In our previous article regarding income tax and deductions for individuals, the basic principles were discussed. This article focuses on individuals earning commission or other perks / benefits, as well as a fixed salary.
We explain by example:
John is a sales representative who earns an annual basic salary of R50 000. During the tax year he also earned commission income of R250 000, giving him a total taxable income of R300 000 for the year. John’s employer does not provide him with office space and he works from home. John travels extensively to see clients, using his car with a cost price of R150 000.
What can John deduct against his income?
Firstly, we need to establish what the income tax act generally allows and prohibits. The “general deduction formula” consists of two parts. Section 11(a) determines what a taxpayer is allowed to deduct: “expenditure and losses actually incurred in the production of income, provided such expenditure and losses are not of a capital nature” Section 23(g) is the flipside of the coin, 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”.
In addition, section 23(a) prohibits the deduction of private expenses, in particular costs incurred in the maintenance of the taxpayer, his family or his home. In short, a taxpayer is not allowed to deduct personal living expenses.
Section 23(b) contains a specific prohibition aimed at the deduction of costs related to a home office or study. It is clear that the Act will not allow a taxpayer to deduct personal expenses and a taxpayer will be required to add back personal expenses. So what is John allowed to deduct? As far as his basic salary of R50 000 is concerned – nothing at all! He may however be allowed certain qualifying deductions against the commission of R250 000. Let’s assume John has a printer that he uses for his work. His children also use the printer for their school projects. Let’s say the printer generates around 1 000 pages per month, of which 100 are for his children’s projects. John is allowed to deduct 90% of the paper and ink used during the year. He can also claim 90% of repair costs and the wear-and-tear allowances. This is the principle of section 23(g); expenses are deductible to the extent that they were incurred for purposes of trade.
Home office expenses:
For a room to qualify 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. John also satisfies the two other requirements, namely that his income is derived mainly from commission and that his employer does not provide him with an office. In terms of section 23(b) it is sufficient if a taxpayer mainly performs his duties otherwise than in an office provided by his employer. Since John complies with all the requirements, he is allowed to deduct expenses relating to his home office. This would include a portion of the interest on his bond, as well as a proportionate amount of rates and taxes. Taxpayers should bear in mind that SARS often challenges home office expenses, so it is advisable to keep accurate and complete records. Sometimes, depending on the size of the office in relation to the size of the house, it is simply not worth the effort to claim this expense.
As John earns commission that is based on his sales figures, he often needs to entertain clients and potential clients. He will be able to claim these expenses, but will need to provide proof in the form of a receipt / till slip / invoice. He will also be required to specify the date, place and name of the person entertained.
Motor vehicle / travelling expenses:
The expenses that John incurs in this respect would certainly comply with the requirements of the general deduction formula. Things do however get complicated as far as proving these expenses to SARS are concerned. John would need to provide proof of his actual expenses; unlike an employee receiving a travelling allowance, he is not allowed to use deemed expenses. He will need to maintain a logbook with the following information: Date / Opening Km’s / Purpose of visit (who and where) / Km’s travelled / Closing Km’s / Business / Private.
At year end he will need to apportion the expense. Let’s assume he travelled 12 000 kilometres during the year, of which 8 000 were for business purposes. John is allowed to deduct 66,6% of the actual expenses. This can include fuel, licenses, repairs and maintenance (for example services and tyre replacement), the interest on the installment sale agreement and insurance. It is important that the insurance documents specify the motor vehicle and the portion of the monthly premium relating to it.
Although a commission earner like John is allowed to deduct expenses incurred in the production of income, it is important to remember that the expenses are limited to the amount of the commission received. He will not be allowed to deduct any excess from his salary income.
This article first appeared on unikone.co.za.