Certain limited expenses may be deducted by employees from their employment income. Such expenses include business-related travel, automobile, and entertainment expenses, with the amount that is deductible by an employee also being limited to the amount of the relevant allowance that is granted to the employee by their employer. A capital depreciation deduction is also available for allowance assets used in the course of employment. Legal fees incurred in respect of employment income are also deductible.
Employees who earn most of their income in the form of commissions may, subject to certain requirements, deduct their home office expenses.
As a general rule, allowances (subject to certain limits), granted to an employee by an employer to meet business expenditure are taxable in South Africa, but only to the extent that they are not so expended for business or exceed the maximum limit for deduction. Allowances to meet purely domestic or private expenditure, such as the cost of living, are taxable.
Donations to certain approved public benefit organisations are allowed as deductions, up to a maximum of 10% of taxable income.
Medical scheme contributions for taxpayers and their dependants (subject to certain maximum limits) convert to a specified monetary amount tax rebate. This rebate can be set-off against the person’s tax liability (see the Other tax credits and incentives section for more information). The conversion rate for persons over the age of 65 and persons with a disability is higher.
The contributions in excess of the specified credit amount as well as any other medical expenses are converted to medical tax rebates at a specified rate. Persons over the age of 65 and persons with a disability are subject to a higher conversion rate and are also not subject to a further threshold for the excess, which applies to persons under the age of 65 who have no disability.
Income insurance policy
Premiums paid on a loss of income insurance policy as a result of death, disablement, severe illness, or unemployment are not allowed as a deduction. However, a corresponding exemption results in none of the proceeds being taxable.
Contributions to a pension, provident, or retirement annuity fund are deductible (subject to certain maximum limits), provided that such funds are registered in South Africa.
The harmonisation of the tax treatment of payments to South African retirement funds to ensure consistent treatment of the contributions, irrespective of the type of retirement vehicle that the person is a member of, is effective from 1 March 2016. However, the requirement that a provident fund will also only be able to pay out one-third as a lump sum on retirement, with the remaining two-thirds having to be annuitised, has been postponed until 1 March 2019.
There are no other standard deductions from income for natural persons. The other deductions that may be claimed by persons earning remuneration income are limited (see Business deductions below, for more information).
If the taxpayer is carrying on a business in their individual capacity or in partnership, the deduction of business expenditure or losses is available to them on the same basis as to companies.
Where the deductions and allowances permissible under the Income Tax Act exceed income, an assessed loss results which may be carried forward for set-off against income earned in future years. Assessed losses that are realised by an individual who falls into the highest tax bracket and that result from so-called 'secondary trades' (such as sports, arts, dealing in collectibles, hobby-farming, and rental of property) are ring-fenced in certain circumstances.
Assessed losses incurred (deductible expenses exceed income) can be carried over to the next tax year to be set-off against the taxable income of that following year, provided that the taxpayer trades in that following year.
Taxpayers who earn employment income and are subject to income tax at the maximum marginal rate of 45% may, upon meeting certain requirements, have their losses from carrying on a secondary trade ring-fenced to that specific secondary trade.