Question

QUESTION THREE Mark Abrahams is a partner at a law firm. He is 40 years old and unmarried. He has incurred a number of expenses during the 2019 year of assessment. He would like to know if they are deductible in the determination of his taxable income. These expenses are as follows: • A local newspaper published the names of what was believed to be a list of members of a club that was under examination by the police as possibly being a brothel. Much to his shock, Mark's name appeared on the list. He was not a member of the club. He had never been a member of the club. He had, however, done certain legal work for the owner of the club. The list was the mailing list of the club, and not the list of its members. In an attempt to maintain his good reputation in town, he had a local newspaper publish a 'disclaimer' that he had prepared. A large and nice photograph of Mark appeared in the newspaper along with his disclaimer'. The cost of this notice that was incurred by him was R2 500 In keeping with this image Mark prefers to drive a sports car. On the odd occasion he needs to call on clients at their homes or at their places of employment. As stated above, he also completes a certain amount of work in his own home. He has kept fairly accurate records of his 'business' trips and these records reveal that he uses his car 40% of the time for business travel. The total costs of running the car, including wear and tear on the car, are R54 000 for the 2019 year of assessment. He has admitted that he could have used a cheaper car that would have been adequate for his business travel. He estimates that by preferring to drive a sports car his costs of running the car are increased by R28 000 each year. • On 1 July 2019 Mark purchased for himself a top of the range 'notebook' computer (a small and portable computer) at a cash cost of R16 200. He takes the 'notebook' computer with him whenever he consults with clients out of the office. He believes that his clients are most impressed when he is able to access and tailor agreements and other standard documents during their consultation. He is also fanatical about computer games and because of the size of the 'notebook' computer he is able to play these games on flights and even in bed. He has estimated that he uses the 'notebook computer 20% of the time for recreational purposes (including his computer games). The commissioner has approved a three-year write-off period for the 'notebook' computer under Interpretation Note 47 and General Binding Rule 7. Other costs incurred on the 'notebook' computer during the 2019 year of assessment are as follows: - Repairs and maintenance of R1 850. - Compact disks used solely for storing work documents and agreements of R2 250. - Compact disks of computer games of R1 420. Joy Rose, the tea lady, was an employee of the firm of attorneys that Mark is a partner of for many years. She retired at the age of 50 years during the 2019 year of assessment. Under a binding agreement between her and the firm of attorneys, it agreed to award R12 000 a year to her for the maintenance of her two minor children, for the next 10 years. Mark supported this agreement because Joy had brought him many cups of tea over the years when she had been employed. He greatly appreciated being served tea by her. The first award of R12 000 was incurred by the firm of attorneys in the 2019 year of assessment. John Wick, a newly qualified attorney, is Mark's personal assistant. In this role, John has worked with Mark on some of his biggest cases. John has therefore had access to confidential client information. John has indicated that he intends to open his own practice. Mark is concerned that John will use the confidential information he has, to 'steal' some of his clients. As a result, Mark in his personal capacity, paid John R120 000, on 1 July 2018, in return for John agreeing not to open his own practice for a period of four years, commencing on 1 March 2018. • On 1 March 2018 Mark purchased a plot of land for R200 000. He paid cash for it. He then erected on it a suite of offices (a commercial building). It cost R3 300 000 to erect. It was completed on 31 December 2018. As from 1 January 2019 it was let at a market-related rental of R22 500 a month to the firm of attorneys that Mark is a partner of. To help finance its cost of erection, Mark had borrowed R3 000 000 at 13%. Interest incurred on this loan for the 10 month period from 1 March 2018 to 31 December 2018 was R325 000. Interest incurred on this loan for the two-month period from 1 January 2019 to 28 February 2018 was R65 000. The only other expense incurred by him on this rent-producing property investment was rates of R60 000 for the 2019 year of assessment. Required: Discuss whether Mark will be entitled to a deduction, or a capital allowance, in the determination of his taxable income for the expenses he incurred as detailed above.

Answer 1

1. Amount incurred by mark from defaulting his reputation will be considered as business expenses. As if he wouldn't have done it would have affected his business. Therefore the amount of 2500 shall by allowed as business expense.

2. Mark uses his car for both personal and business purpose. As mark uses the car at 40% for business purpose. Thefore any amount incurred for maintenace of the car, 40% of such expenses shall be allowed as it relates to business of Mark. Therefore total cost incurred by him to maintaining his car is 54,000 + 28,000 = 82,000. So 40% of 82,000 which is 32,400 shall be allowed as deduction.

3. Mark bought a notebook computer which he purely uses for his business purpose. Therefore the same shall be recorded as asset in the book of mark and mark shall claim depreciation on the asset as per the prescribed rates mentioned in the income tax act.

The maintenance expenses incurred by mark shall be allowed in full as deductible expenses as mark uses the computer notebook for his business purpose. Therefore the total expenses incurred by mark is 1,850 + 2,250 + 1,420 = 5,520 shall be allowed in full as busines expenditure.

4. The amount paid to joy rose shall be allowed as business expenditure as the amount was paid under a business agreement for rendering her services. Therefore the same shall be allowed as business expenditure.

5. The amount paid by mark to john wick is in the nature of business. expenditure. The amount paid by mark is to protect his business client. The fee paid by mark to john can be more described as towards extinguishing john to use the personal client data of Mark. Therefore the same shall be considered as business expenditure and shall be allowed as an allowable expense as per the income tax act. Therefore payment of 1,20,000 to john is an allowable expense.

6. From income tax point of view land is not a depreciable asset and therefore no depreciation shall be charged on land.

On building the depreciation shall be charged as per the rates prescribed in income tax act and the same shall be allowed as an deductible expenditure.

The interest expenditure incurred on the loan shall also be allowed as an deductible expenditure as the loan amount is utilised for the purpose of business, therefore interest paid on the same shall be allowed as interest expenditure.

From accounting point of view, the amount of interest paid before the office building came into use shall be capitalised and the same shall be added to the cost of the building.

Therefore the carrying amount of building in the books of accounts shall not match with the carrying amount of building as per income tax act.