Business Expenses for a Scheuler Income Earner 

TDS 22/18: Income tax - Timing of deduction and Deduction for schedular income expenses

Often small business owners encounter the dilemma of whether certain payments can be claimed as an expense or not. Technical decision summary TDS 22/18 investigates various concerns surrounding the deductibility of expenses.

There are two key issues. Firstly, whether deductions for expenses incurred are to be allocated to the year in which they are incurred or to the year that income will be returned.

Timing of the expense deduction

A taxpayer is allowed to deduct any expense, including depreciation, that is incurred in them deriving their assessable income. As the taxpayer in this case was a trading individual, the accrual basis of accounting is most appropriate. This means it is possible for an expense to be incurred separate from actual cash payment. For non-trading individuals, cash basis is used and an amount is incurred when payment is received/paid. S BD 4 of the ITA states that a deduction for an expense or loss must be allocated to the year in which it was incurred. This is the decision that has been applied in the particular case looked into in TDS 22/08 so it is safe to infer that expenses must be allocated to the year to which they relate, and not to when income is being returned.

Nature of the expense deduction

The second issue explored is whether employment related expenses can be deducted against income. 

S DA 2(2) of the ITA 2007 general permissions states that a deduction is denied when the amount of expenditure/loss is of private/domestic nature. The Court of Appeal stated in a previous case that items such as food, clothing and shelter are all basic living expenses and are not relevant and exclusive to employment.  

Meal Expense

Meal expenses are a private and necessary living expense. Any extra spending on meals as a result of not being home is not a work requirement and they are therefore generally not deductible.

Travel Cost

When the cost of travel has arisen due to the commute between work and home or another unrelated income producing activity, it is generally not deductible. As this commute cannot be directly linked to deriving an income and is the result of the taxpayers personal decisions, it is not deductible. In order to be deductible, the travel must be for work e.g., being sent by employer to visit a client site.

Accommodation Expense

Accommodation expenses that have arisen as a consequence of the taxpayer living far from work, such as having to stay in a different city during the week to avoid a long commute to work, are not deductible. This is because this accommodation does not directly relate to the derivation of income and is of a private nature and the result of a personal decision. Only if the accommodation expense directly relates to the derivation of income will it be deductible e.g., being sent by employer for a meeting/conference.

The above are the general rules regarding schedular income expenses and these can differ depending on the case. Ultimately, whether an expense is deductible or not will come back to the idea of whether it can be directly linked to the derivation of an income.

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