Commission earners who earn more than 50% of their total remuneration as commission income are not limited in the type of business expenses they can claim, as long as these are incurred in the production of their income and are not capital or personal in nature.
To determine if these employees are entitled to claim business expenses, commission income recorded under code 3606 should be more than 50% of the total remuneration on the IRP5, which is the sum of gross retirement funding income (3697) and gross non-retirement funding income (3698). Total remuneration includes basic salary, medical aid contributions, group life premiums, and any retirement fund contributions made by the employer.
REMUNERATION IS SUBJECT TO PAYE
A commission can be a flat fee or a percentage of transaction value. It is an amount paid for executing a transaction. Although a commission earner can be referred to as an “agent” or “representative”, the individual is regarded as an “employee” in the Fourth Schedule of the Income Tax Act. Commission income is variable income. The employer is deemed to incur the commission earned and the employee is deemed to accrue the amount in the month of payment, regardless of when the sales or turnover amounts forming the basis of the commission calculations have taken place.
The deductions for business expenses available to these commission earners are similar to those available to individuals who are sole proprietors or independent contractors.
Typically, these commission earners would apply for fixed percentage directives using the IRP 3(b) form which requires a detailed income and expenditure statement to be included with the application. The detailed income and expenditure statement should contain projected income amounts, which can be based on amounts earned in the latest year of assessment, adjusted for any increases, and a breakdown of anticipated expenses with corresponding upward adjustments. The fixed percentage directives would provide for the percentage of employees’ tax (PAYE) that their employers should withhold on remuneration paid to them.
INCOME RECEIVED SECTION ON THE EMPLOYEE’S TAX CERTIFICATE
Commission Income
Section 23(m) prohibits a deduction of expenditure relating to employment or holding of office unless the deduction is specifically permitted in terms of section 23(m). The prohibition of deductions applies to expenses, losses, or allowances relating to the employment of any person or an office held by any person.
The term ‘employment’ refers to an employer-employee relationship.
The holding of an office generally flows from an appointment, for example, a Minister in the Cabinet or a company director, whereas the holding of employment flows from a contract.
The prohibition of deductions applies to natural persons only.
A person who is an independent contractor under the common law is not affected by the prohibition of the deductions. The prohibition applies to expenses, losses, and allowances that relate to ‘remuneration’ as defined in the Fourth Schedule to the Act. An employee or office holder who receives two or more streams of income may be in a situation where the deduction of expenses, losses, or allowances relating to the ‘remuneration’ stream is prohibited, while it remains deductible if it relates to another trade.
The following expenses and allowances may still be deducted:
Any contribution to a pension or retirement annuity fund may be deducted from the income of that person. Section 11(n) applies to the 2016 year of assessment and prior years and allows deductions for qualifying current contributions and arrear contributions made to a retirement annuity fund. With effect from 1 March 2016 deductions in respect of pensions, retirement annuity funds, and provident funds are covered by section 11F.
Expenses in terms of section 11(nA) and 11(nB), i.e. a refund of any amount (including voluntary payments) received or accrued in respect of services rendered or to be rendered or any amount received in respect of or by virtue of employment or holding of office as was included in the taxable income of that person or a refund of a restraint of trade payment received by him/her.
Any allowance or expense which may be deducted from the income of that person in terms of section 11(c), (e), (i), or (j) – legal expenses, wear and tear, bad debts, and provision for doubtful debts.
For years of assessment prior to 2015, any deduction that is allowed under section 11(a) in respect of any premium paid by that person in terms of an insurance policy:
o That covers a person solely against the loss of income as a result of illness, injury, disability, or unemployment.
o In respect of which all amounts in terms of that policy constitute or will constitute income as defined. Any expenses incurred to maintain a home office. Such expenses will only be considered in special circumstances.
An agent or representative whose remuneration is normally derived mainly (more than 50%) in the form of commission based on sales or turnover that are attributable to him/her, is excluded from the provisions of section 23(m). This means that should the commission income exceed 50% of remuneration, the expenses incurred may be considered as a deduction.
For purposes of section 23(m) the terms ‘agent’, ‘representative’, and ‘commission’ should be interpreted as follows:
‘Agent’ – a person authorised or delegated to transact business for another.
‘Representative’ – one who represents another or others.
‘Commission’ – a percentage of sales or turnover of the person on behalf of whom the agent or representative is acting.
To determine which part of your remuneration does not relate to commission income, calculate the total amount of remuneration and exclude the non-taxable reimbursement allowances.
The following exceptions apply:
Mainly and normally in the form of commission:
A taxpayer receives remuneration which includes commission income, and although the commission income is less than 50% of the gross remuneration received, he/she usually derives remuneration mainly in the form of commission (more than 50%). In other words, the taxpayer’s
remuneration is normally in the form of commission which is more than 50% of gross remuneration, except for the relevant year of assessment, the deductions claimed in the production of income may be considered.
Documentation proving that the income is normally mainly received in the form of commission must be retained for a period of five years after the date of the submission of the return.
Non-executive directors:
Non-executive directors are holders of an office and are therefore subject to the limitations imposed by section 23(m) if the expenses, losses, or allowances relate to that office, and they have received remuneration as defined in the Fourth Schedule to the Act in respect of that office. If they render the services independently of the person to whom they are rendering the service, they are independent contractors, and section 23(m) does not apply.
HOME OFFICE EXPENSES – SECTION 11(a) read with s23(b) and 23(m)
A taxpayer can claim home office expenses if the requirements for section 11 are met and the prohibitions of sections 23(b) and 23(m) do not apply.
- Section 11 provides for the deductions that a person who is carrying on a trade can claim.
- Section 23(m) prohibits the deduction of any expenses in respect of residential/domestic premises, except if a part of the residential premises is used for purposes of trade by a person in employment, a COMMISSION EARNER, or a holder of office.
- Where part of the residential premises is used for trade, the requirements of section 23(b) must be met to claim qualifying home office expenses.
In terms of section 23(b) a part of the residential premises will only be regarded as being used for trade if the following requirements are met:
- It is occupied for the purposes of the taxpayer’s trade
- It is specifically equipped for purposes of the taxpayer’s trade.
Examples: medical equipment required for a dentist’s room, tools for a mechanic, desk/computer/chair for an office-type worker.
- It is used regularly for the purposes of the taxpayer’s trade (i.e. frequently).
The taxpayer will not meet the requirement of ‘regular use’ if for example he/she works once a week from the part of the residential premises and for the rest of the week from a separate business premises/the employer’s premises.
- It is used exclusively for the purposes of the taxpayer’s trade.
The taxpayer will not meet the requirement of ‘exclusive use’ if for example he/she works in the lounge/dining room, if these rooms are also used for their normal purposes; or if the taxpayer and the spouse share the dedicated study/room in the home to work (as the room is being shared it is not used exclusively for the taxpayer’s trade only).
If the income against which the deduction is claimed flows from the holding of employment or an office, no deduction is allowed unless:
- The income from such employment or office is derived mainly from COMMISSION OR OTHER VARIABLE PAYMENTS which are based on work performance, and duties are mainly performed otherwise than in an office provided by an employer.
- The taxpayer’s duties are mainly performed in that part of the private residence occupied for purposes of his/her work (e.g. a study).
- “Mainly” means more than 50%.
TRAVEL EXPENSES (E.G. COMMISSION INCOME)
If you are a commission earner and you did not receive a travel allowance, you may claim a deduction for travel expenses incurred in the production of your income if you kept a logbook. The logbook must be retained for a period of 5 years after the date of submission of the return.
ALLOWABLE ACCOUNTANCY FEES – SECTION 11(a)
The deduction for Accountancy / Administration Fees for the completion of Income Tax returns will be allowed when business income or any of the following income sources are applicable:
- COMMISSION
- Local Interest
- Royalties
- Other Receipts and Accruals
- Foreign Dividends
- Foreign Interest
- Other Foreign Income
- Pension Annuity
- Retirement Annuity
- Purchased Annuity
Only professional fees that were actually paid or are payable for the completion of the Income Tax return can be considered as a deduction. No deduction will be allowed against remuneration in the form of salary or wages.