Security expenditure

2008-04-02 00:00

In its life cycle, an enterprise will incur expenses necessary for the effective running of the business’s operations. With the current crime statistics in South Africa, it is not surprising that security expenditure is one of the expenses that have increased substantially. It is for this reason that the SA Revenue Service (SARS) have issued a Draft Interpretation Note (DIN), which is currently being circulated.

The DIN will provide guidance on the deductibility of security expenditure. Essentially, security expenditure will fall into one of the following categories:

o Expenditure of a private or domestic nature.

o Expenditure incurred in protecting a taxpayer’s business.

o A contribution to a crime-prevention project.

For security expenses to be deductible for income tax purposes, the requirements of the general deduction formula {section 11(a)} read with section 23 (g) (prohibition on deduction of domestic or private expenses) must be satisfied. One also needs to consider the provisions of section 23 (g) (prohibition on deduction of non-trade expenditure). In the event of the security expenditure relating to the protection of the taxpayer’s business, the amount will be capital in nature and will not be deductible in terms of the general deduction formula. The provisions of section 11(e) (wear and tear) will then need to be considered.

In terms of the capital gains legislation, certain security expenditure may qualify as part of the base cost; such items include the installation of an electric fence, or a burglar alarm integrated into the structure of a building. Furthermore, movable assets used for non-trade purposes (for example, private vehicle tracking or alarm systems) are personal use assets and any capital gains or losses on the disposal of such items must be disregarded. On the other hand, recurring expenditure is likely to be of a revenue nature and will be deductible in terms of section 11(a), provided that it does not create an enduring benefit.

It appears that the DIN has been prepared primarily to address the expenditure relating to crime prevention initiatives, as well as highlighting the various sections of the Income Tax Act that relate to deductibility and prohibition of the security expenses. Such contributions may take the form of one of the following:

o A non-deductible donation.

o A donation that is deductible in terms of section 18A.

o Advertising or sponsorship expenditure deductible in terms of section 11(a).

With regard to the donations, the normal rules in terms of section 18A will apply. Other contributions may take the form of:

o Cash contributions — the deduction will be limited to so much of the contributions as the taxpayer can prove produced commercial value for the business through exposure of the name or products.

o Trading stock contributions — these will need to comply with the provisions of the general deduction formula read with section 22(8) of the Income Tax Act No. 58 of 1962, as amended.

o Provision of services — the deduction will be limited to so much of the actual cost of providing the services as the taxpayer can prove produced commercial value for the business through exposure of the name or services in any anti-crime campaign.

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