I’m often asked by my clients “what can I claim against tax?”, “What can I deduct for tax purposes?”
So, let’s start with, why would we be able to claim any form of expenses? This is where we have to go back to the basics. Remember that the Income Tax Act stipulates that we can claim expenses, if it is in production of income, incurred in the year of assessment, actually incurred or become due and payable and not capital in nature.
Oh goodness, what does all that waffling mean? Let’s break it down a bit:
- First and foremost, am I carrying on a trade? Am I spending money to make money?
- Number two, was the money actually spent? Was the cost actually incurred?
- Was the money actually due and payable? Did I receive an invoice for payment due by a certain date?
- And was that money for the relevant tax year, so if my tax year for my business runs from the first of March to 28 February of the next year, did it happen in this particular tax year?
- And was it a running expense? Or did I in actual fact buy an asset? Remember, for the expense to be deductible against taxable income it cannot be capital in nature? But when is it capital? It’s when I’m buying assets. In other words, it’s not a running expense.
An example of this would be if a business owns a commercial building which is let to tenants. The property may be bonded, and utilities and maintenance would be applicable. In this case the tax-deductible expenses incurred for this business would include the interest on the mortgage bond, utilities and maintenance. It is important to remember that the premium for the bond would pay for interest and capital, but the capital repayment is not a tax-deductible expense.
But what if I decide that I want to take the building off the grid as continuous power outages is jeopardising my rental income? I opt to install solar power and gas. In this case what I’m doing is a capital improvement on my building and although I may be able to claim the depreciation as expense, I cannot claim the money spent on the capital improvements.
I hope that this article shed some light on the mysteries of tax. Please feel free to reach out if you need tax planning for your business or trust.