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A Fin24 reader writes:
I receive a monthly allowance of R500 which is fully taxed
each month to use my personal cellphone for business calls. I have read that
one may claim a tax deduction for wear and tear based on the value of the
cellphone written off over two years.
I phoned the SA Revenue Service (Sars) and I was told I
could claim the annual cost of my phone.
Which is the correct or best way?
Wayne Twigg, head of the tax and accounting division of Twigg, responds:
You have two options:
1. Claim the business costs incurred by you against the allowance which you have received (and been taxed on).
Or:
2. Claim a wear and tear allowance against the value of the
cellphone.
Broadly speaking, a non-capital expense which is incurred in
producing income is likely to be allowed as a deduction against that income.
This would form part of what is known as the general deduction formula (s11a) -
there are a few other provisos in s11a that are not relevant to your question.
Two choices
- Cellphone
allowance: as an employee receiving a cellphone allowance, provided the costs
incurred by you are business-related, there is no reason why Sars will not
allow the costs actually incurred (to the maximum of the allowance granted) as
a deduction each year.
This would be regarded as a reimbursive allowance - in other
words your employer is reimbursing you for the business expenses you have
incurred.
- Wear and tear allowance: a key element of the general deduction formula (s11a) mentioned above is that the expense is not a capital expense. For capital items used to produce income, Sars allows you to deduct a portion of the value of the item each year based on the degree to which the item has been "used up".
To work this out, you would look at the useful life of the
asset - in this case the cellphone, and divide the value of the phone (less
what you think it would be worth at then end of its life) over its useful life.
Cost vs value
An interesting distinction between the two options above is
that the first is based on your cost, while the second is based on the value of
the asset irrespective of the cost. The choice will depend on whether you
regard the cellphone as a capital item or not.
For example, say you purchase a phone on a two-year contract
paying R200 per month for 24 months. The phone is valued at R1 500 and is used
50% of the time for business.
It is likely to have a useful life of three years, after
which it is worthless. You receive a cellphone allowance of R500 per month.
Option one: you regard the cellphone as an asset. The value
of the phone will diminish by a third each year equating to R500 per year - 50%
of this can be attributed to producing income, so R250 can be claimed. In
addition, you can claim the actual cost of your business calls.
Option two: you regard the cellphone as an expense. Your
contract costs R200 per month - 50% is work related, so you can claim R100 x 12
= R1 200 plus the actual cost of business calls made for the year
Both these options are limited by to the maximum of your allowance: R500 x 12 = R6 000 per year.
- Fin24
