For commission-earners and the self-employed, the rules are slightly different—but travel costs can be claimed.
The common mistake that I make when writing articles about travel allowances is that I tend to forget that not all of us are ‘wage slaves’. Indeed, there are many taxpayers for whom the saying, “If a man will not work, he shall not eat1” is a daily reality—those who are self-employed, as well as those who derive their earnings from commission.
But the very fact that they don’t earn a regular salary means that they also do not receive a fixed travel allowance. And the general rule when it comes to travel claims is: No allowance, no claim.
That’s the bad news. The good news is that commission-earners and the self-employed may claim the cost of their business travel against their income under Sections 11(a) and 11(e).
General deductions—Section 11(a)
Section 11(a), the so-called ‘general deduction formula’, provides that for an expense to qualify for a tax deduction, it must be (i) incurred in the production of the income; (ii) not of a capital nature; and (iii) in the furtherance of the taxpayer’s trade.
Put in lay terms, this means that, firstly, there must be a direct link between the expense and the potential production of income. I say ‘potential’, since the courts have held that a deduction can be claimed even if no income is actually produced, provided that the purpose and intention of incurring such expenditure was to produce taxable income.
Relief indeed for salespeople, who know all too well that not every call will result in a sale!
Secondly, the expense may not be of a capital nature. This means that if you incur expenses that are connected with your income-earning structure (as distinct from generating a direct income flow)—for example, flying to Germany to look at a machine that you wish to purchase for your business—such cost is not deductible from your income. All is how-ever not lost, for costs of this nature can be added to the base cost of the asset concerned—helpful for reducing your Capital Gains Tax bill when the as-set is eventually sold.
Finally, the expense must be incurred in the furtherance of your trade. In other words, you need to be seriously in business. Full-time self-employed people and commission-earners can satisfy this requirement fairly readily; those who dabble in the occasional business activity will find it much harder.
Having said that, the owner of a block of flats who uses their private vehicle to go and collect the rent each month will be able to justify claiming the costs of such travel as a deduction.
Capital allowances—Section 11(e)
Because an expense incurred that is of a capital nature is disqualified as a tax deduction under Section 11(a), one would wonder whether there is any tax relief that takes into account the reduction in value of an asset over time while it is in use.
The good news is that Section 11(e) allows taxpayers using assets for business purposes to claim in respect of such devaluation, or ‘wear and tear’ to use the correct tax term. The amount that one can claim varies from asset to asset, and while in practice any method can be used, SARS places its reliance on the write-off periods contained in Practice Note 19.
This Practice Note lists a number of different types of assets, together with their write-off period in years. For example, a passenger vehicle may be written off over five years by claiming 20% of the cost thereof as a deduction each year.
Note however that the Practice Note provides that where the asset is acquired part-way during the tax year, the write-off must be reduced proportionately for the appropriate number of months—for example, if a vehicle is bought on 1 December, the write-off for the first year would be 20% of the cost, multiplied by 3/12 (being the three months of the tax year that the vehicle is owned.
Putting it all together—turning theory into practice (and cash)
So how does this all relate to travel deductions? Unlike an employee who receives an allowance, where the tables as set out by SARS would normally be used, a self-employed person or commission-earner must base their claim on actual costs. And contrary to popular belief, there is no specific cost that is excluded.
In other words, while most people would probably be aware that they may claim the cost of fuel, oil, services, and insurance, there are other expenses such as the interest paid on the instalment sale agreement, tyres, annual licence, tolls, parking—even the cost of having your car washed qualifies for deduction.
And here’s a tip when it comes to maintenance plans—if your vehicle’s plan covers a period that is less than five years, ask the dealer to show it separately on the invoice. They may be reluctant to do so for fear that you may somehow discover how much those ‘free’ services are actually costing you, but be insistent about this.
I see no reason why a three-year maintenance plan cannot in fact be written off over the three years, as against the five-year write-off period that would apply if it were to be included as part of the cost of the vehicle.
As far as claiming wear and tear is concerned, remember that you are entitled to claim the wear and tear each year, provided that you actually own the vehicle (whether purchased for cash or under an instalment sale agreement).
Many people get confused in this area, thinking that they can claim wear and tear on a vehicle that has been loaned to them. Unless you are physically paying the owner for the wear and tear on the vehicle, you have not incurred this cost as an expense, and therefore would not be able to claim.
The same goes for vehicles that have been leased. If you are leasing a vehicle, legally it is not yours—it belongs to the bank. You may therefore not claim wear and tear.
However, because you are incurring a cost each month by paying a rental instalment for the use of the vehicle, such instalment can be claimed in full. (Remember, though, that you may not claim ‘interest’ as well, since this already forms part of the monthly rental. Double-deductions are a no-no!).
Instalment sale agreements are a little different in that, although you are making payments each month and the bank has retained the registration papers as security, legally this vehicle belongs to you. You would therefore be entitled to claim wear and tear, as well as the interest component of your monthly instalment.
Banks are now legally obliged to provide you with information relating to the amount of interest paid, so simply ask your branch to give you the interest amount for your claim.
Finally, remember that once you have added up all the components that make up your claim (expenses plus wear and tear), remember that you may only claim the business portion of your travel.
The entire claim must therefore be apportioned between business and private—if, for instance, you travel 32 000 km per year of which 10 000 km are private travel (which includes the regular distance between home and your place of work each day), your total expenses must be multiplied by 22 000 / 32 000 to work out the claimable business portion.
And don’t forget, unless you have a logbook to substantiate your business travel, SARS is likely to disallow your claim.
Written by STEVEN JONES
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Professional experience:
IC Marais is a certified CA (SA) with public sector and private sector technical knowledge based on 5 years’ Public Sector accounting, auditing and financial management experience and 5 years audit, tax and accounting experience. Detailed knowledge of private and public sector accounting and auditing standards (GRAP, IPSAS, IFRS, IAS, ISA) and public sector financial legislation (MFMA, etc.)
He enjoys the outdoors, hunting and fishing.
Professional experience:
Professional experience:
Professional experience:
Lucha started her career as a tax inspector at the Inland Revenue Department of New Zealand. After this she worked in commerce in Canada, Mexico and the United States.
On her return to South Africa, she completed her CA training contract with us and has been with Newtons ever since. She became a Partner in 2012.
Apart from her CA(SA) qualification she also holds a postgraduate certificate in Advanced Taxation (2005) and has the overall responsibility for training as our Training Officer.