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Limitations of deductions for employees and office holders (Interpretation Note 13)

This interpretation note was issued on 15 March 2011. Its purpose is to clarify the deductions that may be claimed by employees and office holders.

Section 23(m) of the Act prohibits the deduction of certain expenses incurred by employees or holders of office, unless specifically permitted, against their general income derived. The prohibition applies to expenses, losses and allowances incurred in the course of employment, or by an office holder, that would otherwise have been deductible under section 11(a).

The term "employment" should be strictly interpreted as it connotes a master-servant relationship, which, for example, excludes independent contractors. Furthermore, directors of companies, judges and persons in governmental positions are typically regarded as "holders of office" and are thus subject to the provisions of section 23(m). Agents and representatives who derive remuneration that mainly (meaning more than 50%) comprises of commission based on sales or turnover are excluded from the operation of, and therefore not limited by, the provisions of section 23(m).

The prohibition applies to expenditure, losses and allowances that relate to "remuneration" as defined in the Fourth Schedule to the Act. Expenditure, losses and allowances that relate to income other than "remuneration" may therefore still be deductible. An office holder or employee in receipt of two or more streams of income may thus be in a situation where the deduction of expenditure, losses or allowances relating to a "remuneration" stream of income is prohibited, while expenditure, losses or allowances relating to another trade remain deductible.

Expenses, losses and allowances that are specified as permissible in terms of section 23(m) include:

  • contributions to pension or retirement annuity funds (subject to the limitations imposed by sections 11(k) and 11(n));
  • certain legal expenses actually incurred in the course of conducting business operations in the carrying on of a trade (section 11(c));
  • wear and tear allowances on assets used in conducting business operations (e.g. computers, fax machines, cell phones, etc) (section 11(e));
  • bad debts (such as income which was not paid to the employee as a result of the insolvency of the employer) as well as doubtful debts (sections 11(i) and 11(j));
  • restraint of trade payments that were included in the individual's taxable income and subsequently refunded to an employer (sections 11(nA) and 11(nB));
  • premiums paid by a person on an insurance policy to the extent that the policy provides cover against the loss of income as a result of either illness, injury, disability, or unemployment. The benefit payable under the policy must also constitute "income" as defined in the Act. The deduction of premiums to policies that pay out amounts of a capital nature, and which are not included in the special inclusions in "gross income" in section 1 of the Act, are thus prohibited. Furthermore, the policyholder must ensure that the premiums are deductible under section 11(a) of the Act; and
  • home offices expenses such as rent and repairs of property occupied, as well as machinery, implements and utensils used for the purpose of trade (section 11(a) and (d)). The deduction will only be allowed to the extent that the expenses are not prohibited under section 23(b) of the Act, which disallows the deduction of domestic or private expenses.

Remission of interest (VAT Interpretation Note 61)

This VAT interpretation note was issued on 29 March 2011 and provides guidelines on the remission of interest imposed in terms of section 39 of the Value-Added Tax Act, No. 89 of 1991 (the VAT Act).

Section 39 imposes a penalty and interest on any VAT and additional tax which is not paid within the period or on the date prescribed in the VAT Act. The Commissioner for the SARS (the Commissioner) has a discretion to remit such interest, in whole or in part, in terms of section 39(7)(a) of the Vat Act.

However, as a result of the amendment to section 39(7) which came into effect on 1 April 2010, the circumstances under which the interest imposed may be remitted for periods pre- and post 1 April 2010 differ.

The pre-1 April 2010 position

Interest imposed on the late payment of VAT or additional tax before 1 April 2010 can be remitted, at the discretion of the Commissioner, on the basis of any one of two independent grounds applying:

that the late payment did not cause any financial loss to the State. As an example, this would be the case where the vendor fails to pay over the VAT on the taxable goods supplied, but can show that the recipient was entitled, but did not, claim a full input tax deduction. Having regard to the input and output tax arising from the supplies, the State would not suffer any financial loss.

that the taxpayer did not benefit financially. This ground prohibits the remission of interest in the case where the taxpayer, for example earned interest on VAT and thus benefited financially, on amounts that should have been paid over to SARS. The financial benefit is generally evidenced by the person earning interest or reducing the amount of interest paid on, for example, an overdraft facility.

The position from 1 April 2010

Section 39(7)(1)(a) was amended with effect from 1 April 2010 and now contains a single test for remission. From 1 April 2010 the Commissioner may only remit interest in the event of circumstances beyond the control of the vendor causing the non-payment or late payment of VAT. This stringent test presupposes that external, unforeseeable, unavoidable or emergency like circumstances will be the only plausible circumstances in which a taxpayer would qualify for the remission of interest.

The interpretation note explains by way of example that circumstances beyond a person's control include:

  • the destruction of relevant documentation by fire, flood or some or other disaster;
  • key personal not being available due to sudden resignation, illness, or death; and
  • the making of timeous payment by way of electronic transfer of funds but a delay ensuing due to a banking system failure.

Circumstances which are not considered tobe beyond a person's control are generally those caused or created by the taxpayer himself or herself including financial hardship; failure to initiate timeous payment to SARS via electronic funds transfer; ignorance of the law; and misconduct or negligence by the taxpayer.

In applying for the remission of interest (imposed on or after 1 April 2010), the onus is on the taxpayer not only to prove the existence of circumstances beyond his or her control, but also to provide the Commissioner with mitigating factors to enable him to exercise his discretion favourably by remitting interest in full. A satisfactory history of compliance is indicative of a bona fide taxpayer and is one example of a mitigating factor which would improve a taxpayer's chances of success.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.