The deadline for submissions of income tax returns is on the 16th of November 2020. We’re assuming that there still a few of you out there who have not yet finalised or submitted your income tax returns. So, we’d thought that we would do a quick post to give you some guidance on what expenses traders can claim from income tax.
A few disclaimers before we start: some of the things that you can claim are listed below, but please note that the percentages (%) indicated will differ for individual taxpayers, depending on their individual circumstances. Therefore they serve as a general guide only, but as a rule of thumb, the portion of an expense type that you can claim must be in line with what the actual use is. So if you claim 50% of your cellphone bill, you must be able to prove that 50% of the calls were related to trading and research. If you need some help, reach out to us and we’ll gladly help you compile and submit your return.
Alright, so in a nutshell, your trading accounts can be grouped together as a ‘business activity’ and then expenses can be claimed against that in your tax return. This effectively reduces your taxable income and reduces your tax obligation.
Here are the expenses that can generally be claimed:
- 50% of your annual internet bill – you use the internet to trade and do research, but you also use the internet for Netflix and general browsing. Therefore you can claim up to 50% of the annual internet expenditure as you need to be connected in order to generate the income earned from your trading.
- 50% of your annual cell phone bill – making calls to brokers, other traders, analysts, etc. are all expenses that you need to undertake in order to generate income. Therefore a portion of your cell phone bill can be claimed as an expense against trading income.
- 30% of your rent or bond – you likely have a home office in which you do your trading and research. Technically you can only claim for the portion of your home that makes up your office. So if your home is 100 square meters, and your office is 15 square meters big, you can claim 15% of you annual rental of bond expenditure. This is capped at 30% of your total annual expense.
- 30% of your water and electricity bill – once again, if your trading office is at home, you are able to claim up to 30% of your water and electricity bill as those are inputs you need in order to generate income.
- Software, data subscription services and newsletters – if you use third party software or have monthly data or newsletter subscriptions that you need for your trading and research activities, you are able to claim these expenses. You could also include a portion of your DSTV subscriptions here (up to 50%) for the purposes of watching news channels during working hours.
- Computer hardware purchases – you can depreciate any computer hardware purchases made in the year. If the purchase price was R7500 or less, you can write it off completely and if it was more than R7500, you can depreciate it and write it off over a three year period. Thus, effectively reducing your earnings for the period. Note that this includes things like UPS systems to protect you from load shedding.
- Furniture purchases – as is the case above with computer hardware, you are able to write down (depreciate or write off) items like chairs, desks and extra screens, or TV’s used to watch news in your office.
- Brokerage and monthly account fees – you can claim these, although they are usually included in the tax certificates your broker sends you annually, so they are technically already included in your final profit and loss calculation used to compile the tax certificates. You cannot claim them twice.
- Salaries paid to supporting staff – if you have a domestic worker that cleans your office or an assistant that helps you with research, you are able to claim back their salary as an expense required to generate income. In the case of a domestic worker, you cannot claim the entire salary as they also do work in the rest of the house, but you can claim one or two days a week, depending on how often they work for you, specifically in respect to your ‘trading office’.
- Books and educational resources – if you have bought any books about trading or educational material about finance in general, you are able to claim those purchases as an expense.
- Consumables – coffee, lunch, stationary and anything else that is consumed (used up) in order for you to be able to generate income and perform your trading and research tasks.
- Travel and entertainment – if you traveled to an investment conference and had to pay for flights and a ticket to the conference, or even had a lunch with an analyst or your stockbroker, you are able to claim those expenses as they were required for you to generate trading income.
As you can see, there are many expenses that you can claim against your trading activities, but consider this a fair warning; you have to be able to prove that these expenses are in fact related to your trading activities.
SARS will audit you if you claim all these various expenses and you will have to supply supporting documents in the form of:
- a schedule outlining when and how these expenses were incurred,
- three sample statements or invoices for each expense type,
- a transaction record of all your trading accounts, as well as,
- a declaration or sworn affidavit stating that these expenses are in fact legitimate expenses incurred in the income generation process.
It is highly advised that the schedule and sample statements be prepared before submitting your return so that you can immediately submit them when the request for supporting documents come. Sometimes SARS will ask for more supporting documents after you have already submitted the schedule and sample statements, at which point a detailed trading record and declaration might be required.
Also, please note that once you are on the audit list at SARS, they will likely audit you every year. It’s not the worst thing as it forces you to stay on top of your expenses and generally works in your favour. You just have to make sure that all the supporting documents are accurate and correctly accounted for in order to avoid any disputes or tedious back-and-forth admin.