An Analysis of The Term Actually Incurred In Section 11(a) of Income Tax Action
Act No 58 of 1962


A TECHNICAL REPORT TO BE PRESENTED TO
THE DEPARTMENT OF ACCOUNTING
UNIVERSITY OF CAPE TOWN

IN PARTIAL FULFILMENT OF
THE REQUIREMENTS FOR THE
BATCHELOR OF COMMERCE (HONOURS)
DEGREE IN TAXATION

BY

PETER CRAWFORD
STUDENT NO. CRWPET005
APRIL 1996



I certify that the report is my own work and all references used, are
accurately recorded.



1.SYNOPSIS

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:

91. A liability is recognised in the balance sheet when it is probable
that an outflow of resources embodying economic benefits will
result from the settlement of a present obligation and the amount
at which the settlement will take place can be measured reliably...

Recognition of expenses:

94. Expenses are recognised in the income statement when a decrease in
future economic benefits related to a decrease in an asset or
an increase of a liability has arisen that can be measured
reliably. This means in effect that recognition of expenses
occurs simultaneously with the recognition of an increase
or a decrease in assets

95. Expenses are recognised in the income statement on the basis
of a direct association between the costs incurred and the and the
earning of specific items of income. This process, commonly
referred to as the matching of costs with revenues, involves the
simultaneous or combined recognition of revenues and expenses that
result directly and jointly from the same transaction or other
events;

The fisc takes little notice of these rules when it comes to the recognition of
expenditure for the purposes of taxation. It is the part of these rules that
govern the general deduction provision that this report will examine.

Section 11(a) of the South African Income Tax Act No. 58 of 1962 (as amended)
reads as follows:

11. General deductions allowed in the determination of taxable income.-
For the purpose of determining the taxable income derived by any
person from the carrying on of any trade within the Republic, there
shall be allowed as deductions from the income of such person so
derived-

(a) expenditure and losses actually incurred in the Republic in the
production of the income, provided such expenditure and losses
are not of a capital nature.

The section defines the conditions that must be met for expenditure and losses
to be allowed as deductions from income. The expenditure or losses must have
been: Actu

ssme

nt
In the Republic of South Africa.
In the production of the income.
Such expenditure or losses must not be of a capital nature.

The section has to 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 recognised, 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 be able to better manage and control
its impact on the recognition of expenditure and losses. It will also explore
some of the grey areas that can and have caused the taxpayer and the fisc
considerable problems in the past. In concluding, some of the recent legislative
changes will de discussed and considered.

2. ACTUALLY INCURRED IN THE CONTEXT OF SECTION 11(a).

Section 11(a) of the South African Income Tax Act No. 58 of 1962(as amended),
reads as follows:

11. General deductions allowed in determination of taxable income.-
For the purpose of determining the taxable income derived
by any person from the carrying on of any trade within the
Republic, there shall be allowed as deductions from the
income of such person so derived-

(a) expenditure and losses actually incurred in the Republic in the
production of the income, provided that such expenditure and
losses are not of a capital