A client has worked for the first ten months no commission but changes work and works for more than 50% on commission for Jan and Feb 2018. Can he claim expenses e.g home office, telephone etc for Jan and Feb when earning the commission?
Important:
This answer is based on tax law for the year ending 28 February 2018.
Answer:
The law relevant to your request is found in section 23(m) and reads as follows:
“No deductions shall in any case be made in respect of the following matters, namely …
(m) any expenditure, loss or allowance, contemplated in section 11, which relates to any employment of, or office held by, any person (other than an agent or representative whose remuneration is normally derived mainly in the form of commissions based on his or her sales or the turnover attributable to him or her) in respect of which he or she derives any remuneration, as defined in paragraph 1 of the Fourth Schedule …”
The first important requirement is that this limitation applies to a person in ‘employment’.
The current practice generally prevailing in this regard is that the term “employment”, in the context of section 23(m), “should be afforded its narrower meaning of an employer-employee (master-servant) relationship. An independent contractor is therefore not affected by the prohibition on deductions.” It is also stated that “the holding of employment flows from a contract and is something in the nature of a post.”
The next requirement relates to the nature of the remuneration. In the first place it must be “any remuneration, as defined in paragraph 1 of the Fourth Schedule”. That definition specifically refers to ‘commission’.
The current practice generally prevailing states that, “for the purposes of section 23(m) the terms “agent”, “representative” and “commission” should be interpreted as follows:
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“Agent” – a person authorised or delegated to transact business for another.
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“Representative” – one who represents another or others.
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“Commission” – a percentage of sales or turnover of the person on behalf of whom the agent or representative is acting.”
The current practice generally prevailing is that “the term “mainly” is interpreted to mean more than 50% of the taxpayer’s gross remuneration. This means that the total income of the taxpayer (including 100% of all allowances) must be compared to his or her commission income.”
Relevant to your request is Example E in the current practice generally prevailing and we copied it below:
Facts:
For the period 1 March 2002 to 31 August 2002 an employee received a salary of R300 000 from employer A, in respect of which cell phone airtime expenses of R3 000 were incurred. For the period 1 September 2002 to 28 February 2003 the employee received commission income of R250 000 on sales from employer B (which is not connected to employer A) and incurred commission-related business expenses consisting of telephone and stationery of R30 000.
Result:
For purposes of section 23(m), each contractual arrangement arising from unconnected sources has to be considered on its own. This means that section 23(m) prohibits the deduction of the expenses incurred in relation to remuneration received from employer A, but that section 23(m) does not prohibit the deduction of expenses incurred in relation to remuneration received from employer B.