Deductions

General Deductions Formula

The general deductions formula contains the general rule for which expenses may be deducted from a taxpayer’s gross income. The general deductions formula is contained in section 11 of the Income Tax Act, which provides the general requirements for an expense or loss to be deductible, read with section 23 of the Income Tax Act, which lists specific deductions which may NOT be claimed by a taxpayer even if they meet the requirements of section 11.

General deductions formula in section 11 of the Income Tax Act provides that a person carrying on any trade may deduct expenditure and losses actually incurred in the production of income provided that such expenditure and losses are not of a capital nature.

Important parts of this definition:

• carrying on a trade
• expenditure and losses
• actually incurred
• in the production of income
• not of a capital nature

Section 23 of the Income Tax Act lists specific deductions that may not be claimed even if they do fit the above definition contained in section 11. Most importantly for individuals who are employed is section 23(m) which has the effect that you cannot claim (most) expenses related to your employment even if they meet the criteria in section 11 but this prohibition does not apply if a person’s remuneration is mostly derived from commission based on sales or turnover.

Even if you are employed and derive most (more than 50%) of your income from a salary, there are certain expenses that may be deductible, including:

• contributions to a pension fund, provident fund or retirement annuity (but not more than R350 000 per year or 27,5% of your annual salary, whichever is less)
• legal fees (in particular circumstances, for instance if you are in a legal dispute with your employer which is directly related to your salary)
• wear-and-tear allowance on the depreciation of assets used for purposes of your employment – for instance your computer
• bad debts which were previously included in your taxable income
• certain amounts expended on your home office if you work mainly from home (and only in respect of the portion of your home used for work)

We will consider some of these deductions (and their requirements) in more detail when we look at ways of saving money on taxes later in the course.

Travel Allowances and Deductions

If you receive a travel allowance from your employer, that allowance must be included in your taxable income, but only to the extent that you do not spend it on business travel. We will discuss the specific requirements in more detail at a later stage.

Medical Expenses and Rebates

A rebate is a refund granted to a taxpayer by SARS in specific instances. SARS allows a monthly rebate of R332 for contributions made to a medical scheme. A taxpayer is also allowed to deduct qualifying medical expenses from their taxable income. We consider this in greater detail later in the course.