New Age Elevators (Pty) Limited is a South African company specialising in the sales, installation, repairs, servicing and maintenance of elevators (lifts) in South Africa. Due to the inherent risk of injury in this industry the company has the following policies: • It is compulsory for all New Age Elevator's employees to attend and pass a course on "Safety precautions in lift installations, repairs and maintenance", and • In the case of injury or death while working, a compensation award equivalent to 3 months' salary, provided that all the necessary safety precautions are adhered to. In April 2019, Tom Light an experienced technician, while working on the top of the lift car in a routine service assignment, was struck on his head by falling objects. Although, his head was protected with a helmet, he lost his balance and fell off the lift car. He later died in hospital. The legally required investigation into the accident revealed that all the necessary safety precautions were adhered to. In keeping with the company's policy, New Age Elevators awarded Tom Light's family a lump sum in the amount of R180 000 on 31 May 2019. This was the first time the company made such an award. You are required to 5.1 Identify and describe the components of the general deduction formula. (5 Marks) 5.2 Discuss, with reference to case law, whether the compensation award in the amount of R180 000 is deductible under the general deduction formula. ( 9 Marks)

As per given details please refer below answer :-

5.1 :-

The general deduction formula allows expenditure and losses to be deducted in the determination of the taxable income derived from the carrying on of a trade. It means Taxpayer can deduct from his assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or. (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. General deductions can only be claimed during the year of assessment in which they are incurred.

The essential elements of the general deduction formula may be summarized as follows:

• Carrying on any trade

• Deducted from the income

• Expenditure and losses

• Actually incurred

• In the production of income

• Not of a capital nature

• To the extent not laid out for the purposes of trade.

All these requirements must be met for an expense or loss to be deductible. Failure to meet any of the requirements will result in a disallowance of the expenditure for taxation purposes.

The seemingly complex provisions of the general deduction formula are used to prevent abuse by taxpayers by making sure only that expenditure and only those losses actually incurred in connection with the taxpayer’s business should be allowed as deductions from his/her taxable income.

5.2 :-

As per given details company has given the compensation to Tom's family. Let's apply above essential elements criteria for Tom's Case

• Carrying on any trade :- Company doing active business in South Africa, hence this condition is met the requirement.

• Deducted from the income :- As compensation is paid hence it need to deduct from income , hence this condition is met the requirement.

• Expenditure and losses :- It is treated as expenditure as benefit given to employees family, hence this condition is met the requirement.

• Actually incurred :- It is actually incurred, hence this condition is met the requirement.

• In the production of income :- Tom's death happen while doing work related to company's income, hence this condition is met the requirement.

• Not of a capital nature :- It is compensation given so it will not in capital nature, hence this condition is met the requirement.

• To the extent not laid out for the purposes of trade :- maintaining lift is routing activity for company regards to earn revenue. So it is purpose of trade, hence this condition is met the requirement.

As above all conditions are met the requirement for general deductions hence company can take this deduction as general deduction in 2019.

Hope given asnwer will solve your query.