An Analysis of The Term Actually Incurred In Section 11(a) of Income Tax Action
STUDENT NO. CRWPET005
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
I certify that the report is my own work and all references used, are
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
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
(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
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 nature.
Section 11(a) is broadly referred to as the general deduction provision. It is
intended to cover the requirements for expenditure and losses to be deductible
in the determination of taxable income. Whilst the section is comprehensive as
it stands, there is a further critical requirement that the expenditure and
losses have been incurred during the year of assessment. This is not expressly
stated in the section, but it is considered to be implicit that expenditure is
only deductible for tax purposes, in the year in which it is incurred.
Significant important case law exists to support this contention. Thus, should
expenditure, usually deductible under s11(a), not be claimed as a deduction in
the year in which it is incurred, it may not be claimed in any other year,
unless the Act provides otherwise.
The recognition or deductibility of expenditure, provided all the other
requirements are met, is triggered by incurral. This report will focus on three
main issues surrounding incurral:
a. Was expenditure actually incurred? To establish this, one needs to
understand and define
exactly what constitutes actual incurral.
b. When did incurral take place? This will lead to understanding exactly
when the action or
actions which triggered incurral, took place. The timing of incurral will
determine the year of
assessment in which the expenditure or loss may be deductible in the
determination of taxable
In the Caltex Oil case Botha J.A. made the point that income tax is
assessed on an annual
basis , this lends support to the contention that expenditure incurred in a
particular year of
assessment is only deductible in that same year. The determination of the
year in which the
expenditure or loss is actually incurred, brings more problems to be
c. There is the problem of expenditure in respect of which the obligation
to pay is, or during
the year, becomes, unconditional, but which cannot be quantified until
after the termination of
the year of assessment.
This again leads to a plethora of problems to resolve. The second year
problem being but only
All the issues give rise to thorny problems. There are many more issues. The
courts and the legislature have battled. Some of the problems encountered have
been raised by the two most recent Commissions of Inquiry such that legislation
has recently been introduced to resolve them in the future. This will also be
discussed and considered.
The primary objective of this report is to try to help to better understand this
fundamentally critical area of the tax law.
Planning to avoid future problems is easier then dealing with a problem
after it has arisen, because history cannot be changed except in exceptional
circumstances To be able to plan so that the occurrence of incurral can be
planned rather then simply to be in the lap of the Gods. This is infinitely
better then defending past actions. It is both cheaper and the outcome much more
3. WHY IS "ACTUALLY INCURRED" SUCH A CRITICAL PROVISION:
3.1 What does it mean to be actually incurred .
In interpreting a fiscal statute,
It is important to distinguish between the presumptions of statutory
interpretation and the
rules or canons of construction. The presumptions have obligatory force,
being legal rules
derived from the common law. They are intrinsic to the principle of
legality because they
qualify parliament s legislative enactments and exist side by side
provisions of all statutes. The rules or canons of construction, on the
other hand, have no
status as legal rules and are merely conceptual models applied(or not
applied as the case may
be) by judges grappling with the meaning of particular legislative
The traditional approach to the interpretation of statutes, often
referred to as the
Cardinal rule, holds that the literal meaning of the wording of a
provision must be
ascertained by the use of ordinary grammatical rules. If the meaning of
the words is clear,
then this meaning represents the intention of Parliament, the object of
interpretation always being to stamp a particular meaning with the
Legislature s impramatur
by means of the fiction of parliamentary intent.
Considerations of equity, hardship, or social policy are irrelevant once
of Parliament is unambiguously established. .
In Partington v Attorney General, Lord Cairns stated that
if a person sought to be taxed comes within the letter of the
law, he must be taxed, however great the hardship may appear
to the judicial mind to be. In other words, if there may be an
equitable construction, certainly such a construction is not
admissible in a taxing statute.
In Cape Brandy Syndicate vs IRC Rowlatt J.  said:
In a taxing Act one has to look merely at what is clearly
said. There is no room for any intendment. There is no
equity about a tax. There is no presumption as to tax.
Nothing is to be read in, nothing is to be implied. One can
only look fairly at the language used.
Given some of the rules of interpretation above, it must be apparent that great
care must be taken when trying to establish the meaning of fiscal statutes. The
end result does not have to be equitable or reasonable. It is therefore
critically important to understand the law so that the taxpayer is able at the
outset to properly plan his affairs so as to achieve tax efficiency, while at
all times keeping within the law. In IRC v Duke of Westminster Lord Tomlin said
at 19 TLR 472,
Every man is entitled, if he can, to order his affairs so
that the tax attaching under the appropriate Acts is less
than it otherwise would be .
To have been actually incurred , means that an unconditional legal liability to
pay now or at some other time has arisen. Payment does not have to have been
effected for incurral to have occurred. Once the events that constitute incurral
have taken place, the expenditure or loss has been actually incurred , and the
expense or loss will be recognised in the determination of taxable income, given
the assumption that all other requirements have been met. Thus incurral can be
seen to be that which triggers recognition.
GAAP lays down very clearly that:
Recognition of liabilities 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.
Thus, probability can precipitate recognition in the financial statements. This
is then brought to account by raising provisions to cater for anticipated
probable expenditure. The Act very clearly in Section 11(a), requires actual
incurral, and as if that were not enough, Section 23(e)spells out the negative
test loud and clear:
23. Deductions not allowed in the determination of taxable
income.- No deductions shall in any case be made in respect
of any of the following matters, namely- (e) income
carried to any reserve fund or capitalised in any way.
The Tax Act requires that unconditional legal liability exists before an expense
has been incurred. Probability however likely, does not meet the bill. An
expense or loss which is contingent upon the happening of an uncertain future
event is not actually incurred. The liability therefor is not absolute and
The Members Handbook of the Institute of Chartered Accountants also spells out
The amount of a contingent loss should be provided for by a charge
in the income statement if:
it is probable that future events will confirm that, after taking
into account any related probable recovery, the value of an asset
has been impaired or a liability has been incurred at the balance
sheet date, and a reasonable estimate of the amount of the
resulting loss can be made.
Again, here is the contrast between a contingent liability and one which, had
been encountered, run into or fallen upon.
In the Australian case, FCT vs James Flood (Pty) Ltd, the taxpayer sought to
deduct in the year of income in question, amounts in respect of annual leave
which were due for payment to employees only in the following fiscal year. In
terms of the applicable industrial agreement these amounts were only payable to
employees at a future date , and under a variety of circumstances an employee
who did not serve his full period might not become entitled to anything. The
company sought to deduct a proportion , equivalent to the period of service in
the year of assessment, of the amount which would become payable if the
employee in the course of the next year, completed the required 12 months
service. The court accepted that a liability can be incurred although it may
not be due and payable. In respect of the leave payment due to employees in the
following fiscal orchard held that there was no debitum in praesenti solvendum
in futuro (a debt or obligation complete when contracted, but of which
performance cannot be required until some future period), because their period
of service had not yet qualified them for annual leave. To qualify for deduction,
the liability must have been incurred in the sense that it had been
encountered, run into or fallen upon . The taxpayer must have completely
subjected himself to the expenditure although it need not be an immediate
obligation enforceable at law and it need not be indefeasible. The appeal by the
Commissioner was allowed.
In Caltex Oil (SA) Ltd vs SIR ,the appellant company obtained supplies of crude
oil and other products from Caltex (UK) Ltd and Caltex Services Ltd, both
located overseas. Invoices would be rendered to the appellant in British
Sterling, immediately the goods were ...