The deductibility for taxation purposes of up front expenditure aid by means of a promissory note
The vexed iss11e _,of the timing of expenditure allowable for income tax purposes is one which has plagued both Commissioners for Inland Revenue and taxpayers throughout the world. The purpose of this report is to analyse the deductibility of up-front expenditure paid by means of a promissory note for income tax purposes. In order to achieve this end, it is necessary to examine briefly the relevant portions of the law on Negotiable Instruments. This law is fairly complex but a cursory overview will suffice in order to bring out the necessary principles. Thereafter, a review of the decided case law on the deductibility of expenditure is done so as to extract the relevant principles applicable to the deductibility of expenditure in general. Specific practical examples are covered, firstly dealing with pure maintenance expenditure paid by means of a promissory note. Then the same example is extended to include a finance charge element to compensate the payee of the promissory note for the time value of money to the due date of the promissory note. In both examples the decided case law principles are applied in examining the deductibility of the relevant expenditure. The effect of the negotiation (discounting) of the promissory note by the payee to an independent third party is investigated in order to ascertain whether this action impacts on the deductibility of the expenditure. The taxation implications of the payee of a promissory note giving due regard to current legislation is also covered. Finally, it is hoped that the salient principles will emerge from the material in this report which can assist both the tax gatherer and the taxpayer in determining whether up-front expenditure is deductible.
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