1. A sole proprietor’s use of motor vehicle for business purposes. What percentage of the expenses of the vehicle (eg. Fuel, repairs/maintenance/insurance and other vehicle expenses) can be written off as business expenses if for (a) no mileage log
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
The adjustment, under section 23(a) or 23(g), in respect of non-trade related travel must be based on a log book. Practice note 24 (8 August 1994: Private use of motor vehicle) was, in line with the amendment to section 8 that taxpayers are expected to keep better records, withdraw with effect from years of assessment commencing on or after 1 March 2010. The practice note allowed for a percentage adjustment.
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The principle in this instance is that the taxpayer will have to meet the onus of proof with regard to two issues. Judge Conradie explained the two issues as follows in the Warner Lambert case:
“Deductible expenditure has certain characteristics: it must be incurred in the production of income (s 11(a)) and will not be allowed as a deduction against gross income if it is not laid out or expended for the purposes of trade.”
It was stated by judge Watermeyer, in the PE Tramway case, that “… income is produced by the performance of a series of acts, and attendant upon them are expenses. Such expenses are deductible expenses, provided they are so closely linked to such acts as to be regarded as part of the cost of performing them.” In the recent MTN case it was confirmed that expenses “which is “necessarily attached” to the performance of income-earning operations” also qualify.”
Judge Beadle explained it as follows in the Rendle case: “In deciding whether such an expenditure is deductible, it seems to me the enquiry must be whether the “chance” of such expenditure being incurred is sufficiently closely connected with the business operation. The enquiry is not whether the actual expenditure itself (should it ever eventuate) is sufficiently closely connected. If the expenditure itself had to be a necessary concomitant of the business before it could be deducted, it could hardly be called “chance expenditure”. The word “chance” is singularly inappropriate when describing an event which is bound, or almost bound, to happen. If such chance expenditure is to be deductible, if it is closely enough connected with the business operation, and is still to retain its character of “chance expenditure”, it can only be the “chance” or the “risk” of it being incurred which must be the links connecting it with that business operation.”
If the taxpayer therefore can prove that the cost of the study assistance meets these requirements it can make the deduction. We submit that the expense will not be capital in nature, but the taxpayer may have a difficulty meeting the onus with regard to the other – in production of income.
There should be no Value-added tax on tuition (educational services), and the accommodation may well be entertainment (denied). The vendor then will have to be able to prove that the goods or services concerned were acquired by the vendor wholly (or partly) “for the purpose of consumption, use or supply in the course of making taxable supplies”.
In the De Beers case Judge Southwoord, whilst agreeing with the minority view expressed by judges Navsa and Judge van Heerden dealt with this issue as follows:
“[48] To be entitled to deduct ‘input tax’ in the calculation of his VAT payable, a vendor must be registered in terms of the Act, must be carrying on an ‘enterprise’ and must have paid VAT on goods or services which the vendor acquired wholly for the purpose of consumption, use or supply in the course of supplying goods or services which are chargeable with tax under the provisions of s 7(1)(a) of the Act (i.e. goods or services supplied in the course or furtherance of the ‘enterprise’).”
Judge Southwood then continued as follows:
“[51] The primary question requires that there be clarity as to the nature of the ‘enterprise’ because the purpose of acquiring the services and whether they were consumed or utilized in making ‘taxable supplies’ can only be determined in relation to a particular ‘enterprise’. What the ‘enterprise’ consists of is a factual question. There must be a particular activity which complies with all the requirements in the definition.”
And concludes by saying: “The question to be answered therefore is whether NMR’s services were acquired for the purpose of making ‘taxable supplies’ in that ‘enterprise’.”
In arriving at his decision that “the services were not acquired for the purpose of making ‘taxable supplies’ by an ‘enterprise’ which mines, markets and sells diamonds” judge Southwood said that the “…services were not acquired to enable DBCM to enhance its VAT ‘enterprise’ of mining, marketing and selling diamonds. The ‘enterprise’ was not in the least affected by whether or not DBCM acquired NMR’s services. They could not contribute in any way to the making of DBCM’s ‘taxable supplies’. They were also not acquired in the ordinary course of DBCM’s ‘enterprise’ as part of its overhead expenditure as argued by DBCM. They were supplied simply to enable DBCM’s board to comply with its legal obligations.”
The test therefore is different to the test applied when a deduction for normal tax purposes is made – see for instance in the Warner brothers case where the deduction (for normal tax purposes) of social responsibility expenses were in dispute.
Your client will therefore have to prove that the taxes paid on the expenses incurred in terms of the study assistance were for the purpose of making ‘taxable supplies’ in that ‘enterprise’.