By Bradley Woolridge, Director at Burns Acutt
When it comes to tax deductible expenditure, most professionals are unsure about what to include – and what to leave out.
However, understanding the difference between them is crucial, and this can be illustrated by the following example:
Imagine you have an expense of R100, and that it is tax deductible. This means you will need to earn R100 in order to pay the R100 expense.
Now imagine that the R100 expense isn’t tax-deductible. This means you will need to earn a total of R174, since you’ll be liable for an additional 28% in company tax (an amount of R49) and required to pay an extra 20% in dividends tax (an amount of R25), just so that you can be left with R100 to pay the bill.
In this case, we are talking about earning almost double the original expense amount – 74% to be exact – needed to pay the same very same thing!
To assist in understanding this worst case and other scenarios, please see this table and if you do have questions, remember we are here to help.
This is why understanding the difference between deductible and non-deductible expenses is absolutely paramount to the overall success of your tax planning.
According to the Income Tax Act, whatever expenditures (or losses) incurred in the production of the income, can be deducted.
Each industry is subject to its own unique identifiers, best practices and specific processes that are known and accepted by SARS, so you need to ensure you are making use of the best method according to your given field.
While all the basic items such as staff salaries, 3rd party payroll services fees, office rent, communication expenses, stationary costs, and staff meals might be handled easily enough, what about the more complex costs? Are the more complicated expenses, such as home office costs, licencing fees for the various healthcare financial systems you use, travel expenses, insurance fees, uniform purchases, interest, or even allowances on equipment also being optimally claimed for?
A good rule of thumb would be to make sure there is a commercial explanation for each expenditure type. In other words, if it is in the production of income, first make sure that you understand why, then make sure you can explain why it would be more challenging, or even better – impossible – to earn an income without the expenditure for which you are claiming.
Finally, make sure you keep a good record of all the relevant documentation, such as invoices, because you will need to submit them upon claiming for the expense deduction.
A relatively common query among professionals is around school fees – they want to know whether academic expenses can be claimed for in a company tax return. Unfortunately, the answer is a resounding “no”! School fees, as well as any other private expenditure should never be claimed.
It is important that you differentiate between what is personal and what is business when it comes to every cent you spend. As a member of a private practice, you could end up spending more than you anticipate, but it should bring you some comfort at least, to realise that this could also mean increased opportunities for tax efficiency and savings. Make sure you claim and save 74% every single time!
Now, if you feel you would rather use an outsourced accounting services provider to take care of this for you, you are like the majority of professionals, across all industries. The key is to find an accounting and taxation services provider that understands how complex tax is, and how confusing it can be to determine what is really in the production of income – and what is not.
If you find anything that we have said here complicated, and would like further assistance, feel free to contact us.