Daluxolo Mxenge (also known as Dali), a South African resident, is the owner of four luxury guesthouses in Bisho, Mthatha, Tsitsikamma (Eastern Cape) and Durban (Kwa-Zulu Natal). He has no experience with regards to taxation. As a family friend and also knowing that you are excelling in taxation at the University of the Free State, he recently approached you for guidance on whether the following expenses are deductible in terms of the general deduction formula:
1. During the 2021 year of assessment, Dali purchased and paid for R35 000 worth of cookies and hot drink sachets. These cookies and hot drink sachets are to be used exclusively for business purposes as the guests consume them during their stay.
2. To see if people make alterations to their homes, the eThekwini Metropolitan Municipality takes aerial photographs of their suburbs every four years. Also, the Municipality assigns building inspectors to monitor developments on the ground. Dali was caught with unapproved alterations at the Durban guesthouse. When officials at eThekwini Metropolitan Municipality became aware of this, they imposed a once-off penalty of R3 150 on his rates and taxes in January 2021. Unapproved alternations to buildings constitute unlawful activities in terms of the relevant municipal legislation (non-compliance with the National Building Regulations and Building Standards Act).
3. In January 2020, Dali appointed a pest control company to exterminate termites and ants at the Tsitsikama guesthouse for R2 100. He made the total cash payment immediately after the fumigation was
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completed. Because Dali does not have tax knowledge, he did not claim this expense during the 2020 year of assessment.
4. In June 2020, Dali purchased two new couches for the Tsitsikamma guesthouse for the reception area to the value of R8 999 (in total).

REQUIRED
Determine (using the layout and structure as indicated below) whether the expenses and losses above are deductible for Dali's 2021 year of assessment in terms of the general deduction formula and the prohibition sections in terms of section 23 of the Income Tax Act. Address only the general deduction formula component that is considered to be an issue (in other words, don't write out the entire general deduction formula); if applicable, refer to at least one relevant court case when appropriate.
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Layout and presentation – use the structure below to answers each part of this question (there is no need for detailed responses):
Example:
Issue: Actually incurred
Court case: N/A (if the court case is applicable, you should mention the case)
Principle: N/A (if the court case is applicable, you should mention the principle of the court case)
s23 Prohibited deduction: s23(m) prohibit the deduction that relates to
employment.
Conclusion: The R100 of the home telephone cost is not deductible for tax.

Answer rating: 100% (QA)

Issue Deductibility of R35 000 spent on cookies and hot drink sachets Court case NA Principle In order for an expense to be deductible it must be incu... View the full answer