A taxpayer is an independent contractor. Her primary residence is in Johannesburg, South Africa. She signed a contract of employment to work in Cape town for 6 months. Can she receive an allowance and is she able to claim the full accommodation cost as a deduction?
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
The following guidance is relevant to the issue of whether deductions can be made, or taking a tax position (or giving an opinion). The Tax Administration Act (not SARS) provides that the “taxpayer bears the burden of proving … that an amount or item is deductible …” Judge Conradie in Warner. Lambert SA (Pty) Ltd v Commissioner, SARS 2003 (5) SA 344 (SCA), stated the law in this regard when he said “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.” The crucial requirement of section 11(a) is that deductions are only allowed, for the purpose of determining the taxable income derived by any person” from the income of that person derived from carrying on any trade. It is the ‘in the production of income’ requirement that may prove problematic. The most important principle in this regard follows from a remark made by Judge Watermeyer in Port Elizabeth Electric Tramway Co v CIR when the Judge explained that “… income is produced by the performance of a series of acts and attendant upon them are expenses. Such expenses are deductible expenses provided that they are so closely linked to such acts as to be regarded as part of the cost of performing them ...” “The purpose of the act entailing expenditure must be looked to. If it is performed for the purpose of earning income, then the expenditure attendant upon it is deductible ...” In Ticktin Timbers CC v Commissioner for Inland Revenue 1999 (4) SA 939 (SCA) Judge Hefer called the purpose for which expenditure was incurred, 'the decisive consideration in the application of 23 (g)'. So, the principle is, expenditure doesn’t have to lead to income directly. All that is required is that the purpose of the expense must be to produce income and not that income was actually produced. Judge Ndita, in the recently reported SARS v Spur Group (Pty) Ltd (Judge Sher concurring), summed it up as follows: “Accordingly, for the expenditure to meet the “in the production of income” test and satisfy the requirements of section 11(a) of the Act, there must be a sufficiently close connection or link between it and the income earning operations of the taxpayer. The degree of closeness required for the expenditure to be deductible is determined on the particular facts and circumstances of each taxpayer. It does not need to be shown that expenditure produced any part of the income in a particular year of assessment for it to be deductible for tax purposes. The critical enquiry is whether the expenditure was incurred for the purpose of earning income as defined in section 1 of the ITA, whether in the current or future year of assessment.” But, the main problem lies in section 23(a), or section 23(g), of the Act. The expenses in respect of the food, for instance, would be “… cost incurred in the maintenance of any taxpayer, his family or establishment …” – see section 23(a).
The Income Tax Act does not define any of these words in section 23(a) and one will have to rely on the normal meaning of the word. With regard to “maintenance” Judge Beyers made the following comment in CIR v Hickson: “I take "maintenance of the taxpayer, his family or establishment" to mean feeding and clothing himself and his family, providing them with the necessities of life, and comforts, and, as it were, maintaining a certain standard of living, and keeping up his establishment. "Domestic and private expenses" are, I should say, without attempting an exhaustive definition, expenses pertaining to the household, and to the taxpayer's private life as opposed to his life as a trader. House rent and the cost of repairing the house are specifically mentioned. Other costs which come to mind are servants' wages, the cost of board and lodging, the cost of running a motor-car for private use, holiday expenses, and so forth”. If the taxpayer can prove that the accommodation is used to produce the income, and not only to sleep there, an apportionment may be required as only the trade use (section 23(g)) can be deducted.