Some taxpayers do not understand why SARS has not been allowing their expenses as deductions, most of which they used to claim in the past without a problem. Of Course, tax laws have changed and continue to change from one to the next. But, the simplest reason why a taxpayer’s expenses may be disallowed would be due to the documents submitted are falling short of SARS’s requirements. In this article, I seek to provide more clarity on certain SARS requirements and expectations. I hope these will save you time and frustrations associated with verification, audits and notice of objections.
I have noticed that some taxpayers will include member drawings in their sole proprietor profit and loss statements. SARS will not allow this as a deduction. To understand why these can be disallowed by SARS, even if supporting documents are submitted, one needs to understand what drawings are. Drawings will be seen as personal and not business expenses. To avoid this, show your drawings on the balance sheet or be specific as to what it was that you expenses this money on. If you attended training to stay up to date with developments in your trade, specify this and as always ensure that you have the correct and valid tax supporting documents. Remember, drawings are personal expenses and cannot be deducted against your taxable income.
If you contributed to a medical aid fund, you will need to submit your medical aid certificate (the one you received from your finance house.) In some instances, I have seen SARS asking taxpayers to substantiate the contributions by way of bank statements of other relevant document to prove they paid the contributions. You may need to get a confirmation letter from the medical aid fund that you were a member and that you contributed so much in that tax year. Also, remember that additional medical expenses do not necessarily mean automatic tax deduction. Reality is that you will have to spend a significant amount of these medical expenses before they can be taken into account. SARS uses a complicated formula to determine if your out-of-pocket expenses qualify for a deduction. I would encourage you to consult with your tax practitioner to obtain clarity on this.
In the past, submission of a travel logbook, showing your business and private kilometres, was sufficient. What we have seen this year is that SARS is asking for the vehicle purchase agreement to validate the vehicle price, date of purchase AND to ensure it is in the taxpayer’s name. Now this can present a few challenges. For example, if the vehicle is in the name of your spouse, you may need to prove that you are making payments to the vehicle. This can be done by way of an affidavit or bank statements.
This is a big one especially for guys operating as sole proprietors. And this has always been a sticky one with SARS. The reason being that some taxpayers always try to slip in their personal grocery expenses here. You should always be prepared to provide SARS with a detailed schedule reflecting details of people entertained, nature of entertainment and the reasons for entertainment. You must also provide a description of your business and why the entertainment expenses should be deducted.
This is another sticky area. SARS will always want a taxpayer to prove their rental expense. A lease agreement clearly showing the rental expense is ideal here. For taxpayers earning rental income, they should submit the following documents to justify their expenses:
- Bond/mortgage statement clearly showing the interest accrued in the tax year under review (Only interest can be claimed as an expenses)
- Rental contract in your name (if you are married in community of property, remember you are taxed 50/50 on the rental income. You should have the rental agreement in both your names)
- Insurance contract clearly showing the premium you pay on the house.
- For repairs and other expenses, a detailed schedule of these expenses and valid supporting documents (You can also claim on the rates on the property)
I have also seen some taxpayers not understanding why some of their car payments cannot be deducted. Like rent above, you should be able to provide the instalment agreement clearly showing the interest charged on the vehicle. Also, remember only interest can be deducted as an expense.