n Business Tax and Company Law Quarterly - Pre-production problems : is section 11A of the Income Tax Act a solution?

Volume 5, Issue 1
  • ISSN : 2219-1585


Expenditure incurred prior to the commissioning of an asset has been held by the courts to be of a capital nature and incurred neither in the production of income nor for purposes of trade.

The introduction of section 11(bA) was a partial solution to that problem in relation to interest expenditure. The later introduction of section 11A dealt with the related issue of expenditure incurred before the commencement of trade. However, section 11(bA) was deleted with effect from January 2012 and the question arises whether section 11A on its own, or in conjunction with section 24J (for interest expenditure) provides any deduction for so-called 'pre-production expenditure' incurred in respect of new assets in an existing trade. An analysis of the terms of both sections leads to the conclusion that a significant risk exists that such expenses are not deductible at all.
However, true 'pre-trade' expenditure is generally deductible when trade commences. Knowledge of when that can be said to occur, is essential.

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