In this fourth article in our series on how best to structure your salary package, we find out which business expenses you can claim as tax deductions and which allowances for work-related costs are tax friendly.
The principle behind claiming certain business expenses as tax deductions is that the expenses should be incurred as a direct result of your employment - in other words, they should have been indirectly incurred by your employer in the course of producing profits.
Home Study
The Receiver of Revenue has considerably narrowed the scope for claiming for a room set aside in your house as an office or study. As a salaried employee you will not be able to claim on your tax form for the expenses of a home office, unless you work mainly (more than 50 percent) at home.
Those who are still entitled to claim for a home office are the self-employed, commission earners working mainly outside their employer's office, and those doing freelance work outside their normal employment, who could offset their home office expenses against their freelance earnings only.
The amount you can claim for the expenses of a home study is proportional to the floor space it occupies in your home. For example, if your study is 20 square metres of a 200 square metre house, you can claim 10 percent of your bond interest or rental, 10 percent of your rates, water and electricity, insurance, security and cleaning. You can also claim in full any repair or maintenance work to that room, but not to the rest of the house, and wear and tear on furniture and equipment in the study. You can also claim business calls from your private phone.
Your study must be a room or space set aside and equipped specifically for working at home, so that if a Revenue inspector came to your house he could see a designated area. A corner of the kitchen table will not qualify.
Jenny Klein, tax manager at Deloitte & Touche, says your claim should be reasonable, and as with every tax deduction claimed, the onus is on you to prove it. For example, Revenue may challenge you to prove that you never do any home budgeting or private correspondence on your computer and it is up to you to show that you do not. It would be reasonable to apportion the use of your study between business and private use and claim on a pro rata base.
Entertainment Allowance
If you earn a salary and receive an entertainment allowance, you can generally only claim for entertainment expenses up to a maximum of R2 500 a year if your job justifies you entertaining - a bank teller, for example, might find it difficult to justify filing entertainment expenses, but a public relations officer would not.
If you receive an entertainment allowance of R2 500 a year this is taxed by your employer at your marginal rate of tax, but you can apply for a deduction at the end of the tax year by keeping all receipts and invoices and putting in a detailed claim to the taxman. You need not send him your receipts, but hold them for at least three years after you have been assessed in case there is a query.
If you do not receive an entertainment allowance, you can claim actual entertainment expenditure from your employer, to whom you submit invoices, and your reimbursement would not be taxed - you paid these expenses from after-tax money. The only limit to the amount you claim this way would be what your employer regards as reasonable, because your employer is in turn claiming these expenses from the Receiver.
The entertainment allowance ceiling of R2 500 has prevailed for many years, despite rising costs of restaurants and alcohol.
Use of Assets
If your employer sells you an asset at reduced cost or gives it to you, you will be taxed on the difference between what you paid for it and its market value at the time.
But you can have the use of assets, which your employer paid for and therefore owns, without your being liable for any fringe benefit tax, as long as your private use of these assets is insignificant, or incidental to their business use.
For example, if your employer allows you to use a computer at home so you can work outside normal office hours, there will be no fringe benefit tax on this computer - even if you have a couple of games on it.
But if a revenue inspector visited your house and demanded to see the computer and found nothing on the hard drive but games and the draft of your first novel, the computer might conceivably be regarded as a gift to you on which you will be taxed at the amount it cost your employer.
Klein says it is worthwhile for you in many cases to receive a computer allowance if you have your own computer at home which you use for work.
If you receive an allowance for a home computer, you can offset against the allowance all the costs related specifically to the business use of the computer, including depreciation of hardware at 33,3 percent a year of cost (written off over three years), and software at 50 percent a year of cost (over two years), as well as insurance, consumables and repairs.
Cellphone use or Allowance
If you have a very generous employer who gives you a cellphone on which you can make as many business and private calls as you wish, its value as a fringe benefit, added to your salary, is 15 percent of the cost of the asset, or 15 percent of its market value, whichever is lower.
Ron Warren of Pay Squad, who runs tax seminars for Dynamique Africa, says in practice a cellphone provided by your employer is taxed at R35 a month - which is a very good fringe benefit.
But it could also be argued that if this phone is intended mainly for business, its use is similar to the fixed line phone in your office, on which you are not taxed. If a cellphone is essential to your job - perhaps because you are a computer repair technician on call at night - there is no reason why this should be regarded as a fringe benefit or added onto your salary.
As a perk, you might be given a monthly allowance for a cellphone, which will be added onto your salary and taxed at your marginal rate of tax. At the end of the year, you could claim back on your tax return (with the support of detailed billing statements) the costs of all business calls.
Or if you have a cellphone which you are paying for, you could claim back from your employer the costs of all business calls. This reimbursement would not be taxable.
Other Items
As long as you can reasonably justify an expense incurred in the course of your job, you may be entitled to claim it on your tax return.
For example, if you are a doctor, you can claim the costs of subscriptions to medical journals and textbooks - but be sure you can produce receipts, in case there is a query. Some advertising executives apparently claim their M-Net subscriptions, because they argue their jobs require them to watch television advertisements, but whether, or how much of, this claim would be allowed for tax purposes depends on the attitude of your local Receiver of Revenue.