In order to determine whether the legal fees paid by Gauteng Train (Pty) Ltd may be deducted from their income in the 2020 year of assessment, we must look at the general deduction formula as outlined in section 11(a) of the Income Tax Act, read with section 23(g).
Section 11(a) allows for the deduction of expenditure actually incurred in the production of income, provided that the expenditure is not of a capital nature. Section 23(g) specifically allows for the deduction of legal expenses incurred in the carrying on of any trade, provided that the expenses are not of a capital nature.
In the case of Mainstay Group (Pty) Ltd v Commissioner for Inland Revenue 1981 (3) SA 192 (A), the court held that legal expenses incurred in defending a claim that could potentially have a lasting impact on the taxpayer's trade or business, such as a claim for negligence resulting in death, are of a capital nature and therefore not deductible under section 11(a) read with section 23(g).
In the case of Commissioner for Inland Revenue v Grinaker Electronics 1986 (2) SA 622 (A), the court held that legal expenses incurred in defending a claim that is directly related to the taxpayer's trade or business, but does not have a lasting impact, may be deducted as they are not of a capital nature.
In the case of Gauteng Train (Pty) Ltd, the legal expenses incurred in opposing the compensation claim for the death of their driver could be seen as directly related to their trade or business of operating a train service in Gauteng. However, since the claim was for a significant amount and could potentially have had a lasting impact on the company, it could be argued that the legal expenses are of a capital nature and therefore not deductible.
Therefore, it is advisable for Gauteng Train (Pty) Ltd to carefully consider the specific circumstances of the legal expenses incurred in opposing the compensation claim and seek advice from a tax professional to determine whether or not the expenses are deductible in the 2020 year of assessment.
Question 2:
You are a lawyer that specialises in Taxation, and is currently employed at Gauteng
Train (Proprietary) Limited (“Gauteng Train”), a company that operates a train
service all over Gauteng, with a tax year that ends 28/29 February. In an
unfortunate accident at work, a driver (an employee of Gauteng Train) of one of the
trains was killed. The deceased’s widow sued Gauteng Train for compensation with
regards to her husband’s death, to the amount of R10 million. Gauteng Train
incurred legal costs to the amount. Gauteng Train incurred legal costs to the amount
of R500 000 in opposing the compensation claim and paid their lawyers on 31
October 2019 (2 days after the court delivered its decision). Gauteng Train
was successful in opposing the claim against them and were not required to settle
the claim of R10 million.
REQUIRED:
Explain to Gauteng Train (Pty) Ltd whether the legal fees paid may be deducted
from their income in terms of the general deduction formula (s11(a) read with section
23(g)) in the 2020 year of assessment. As part of your explanation, refer to relevant
case law (court cases) where applicable. (10 marks
1 answer
1 answer