NEWS & OPINION
31 January 2021
BOBBY WESSELS Consultant, AJM
Deducting fees from income received on investments
W
ith most South Africans facing high levels of strain on their pockets, following months of hard lockdown and ongoing economic malaise, one way to achieve a measure of relief is deducting fees from income received on investments. Crucial to claiming such a deduction is ensuring that the expense was incurred in the production of income, for the purposes of trade, and was not capital in nature. These are three key hurdles to overcome, which form part of the general deduction formula and, if not satisfied, will result in the deduction being disallowed. Whether an expense is capital in nature or not has possibly become one of the most contested questions in tax law today. Our courts have laid down a variety of tests that aim to solve this complex problem. Common to any enquiry as to the capital nature of an expense is the principle that the true nature of the expense needs to be considered. Where the expense is part of the cost incidental to the performance of the income-producing operations, it will not be regarded as being capital in nature. Where shares are traded frequently – although not decisive – it may be indicative of those shares not being capital in nature. Fortunately, for those investing in shares, the legislature has stepped in to provide more certainty on the matter. Where you hold an equity share for three years, section 9C of Income Tax Act No. 58 of 1962 deems that share to be capital in nature and would automatically exclude you from including these expenses as deductions. For most investors, the next
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biggest hurdle in the deduction of is thus determined based on the facts fees incurred on investments held, is and the nature of the entity’s activities. whether or not they can be seen as It is a question of degree. carrying on a trade. While section 1 The final requirement as part of of the Act provides for the general deduction a definition of trade, formula is whether WHETHER ONE difficulties arise where the expenditure an activity does not QUALIFIES FOR was incurred in the fall within the ambit of production of income. THE DEDUCTION The South African that definition. Whether a person is courts have confirmed OF ADVISER carrying on a business FEES IN TERMS that such expenses are as an investor of deductible expenses, OF THE GENERAL provided they are so money will depend on the facts and closely linked to such FORMULA CAN circumstances of the acts as to be regarded BE TRICKY TO particular case. Much part of the cost of ASCERTAIN will depend on the performing them. From scale and nature of its this, two questions arise: activities. The fundamental principles (a) whether the act to which the of when a person is carrying on a trade expenditure is attached is performed
in the production of income and (b) whether the expenditure is a necessary concomitant of the trading operations. Section 23 of the Act makes provision for cases in which deductions will be disallowed. Among those are any expenses incurred in respect of amounts received or accrued which do not constitute income as defined in the Act (such as a portion of local interest income and local dividends). Provided all the requirements of the general deduction formula are met, the example below can show the deduction to be afforded to investors: Consider Mr X, who is under 65 and has paid R1 500 in adviser fees. He earned local interest on his investments of R50 000, local dividends of R20 000 and foreign interest of R50 000 during the tax year. First, subtract the income tax exemptions received from his taxable income. The local dividends would be completely exempt, while the first R23 800 of local earned interest will be exempt. The foreign interest will be wholly taxable. This leaves Mr X’s taxable income at R76 200. The taxable income must be calculated as a percentage of total amounts received to get what is called the apportionment percentage. The apportionment percentage is calculated as follows: R76 200/ R120 000 x 100= 63.5%. This means that of the R1 500 paid in adviser fees, only 63.5% (or R952.50) can be deducted. Whether one qualifies for the deduction of adviser fees in terms of the general formula can be tricky to ascertain, yet if applied correctly, some healthy savings can be achieved.
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