Deducting Business Entertainment Expenses
08 March 2013
Posted by: Erich Bell
General tax rules determine that if one incurs business
related expenses, it can be deducted from income. In terms of section 11(a), a
person is allowed a deduction from income if the expenditure or loss has actually
been incurred in the production of income, provided that such expenditure or
loss is not capital of nature. Purchasing trading stock for the purpose of
selling it; is easy to classify as a general deduction, but entertainment
expenses is a completely different story. The question is whether entertainment
expenses are actually incurred in the production of income.
Entertainment is defined in Section 1 of the VAT Act, as
the provision of any food, beverages, accommodation, entertainment, amusement,
recreation or hospitality of any kind by a vendor whether directly or
indirectly to any person in connection with an enterprise carried on by him.
When a person entertains another person or a group of people, there would have
been expenditure incurred. This expenditure would also not be capital of nature
because the entertainment is provided or consumed in a short period of time.
In the court case of Port Elizabeth Electric Tramway Co
Ltd v CIR (1936 CPD), Judge AJP Watermeyer stated that the expense incurred
should be closely linked to or incurred in the production of income. But how
close should this link be? This principle can be approached from a few
different angles. The entertainment of the client could have occurred in a
clear business environment where the main purpose of the provision for
entertainment was to conduct business. Another view might be that there was a
general expectation of getting possible future income or a specific business
benefit as a result of entertaining a client.
So whether one is taking a client, or potential client,
out to dinner or providing entertainment at a business conference, it can be
argued that the expenses were incurred in the production of income. This is
supported by the Sub-Nigel Ltd v CIR (1948 A) court case, where it is said that
as long as the expenditure has been laid out for the purpose of earning income,
it is deductible even if the income may only be earned in the future.
Therefore, a very
important rule is that one must be able to prove that the entertainment expenses
were incurred for business purposes. Entertainment expenses that were incurred
for personal use will not be allowed as a deduction. Thus, taking the family
out for a birthday celebration may not be deducted in terms of section 11(a),
but how can the South African Revenue Service (SARS) prove this was not for
business purposes? Section 29(1) of the Tax Administration Act determines that
a person has the duty to keep his records, books and accounts used in his
business. This documentation will provide evidence when it becomes necessary to
prove that the entertainment expenses were for business purposes.
Denial of Input Tax
A person will be denied the opportunity to claim input
tax on goods or services if these goods or services were acquired for
entertainment purposes, however, there are special cases where it will not be
1. A vendor will be able to claim input VAT on entertainment
if the entertainment supplied was in the furtherance of their business. This
will for example be in the situation where a vendor’s business is a restaurant
or some other form of entertainment.
2. The second case may be where a vendor supplies
entertainment for bona fide promotional purposes to current customers. An
example might be the situation where a company provides entertainment at a
business event for promoting their brand.
3. In the event where a vendor supplies entertainment in
exchange for remuneration covering all costs by employees or any connected
4. In the instance where a vendor is operating a taxable
passenger transport service. An example of transport services might be where a
person supplies transport by air to businessmen.
5. Vendors organising seminars or similar events for reward.
An example may be where a professional organisation provides a Continuing Professional Development training seminar for
6. Where any meals, refreshments or accommodation is
supplied by a vendor for his employees or any self-employed natural person who
is required to be away from his usual place of residence/place of business for
at least one night.
Therefore, spending money on clients, or potential
clients, will not only safeguard their trust and loyalty but will also be
beneficial for you and your business as the entertainment expense deduction
will reduce your taxable income. Keeping the necessary documentation will
support your case when SARS comes knocking.
Source: Charl Geldenhuys