Deductibility of expenses incurred by a sole trader for training purposes
13 November 2014
Posted by: Author: SAIT Technical
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
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
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