Is Occupational Rental paid allowable as a deduction against Rental Income? Taxpayer purchased flat for investment purposes In Dec 2011. He declared Rental Income Received for Dec 2011, Jan, 2012 and Feb 2012. As the bond was registered in April 2012.


Important:

This answer is based on tax law for the year ending 28 February 2012.

Answer:

As indicated the service offered is limited to guidance only.  We can therefore not express an opinion on whether or not the occupational interest is an expense incurred in the production of income derived from the carrying on of a trade.  

According to Judge Nienaber (in Thompson v Scholtz) “occupational interest is the return which the seller of immovable property earns by permitting his purchaser, pending payment, to occupy the property sold …” and also that “the occupational interest in turn is related not to the use of the property sold but to the purchase price, which is again related to the value of the property and not to its temporary use.”  

SARS didn’t disallow the deduction on that basis (i.e. that it is capital in nature).  You indicated that the subrule (1) (of rule 9) basis for the disallowance of the objection is that the expenditure doesn’t meet the requirements of section 11(a) read with section 23(g).   It doesn’t appear that SARS applied section 11A in this regard.  

The taxpayer will, in the notice of appeal, specify in detail in respect of which grounds of the objection referred to in rule 7 the taxpayer is appealing or any new ground on which the taxpayer is appealing – see rule 10(2).  In essence then the taxpayer will have to, in order to meet the burden of proof that expenditure, meet the requirements of section 11(a) and are not prohibited by section 23, provide grounds for that view. The most important requirement is that a trade is carried on.  Section 23(g) specifically elaborates on that, by adding that the expense can only be deducted to the extent that it was laid out or expended for purposes of trade. This assumes that the taxpayer will not be relying on a new ground of appeal.

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