilities and losses and expenses incurred in relation to illegal
receipts. The author will begin first by dealing with the interpretation of tax statutes, the author
will then, in general terms, consider the general deduction formula after which the
author will delve into the meaning of the phrase “actually incurred” in the contexts of
each of the transactions mentioned above.
