Abstract
M. Comm.
The purpose of the study is to identify some guidelines to determine if any legal expenses — as defined in section 11(c) of the Income Tax Act, No 58 of 1962 ("the Act") actually incurred in respect of any claim, dispute or action at law arising in the course of or by any reason of the ordinary operations of a taxpayer in the carrying on of his trade —, are deductible. The admissibility of legal fees as a deduction depends primarily upon whether, in applying the provisions of section 11(a), the taxpayer is able to establish that such expenditure had been incurred in the production of income and was not of a
capital nature. Furthermore, in terms of paragraph (c) of section 11, a taxpayer is entitled to deduct from his income any legal expenses, other than those of a capital nature, which he incurs and which arise in the course or by reason of the ordinary operations undertaken by him in the carrying on of his trade.The deduction is, however, limited to so much thereof as it: Is not of capital nature; Is not incurred in respect of any claim made against the taxpayer for the payment of damages or compensation if by reason of the
nature of the claim or the circumstances, any payment which is or might be made in satisfaction or settlement of the claim does not or would not rank for deduction under section 11(a) or (b) of the Act; Is not incurred in respect of any claim made by the taxpayer for the payment to him of any amount which does not or would not
constitute income of the taxpayer; and is not incurred in respect of any dispute or action at law relating to any such claim as in referred to in (ii) and (iii) above. The admissibility of legal expenses as a deduction depends primarily upon whether, in applying the provisions of section 11(a), the taxpayer is able to establish that such expenditure had been incurred in the production of income and was not of a capital nature. Furthermore, to establish, in terms of paragraph (c) of section 11, whether a taxpayer is entitled to deduct from
income any legal expenses, other than those of a capital nature, which he incurs and which arise in the course or by reason of the ordinary operations undertaken by him in the carrying on of his trade.