Profits Tax - Notional
Notional expenditure means the expenditure only exists
imaginarily and no money has been paid for such "expenditure".
Usually, it is the loss anticipated or
profit forfeited if an act or transaction were done. In economics, it is called
By the "prudence concept" or "historical cost concept" of
the generally accepted accounting principles, such expenditure cannot be a
deductible expense in the accounts.
Because generally accepted accounting
principles are followed for tax purpose, save specific provisions in the tax
law, notional expenditure is not deductible.
In the case Lowry
versus Consolidated African Selection Trust Ltd. 23 TC 259, the company claimed
a deduction that involved no expenditure --- the company issued shares to its
employees at par value which was considerably below the then open market value ---
the taxpayer claimed the difference as an expenditure. The court rejected the claim.
Tax guide on excessive remuneration