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n SA Mercantile Law Journal = SA Tydskrif vir Handelsreg - The origins and development of the general deduction formula in income tax legislation of the Cape Colony
In 2014 comprehensive income tax legislation is a hundred years old in South Africa. In light of this milestone, the origins of one of the important cornerstones of this legislation, the general deduction formula, is reflected upon here.
The general deduction formula plays a prominent role in the calculation of a taxpayer's liability for income tax. Currently, this calculation requires from the taxpayer to deduct certain expenditure and losses from his 'income' (which refers to his gross receipts or accruals, from which certain amounts are exempt). However, only those expenses and losses provided for in the act, and not under, for example, accounting principles, may be so deducted. Some of these deductible expenses and losses are specifically listed in the act itself, whereas others, although not specifically listed, are deductible if they meet a set of general requirements set out in ss 11(a) and 23(g). These sections are collectively known as 'the general deduction formula', with s 11(a) often being referred to as the 'positive leg' (since it sets out the criteria which, if met, will allow for a deduction) and s 23(g) as the 'negative leg' (since it places prohibitions against the deduction of certain expenses) of the formula.
This article considers the origins of the wording of the general deduction formula as incorporated in legislation promulgated by the Colony of the Cape of Good Hope ('the Cape') before the Union of South Africa was formed, as well as the role that case law played in the understanding of the formula during these early years. This Cape legislation would later form the basis of the Union's first comprehensive income tax act, promulgated in 1914 ('the 1914 Act') and, since all subsequent South African income tax acts were substantially based on the preceding one, the general deduction formula found in the current income tax legislation of South Africa can be traced back to the Cape legislation. Understanding the heritage of the formula in the Cape legislation thus also gives insight into the current formula.
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