The golden rule – All expenses are tax deductible unless they are not deductible

Taxpayers are often paralysed by fear of SARS by adopting the SARS mantra of “when in doubt, don’t claim”. In practice we often hear taxpayers lamenting that “SARS won’t like that!”.  The simple reality is that SARS must administer the Income Tax Act and cannot make law. This article deals with income tax deductions for individuals that often cause confusion in practice or are simply overlooked.

Introduction

The 2022 tax year for most individuals ends on 28 February 2022. Then starts the tedious process of preparing and submitting your tax return and hoping for the best.

Many taxpayers forfeit certain legitimate deductions because they simply are unaware that they are entitled to claim such deductions or are paralysed by fear that they may be challenged by SARS.

In this article we deal with income tax deductions that are under certain circumstances allowable notwithstanding the fact that such items are regarded as private or domestic expenses.

The basic principles

As a general principle a taxpayer cannot claim domestic or private expenses against taxable income accruing to the taxpayer.

There are however certain exceptions to the above basic rule. If a taxpayer is not aware of the exceptions, it will forfeit the benefit of allowable deductions.

SARS will definitely not advise a taxpayer that it is entitled to deductions that they are not claiming. The onus is squarely on the taxpayer to ensure that he or she minimises their tax liability. So let’s have a closer look …

Contributions to retirement funds

Contributions to retirement funds can be deducted to a maximum of the lesser of R350,000 or 27,5% of the higher of a taxpayer’s remuneration or taxable income for a particular year of assessment (adjusted for certain categories of income, e.g. lump sums received from retirement finds).

The good news is that this information is supplied to SARS by employers who pay remuneration to employees and by retirement funds. This is the one instance where SARS will allow the deduction whether or not you know about is.

The bad news is that persons who are earning only remuneration and are not required to submit income tax returns, will forfeit the deduction unless they request, complete and submit an income tax return.

A more practical solution to the above challenge is for employees in this position  to advise the employer to take contributions to retirement annuity funds into account when determining the monthly deductions of PAYE.

Problem solved …

Sundry deductibles

The Income Tax Act makes specific provision for the deduction of legal costs, wear-and-tear, bad debts and deductions in respect of a provision for doubtful debts.

Unfortunately the above rules do not provide carte blanche to taxpayers to claim all expenses falling into one or more of the relevant categories. For amounts to be deductible under any of the above categories, the normal income tax requirements for deductions must still be complied with.

The onus is on the taxpayer to prove that the relevant costs were incurred to earn the income against which the deductions are sought. In the case of a person earning a straight salary, the onus will be challenging (if not impossible) to dispose of.

Refunds of remuneration previously earned

Where a person is required to refund remuneration already earned by the person previously, the amount to be refunded may be claimed as a deduction against future earnings.

For politically correct reasons we cannot provide specific examples where persons have been paid and are now required to repay what they’ve previously received (but not earned?).

Costs re private residences

Where a taxpayer conducts its business from home, a person is entitled to a deduction of a pro-rata portion of all costs relating to the property.

The above is particularly relevant in the new working environment where working from home has become the norm.

The so-called “home office” deduction is only available if the home office is specifically equipped for purposes of the taxpayer’s trade, is used regularly and exclusively for the purposes of the taxpayer’s trade and the employee’s duties are mainly performed at that home office. If any of the above boxes cannot be ticked, the deduction goes out your private window at home!

Summary

The above examples of deductions that are available to taxpayers demonstrate that awareness of the tax playing field is essential to manage one’s tax affairs effectively. In future articles we shall deal with more issues that need to be considered when managing your liability for tax in a honest but robust manner.