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Deductibility of expenses incurred by a sole trader for training purposes

13 November 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: If an individual farmer attends an international expo to learn new methods of farming, are the attendant expenses deductible? The farmer is a sole trader, operating in his personal capacity. Are there any tax incentives or benefits available to a South African company if they pay for the travelling expenses of employees travelling for business purposes?

A: The deduction will only be permitted if it meets the requirements of section 11(a) and is not prohibited by section 23(g).  

The two requirements which are often in issue when dealing with the deductibility of expenditure incurred on education/training are the nature of the expenditure and whether it was incurred in the production of income. 

The leading case on the nature of expenditure incurred on training is that of Smith v SIR1968 (2) SA 480 (A), 30 SATC 35. The case dealt with the question as to whether expenditure incurred in defending criminal charges was deductible. Steyn CJ held that the reference in s 11(2)(b)bis (the predecessor to s 11(1) in the 1941 Income Tax Act) to 'of a capital nature' does not have the effect that, when dealing with the question as to the nature of the expenditure in respect of a 'structure' surrounding a taxpayer's income-earning capacity, it is sufficient to prove that the structure was of a capital nature. The structure itself should be capital.

The judge also rejected a statement by an American court to the effect that 'reputation and learning are akin to capital assets, like the goodwill of an old partnership' (Welch v Helverling 290 US 111 115). According to Steyn CJ, the word 'capital' should be given its ordinary meaning and includes 'money and every form of property used or capable of being used in the production of income or wealth' (at 40). The taxpayer in the Smith case tried to protect his right to practise as an accountant that is the right to enter into contracts of employment, which right has no commercial value and cannot be described as property. Expenditure incurred in this respect is thus not of a capital nature as the structure itself is not capital.

A deduction of expenditure on training is often disallowed on the basis that it was not incurred in the production of income. It may be argued that expenditure incurred in attending a conference presented by other institutions is also deductible provided the purpose for which it is incurred is sufficiently closely connected to the taxpayer's income-earning activities.  

The cost of employees travelling on business will also be deducted if it meets the requirements of section 1(a) (read with section 23).  Even if this is done by way of an allowance the deduction should be permitted.  There are no other special incentives.  

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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