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July 31, 2018
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July 31, 2018

When can business expenses be deducted for an individual if additional income is earned over salary?

Tax legislation allows a taxpayer to claim certain expenses which were incurred during a year of assessment against the income received. Nevertheless, the nature of expenses you can claim is dependent on the type of income one would receive. These expenses for different types of income are the following:

  1. Salary
  • Pension fund contributions
  • Retirement annuity fund contributions
  • Provident fund contributions (only from 1 March 2016)
  • Legal costs – under certain qualifying circumstances
  • Wear–and-tear – in respect of certain assets
  • Donations – to approved bodies
  • Repayable amounts – amount received for services rendered as refunded by that person
  • Bad and doubtful debts – employment related
  1. Commission, independent contractors, holders of public office
    Taxpayers who earn commission income will have to refer to section 11(a) of the Income Tax Act no 58 of 1962. This act will help to determine exactly what expenses can be claimed.

The “general deduction formula” consists of two parts. Section 11(a) determines what a taxpayer can deduct: “expenditure and losses actually incurred in the production of income, provided such expenditure and losses are not of a capital nature”. While section 23(g) is the opposite, prohibiting the deduction of “any moneys, claimed as a deduction from income derived from trade, to the extent to which such moneys were not laid out or expended for the purpose of trade”. 

Section 23(a) prohibits the deduction of private expenses, costs incurred in the maintenance of the taxpayer, his family or his home. Thus, meaning that a taxpayer is not allowed to deduct personal living expenses.

Section 23(b) covers a specific prohibition aimed at the deduction of costs related to a home office or study. The Act will not allow a taxpayer to deduct personal expenses and a taxpayer will be required to add back personal expenses.

Meanwhile, the principle of section 23(g) is that expenses are deductible to the extent that they were incurred for purposes of trade.

Home office expenses:

For a room to be eligible as a home office or study, it needs to be specifically equipped for the purposes of the taxpayer’s trade and must regularly and exclusively be used for business purposes.

Entertainment:

To be able to claim these expenses, one will need to provide proof in the form of a receipt / till slip / invoice.  The specific the date, place and name of the person entertained is also required. 

Motor vehicle / travelling expenses:

The expenses that incur regarding these expenses would have to comply with the requirements of the general deduction formula.  A logbook needs to be obtained with the following information: Date / Opening Km’s / Purpose of visit (who and where) / Km’s travelled / Closing Km’s / Business / Private.

If you need any assistance to prepare your tax return, contact our friendly staff for assistance.