ITC JUNE 2022 SUGGESTED SOLUTION PAPER 1 PART II ITC June 2022 3 © SAICA 2022

ITC JUNE 2022 SUGGESTED SOLUTION

PAPER 1 PART II

ITC June 2022 3 © SAICA 2022

Part (h) Discuss the deductibility of the tenant installation allowance for Beeprop in terms of the general deduction formula.

Answer

Part (h): Deductibility of Tenant Installation Allowance (Beeprop to Callme)

Beeprop paid a R3.45 million tenant installation allowance to Callme to secure a 5-year office lease. The question is whether Beeprop can deduct this payment for tax purposes.

Conclusion: The tenant installation allowance is considered capital in nature and is NOT immediately deductible.

Reasons:

1. Trade: Beeprop is carrying on a "trade" (property letting), so this test is met.

2. Capital vs. Revenue: This is the key.

   • The allowance secures a long-term benefit (5-year lease) for Beeprop.

   • It's a proxy for capital improvements that Beeprop, as landlord, would normally make to enhance its property. These improvements add to the income-earning structure of Beeprop's property.

   • Therefore, it's not a day-to-day operating expense (revenue), but rather an expenditure for an enduring asset/benefit (capital).

Result: Beeprop cannot deduct the R3.45 million allowance in full this year.