Is a deduction available to a company or sole proprietor that provides an open bursary to a non-employee?
Author: Graham Walker
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
The mere fact that the receipt of the bonus may not result in taxable income to the recipient, because of the section 10(1)(q) exemption, is irrelevant with regard to whether the grantor can make a deduction. 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.”
Relevant law: Step 1: s 10(1)(q) of the Income Tax Act No.58 of 1962 (“ITA”). It says any person and only attaches conditions to employees and relatives of employees for a personal tax exemption. Step: 2: s 11(a) of the ITA needs to be met to claim a deduction. We don’t have all your facts. Other resources: • SARS IN 66. Comment on member’s query: The above guidance should lead you to the correct action. The mere fact that the receipt of the bonus may not result in taxable income to the recipient, because of the section 10(1)(q) exemption, is irrelevant with regard to whether the grantor can make a deduction. 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.”