Expenses of a capital nature – Deductibility

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Assignment paper 1

Module B

Question 3

 

 

Article 14 of the Income Tax Act prescribes the deductions that can be claimed in arriving at the amount of chargeable income. In sub article 1, the Act sets out a basic underlying principle to determine which expenses and outgoings can be claimed as a deduction.

 

i. Determine how this basic rule excludes expenses incurred pre-trading as well as expenses of a capital nature

ii. By way of exception, other provisions of article 14 as well as subsidiary legislation however provides for deductions to be claimed in respect both pre-trading expenses as well as expenses of a capital nature. Set out some examples of this including the relevant restrictions that would apply.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONTENTS

 

Introduction – Art.14 ITA & Art.26 ITA ………………………………………………………….. 1

Pre-trading expenses – Exclusion and deductibility ……………………………………… 2

Expenses of a capital nature – Exclusion ……………………….....………………………… 6

Expenses of a capital nature – Deductibility ……………………....………………………… 7

Conclusion ………………………………………………………………………………………………….

 


Introduction

 

Article 14 of the Income Tax Act is a vital piece of legislation, generally termed the “positive test”, its opposite, article 26 of the Income Tax Act, is generally known as the “negative test”.

Whilst the former sets out the general rule and includes a list of certain well-defined deductions allowed when ascertaining the chargeable income, the latter, in contrast, comprises a list of deductions that must not be allowed to any person.

It is worth noting that an expense is deductible solely when it satisfies both tests, the “positive test” and the “negative test”, hence the two tests are cumulative rather than be mutually exclusive and independent, they have a Yin and Yan relationship
[1]
.

 

In order for a deduction to be allowed it is not sufficient that the deduction does not fall within the prohibitions contained in art.11 (now art.26) but it must also qualify as a deduction in terms of art.10 (now art.14)”
[2]
.

 

The merit of article 14 and article 26 is that both articles, in conjunction, provide a pathway which facilitates the calculation of the chargeable income of a person, an “either in or out” approach that other legislations may not provide.

The advantage mentioned above is even more conspicuous if one juxtaposes the U.K. legislation dealing with deductibility of expenses, which substantially only forbids certain deductions without setting out which expenses are allowable, with the Maltese legislation which provides that certain expenses are to be allowed and others are not to be allowed.

On these bases one may argue that the Maltese legislation, in this regard, gives a more perspicuous guidance, reduces the risk of misunderstanding to minimum levels and at times facilitates decision-making.

 



[1]
Attard Robert, Principle of Maltese Income Tax Law (updated to 2013) pp. 234


[2]
Court of Appeal Case 24

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