[FAQ] The deduction of expenses incurred when taking staff on a weekend away

[FAQ] The deduction of expenses incurred when taking staff on a weekend away

• 01 February 2021
• Corporate Tax
• Piet Nel

Background

A taxpayer wants to take her staff and their families away for a few days as a team building/thank you/bonus.

Can these expenses be claimed as a business expense?

Answer

The Income Tax Act

You are reminded that SAIT's technical query system policy prescribes that only guidance should be provided in relation to requests submitted. To do otherwise would cause SAIT to compete with its own members. Guidance implies that sources or references relevant to the request are provided, but that ultimately the tax practitioner’s own professional judgment is required to be applied to the specific circumstances.

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.”

Webinar Commentary

Further webinar commentary on 2020 Managing Corporate Income Tax can be accessed here.

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