The taxpayer therefore engaged the services of legal counsel in order to protect its and their interests. The scope of the enquiry was so wide as to make it likely that the taxpayer, and perhaps some of its employees, might be incriminated by the evidence. The Department of Manpower launched an investigation, followed by a magisterial enquiry. In 1992 an employee was found to be suffering from mercury vapour poisoning, while another two employees had died from the same condition. The taxpayer operated a factory manufacturing mercury products. The second case, C:SARS v Thor Chemicals SA (Pty) Ltd, 62 SATC 3 08, dealt with legal expenses incurred by the taxpayer in defending itself against accusations of negligence in carrying on its operations. The court therefore analysed the legal activities into component parts and then considered each component in light of section 11(c) and made its decision accordingly. This was found not to relate to preserving the copyright or any other asset and was thus revenue in nature. This was found to relate to the new work and was thus capital in nature Īn argument as to whether or not an agreement by the taxpayer to withdraw a related work was a sufficient defence against the interdict sought. The taxpayer opposing an interdict sought by the applicant to prohibit the taxpayer from producing or publishing the work. This expense was related to its income earning operations and was thus revenue in nature The taxpayer opposing a claim of unfair competition, in effect that its advertising for the new work was misleading. In so doing, the taxpayer was seeking to protect its market, which was part of its structure and capital in nature The taxpayer preserving its copyright in respect of a new work it had published, by opposing the allegation that this work had infringed the copyright of the applicant. The court then divided the action into four components: In addition, the wording of the proviso to section 11(c)(i) opened the way for an apportionment of expense by the court: 'so much thereof as is not of a capital nature'.

The court could also enquire whether the expenditure had brought an asset or enduring benefit into existence if so, this would indicate a capital nature.

The court noted that the crisp question was whether the expense related to the income earning structure (and was therefore capital in nature) or to the income earning operations (which would mean that they were in the nature of revenue). The costs borne by the taxpayer were the subject of the income tax case, as SARS was of the opinion that they were capital in nature. The unsuccessful applicant was granted leave to appeal, but the parties finally settled the matter. Judgment with costs had gone in favour of the taxpayer, subject to certain costs for which the taxpayer was responsible. In ITC 1677, 62 SATC 276, the tax payer, a publishing company, had incurred legal costs in the High Court (as it is now called) in resisting a claim for infringement of copyright. If it involves loss of earnings, for example, the legal costs will be deductible. If the claim is about damage to a capital asset like goodwill, the legal costs will not be deductible. Simply put, legal expenses take their tax nature from that of the underlying claim. The deductibility of expenses is limited to those that are: not capital in nature not incurred in respect of a claim against the taxpayer where the underlying amount would not be deductible by the taxpayer, or where the proceeds would not be taxable. Section 11(c) of the Income Tax Act provides for the deduction of legal expenses actually incurred during the year in the course of or by reason of the ordinary operations undertaken by the taxpayer in carrying on his trade. One case involved copyright, and the other dealt with alleged negligence.

Two tax cases decided recently, involving the deductibility or otherwise of legal expenses, illustrate the principles applied in this area of tax law and the fine points on which they sometimes turn.

Incurred expenses