Commission earners, (and no doubt independent contractors generally,) must use actual costs to claim for car travel for business. What is the authority for this statement if any? Certainly section 11 (a), to which you refer, specifies “expenditure and lo
Important:
This answer is based on tax law for the year ending 28 February 2020.
Answer:
For purposes of the guidance that follows I accept (as you indicated) that the individual derived income, by way of commission only or in the course of any trade carried on by him independently of the person by whom such amount is paid. It is therefore accepted that section 23(m) of the Income Tax Act doesn’t apply. That also implies that the individual then also didn’t receive a travel allowance.
The individual would then not be limited and would be able to make the deductions available in terms of the legislation. This is because the individual is carrying on trade and any expenditure, loss or allowance, contemplated in section 11, doesn’t to any employment of, or office held by the person.
The relevant deductions would, for example, be made under section 11(a), 11(d) and / or 11(e). It would of course depend on the nature of the expense. Of course, if there is private use, the necessary apportionment would be required.
With regard to business travel, the deduction must be based on the actual cost, which would include expenditure on fuel, insurance, finance, maintenance and wear and tear (in other words, under section 11(a), 11(e), 11(d) and 24J where applicable). The total must then be adjusted for private use (based on the logbook) – section 23(a) or (g).
There is case law on the matter, but not specific to the business-related travel cost. SARS withdrew a practice note that allowed with effect 1 March 2010. The changes to the Income Tax Act effectively removed the ability of the recipient of an allowance to rely on a deemed business use and also forced person’s not in receipt of an allowance, to use actual expenses.
We copy from the Explanatory Memorandum on the Taxation Laws Amendment Bill, 2009 as it is well explained there:
Explaining the change:
“To the extent that taxpayers are travelling on business (excluding commuting), taxpayers can claim a deduction against vehicle travel allowances based on the actual distance travelled (the log book method) or a deeming approach based on the total kilometres travelled (the deemed kilometre method). Under the deemed kilometre method, business travel of 14 000 kilometres is assumed if the taxpayer has driven at least 32 000 kilometres for the year at issue. If the total kilometres fall below 18 000 kilometres no business travel is deemed.”
The proposal:
“In view of the above, it is proposed that the deemed kilometre method be repealed. Taxpayers who are required to use their personal vehicles for business purposes will continue to be able to claim business travel expenses by way of the logbook method.”
SARS communicated this by way of a note and in the same note, SARS explained that claims made on the basis of actual expenditure must also be apportioned (to remove the private component of the expense) on the basis of a logbook. They then withdrew the deemed cost method for persons not in receipt of an allowance as well. It was practice note 24 and the reason given was “In line with the amendment to section 8, taxpayers are expected to keep better records.”
The practice of SARS to accept the deemed expenditure, or the Gazette amounts which includes the simplified method was introduced to assist persons in receipt of a travel allowance who did not keep accurate records. It was never available to independent contractors or commission earners who don’t receive an allowance.
It is only in recent years that SARS, during the review process, started adding back the claim if the taxpayer can’t provide detail of actual expenses. They generally, and I think correctly so, levy an understatement penalty if the claim was based on the Gazetted amounts or the simplified method. This is why I dealt with it in last year’s and this year’s ITR12 seminars. To many people are still using the Gazetted amounts or some other method and not actual expenditure.