, PLEASE USE THIS DOCUMENT AS A GUIDE ONLY
QUESTION 1
A) Discuss whether the expenditure/losses above are deductible by Dzindu Properties (Pty) Ltd
in terms of the general deduction formula (section 11(a) read with section 23) for the year of
assessment ending 30 March 2026.
To determine whether the loss of the houses and the subsequent insurance payout are deductible for
Dzindu Properties (Pty) Ltd (Dzindu), we must apply the General Deduction Formula as set out in
Section 11(a), read with the negative prohibitions of Section 23 of the Income Tax Act.
1. Analysis of the Loss (Development Costs)
For an expenditure or loss to be deductible under Section 11(a), it must meet specific criteria:
Expenditure or Loss: The destruction of the houses constitutes a "loss" of R2 700 000.
Actually Incurred: The loss is actual and not national; the houses were physically destroyed in
November 2025.
During the Year of Assessment: The loss occurred in November 2025, which falls within the
financial year ending 30 March 2026.
In the Production of Income: Dzindu’s trade is building and selling residential houses. These
houses represented trading stock. Since the cost was incurred to create assets intended for sale
(income generation), the loss is linked to the production of income.
Not of a Capital Nature: Because the houses are trading stock (floating capital) and not fixed
assets (capital nature), the loss is revenue in nature.
Conclusion on Section 11(a): The R2 700 000 loss is generally deductible under Section 11(a)
because it relates to the loss of trading stock in the course of trade.
2. Application of Section 23 (Negative Prohibitions)
Section 23(c) specifically prohibits the deduction of any loss or expense to the extent that it is
recovered under a contract of insurance or indemnity.
Insurance Payout: Dzindu received R2 000 000 from their insurance company on 20 January
2026.
Impact: This means that although a loss of R2 700 000 was incurred, R2 000 000 of that loss
has been "recouped" or "compensated."
Section 23(g): Furthermore, the expense must be laid out for the purposes of trade. As this was
trading stock, it satisfies this requirement.
QUESTION 1
A) Discuss whether the expenditure/losses above are deductible by Dzindu Properties (Pty) Ltd
in terms of the general deduction formula (section 11(a) read with section 23) for the year of
assessment ending 30 March 2026.
To determine whether the loss of the houses and the subsequent insurance payout are deductible for
Dzindu Properties (Pty) Ltd (Dzindu), we must apply the General Deduction Formula as set out in
Section 11(a), read with the negative prohibitions of Section 23 of the Income Tax Act.
1. Analysis of the Loss (Development Costs)
For an expenditure or loss to be deductible under Section 11(a), it must meet specific criteria:
Expenditure or Loss: The destruction of the houses constitutes a "loss" of R2 700 000.
Actually Incurred: The loss is actual and not national; the houses were physically destroyed in
November 2025.
During the Year of Assessment: The loss occurred in November 2025, which falls within the
financial year ending 30 March 2026.
In the Production of Income: Dzindu’s trade is building and selling residential houses. These
houses represented trading stock. Since the cost was incurred to create assets intended for sale
(income generation), the loss is linked to the production of income.
Not of a Capital Nature: Because the houses are trading stock (floating capital) and not fixed
assets (capital nature), the loss is revenue in nature.
Conclusion on Section 11(a): The R2 700 000 loss is generally deductible under Section 11(a)
because it relates to the loss of trading stock in the course of trade.
2. Application of Section 23 (Negative Prohibitions)
Section 23(c) specifically prohibits the deduction of any loss or expense to the extent that it is
recovered under a contract of insurance or indemnity.
Insurance Payout: Dzindu received R2 000 000 from their insurance company on 20 January
2026.
Impact: This means that although a loss of R2 700 000 was incurred, R2 000 000 of that loss
has been "recouped" or "compensated."
Section 23(g): Furthermore, the expense must be laid out for the purposes of trade. As this was
trading stock, it satisfies this requirement.
