Tax Deductible Expenses - A Taxing Business!

The Weekender / Business Day 29/30 July 2006

What are the tax deductible expenses?

The law allows us to deduct any expense incurred in the production of income. It is proving the tax deduction with relevant paperwork that trips up most taxpayers.

Complying with the tax return submission deadline can be a mad rush to get one’s records in order and obtain certificates from various companies. With this in mind, let’s focus on planning throughout the year, not only when it is time to submit the tax return.

Most salaried employees have limited tax planning opportunities after the recent amendments to tax deuctible expenses in the Income Tax Act. These are limited to deductions for business travel against their car allowance, certain medical expenses, contributions to pension and retirement annuity funds, wear and tear allowances on certain equipment, and certain costs associated with running an office from home.

It makes sense to keep records of all of your contributions to your medical aid fund, as well as all medical and dental expenditure.

If you are under the age of 65, you are entitled to claim a tax deduction to the extent your medical and dental expenditure (including medical aid contributions) exceeds 7,5% of your taxable income. If you are over the age of 65, all medical and dental expenditure is tax deductible.

It is extremely important that an accurate logbook is kept of genuine business travel throughout the tax year. If you do not keep a logbook of your business travel, the South African Revenue Service (SARS) will deem that your first 18,000 kilometers was for private use. As many people do not travel in excess of 18,000 kilometers, they will not be able to claim any tax deductible expenses for travelling.

Tax deductible expenses related to personal retirement annuity (RA) fund contributions are limited to the greater of 15% of taxable income from non-retirement funding employment, R1,750 or R3,500 less pension fund contributions.

Provident fund members may contribute at least R3,500 a year to an RA. It is advisable that you keep records of your RA contributions. At the end of the tax year, you may find that you still have further opportunity to contribute to a retirement annuity fund and claim it as tax deductible expenses due to unforeseen bonuses or overtime pay.

Remember, that if you miss the opportunity to contribute for a particular tax year, the tax deductible expense is gone forever. Should you not be able to deduct all of your contribution in a particular tax year, this may be carried forward to the following tax year, subject to certain limits.

When deciding to sell an investment, it may make sense to sell half the investment in February (the current tax year) and the other half in March (the next tax year). This will enable you to make use of the capital gains tax exemption of R12,500 in respect of both years. Bear in mind that the paramount decision is when the best time is to sell the investment, and the tax saving should be a secondary consideration.

If you are a provisional tax payer, you are required to make two payments during a tax year. These payments may play havoc with your cash flow, so you need to be aware of your tax liability and plan ahead. A monthly debit order crediting your access bond is the most effective place to store your tax budget, or a money market account.

Should you be a person who has spent a lot of time working overseas, consider extending the amount of time you work out of the country. If you derive any remuneration from working outside the country for a period exceeding 183 full days in any twelve month period, the income received from such work may be exempt from income tax.

It is important to note that this exemption does not apply to government employees.

On a more practical note, it is also worth mentioning that should you foresee that you will be unable to meet the SARS deadline for filing your tax return, you should apply in advance for an extension. SARS is quite reasonable.

Business owners need to become more proactive about their tax management.

According to my colleague, Ian Beere, a chartered accountant and practicing financial planner, all business owners should consult proactively with their accountant well before the end of the tax year to plan their expenditure on marketing, staffing, capital budgets and provident fund contributions, in order to capitalize on the benefits of the tax deductible expenses and incentives provided by SARS.

Once again, for most of the tax deductible expenses, if the benefits are not claimed in the same year, they are lost forever. You do not want to be paying more tax than you need to.

Effective tax planning needs to be done proactively during the relevant tax year, and we encourage a review between September and December.

Tax planning must be implemented in conjunction with suitable investment planning, asset allocation and estate planning.

Once again, select a fee-based qualified financial planner or a chartered accountant to assist you. You can visit the website of the Financial Planning Institute, www.fpi.co.za, or the South African Institute of Chartered Accountants, www.saica.co.za, to select a reputable professional.

It is also a good idea to keep up to date on tax issues (including changes in permitted tax deductible expenses) by subscribing to e-mail alerts on the SARS website, www.sars.gov.za.

Debbie Netto-Jonker, CFP™, is founder of Netto Financial Services and was financial planner of the year in 2001.