APPORTIONMENT OF EXPENDITURE FOR INCOME TAX PURPOSES
01 Jul 2016
Practically, this becomes a difficult question where expenditure is incurred to earn both exempt and non-exempt income. Take a management fee paid to a broker for example. The underlying investments may comprise a combination of bonds and listed shares, therefore yielding both interest and dividends. While interest would be ‘income’ as defined, dividends are not. To what extent therefore is the management fee incurred in the production of income?
The Income Tax Act provides for expenditure such as the above to be apportioned when claimed as a deduction. However, it is not prescriptive as to the manner in which said apportionment is to be applied. In the above example, assume that the interest income amounts to R10,000 in the particular tax period, whilst dividend income amounts to R20,000. Many tax practitioners’ approach is to apportion expenditure in the ratio that the ‘income’ bears to the total amount of ‘gross income’ received: in the above example one third of the expenditure would be deductible on this basis (R10,000 / R30,000).
While the above approach may be appropriate in certain instances, the most appropriate basis for apportionment will depend on the facts at hand, including pertinently the nature of the fees, the nature of the underlying income, and the degree to which the fees are connected through causality to the income received (Commissioner for Inland Revenue v Nemojim (Pty) Ltd 1983 (4) SA 935 (A)). In CSARS v MTN Holdings (Pty) Ltd (966/12)  ZASCA 4 (7 March 2014), where the deductibility of audit fees were considered as applied to a holding/treasury company, the Supreme Court of Appeal considered an apportionment based on the above formula to be inappropriate. That is not to state that such an approach would always be inappropriate, but only that it was inappropriate based on the facts of the MTN case.
What should be gleaned from the above though is that various bases may exist upon which to apportion expenditure, only one of which potential bases is the above formula. One may consider the amount of time and effort that goes into the various revenue generating activities as a more appropriate basis for example. The ultimate question is what the quid pro quo of the expenditure is. Apportionment is therefore not merely one which should be reduced to an arithmetical exercise, but one which should be appropriate considering the relevant facts linked to both the income and expenditure in question.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)