Tax and trips

Going abroad to buy a stud bull and treat your family to a holiday? With a bit of planning, you can enjoy tax deductions that weren’t available in the past

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In 1950, a South African farmer went to Switzerland to buy a stud bull in order to improve his herd, and combined the business trip with a holiday with his wife.

The bull was shipped to South Africa, but the “bare cost” of the farmer’s trip was refused as an income tax deduction. On appeal, the judge ruled that because the trip had had a dual purpose – it was undertaken for the purchase of a bull and for a holiday – the bare cost deduction claim had to be denied.

The tax payer had not proved that the expenses were “exclusively laid out or expended for the purposes of trade”.

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What’s the position today? If a SA cattle breeder were to go overseas to buy an animal and also enjoy a holiday with his family while there, would their expenses, or any part thereof, be allowable as a deduction for income tax purposes?

The answer is yes!

In the 1984 case of the Nemojim company, the tax payer had a brilliant scheme involving the buying and selling of companies. Once it had acquired a company, Nemojim distributed the dividends to itself and sold the company.

Naturally, the sale price was less than the purchase price, the stripped company not having the same appeal as a company rich in cash and assets. So, on paper, the tax payer made losses for tax purposes – and enjoyed a dividend income, which is free of tax.

This continued until the revenue services changed the rules: They disallowed the deduction of the purchase consideration insofar as it related to cash-rich companies.

Part of the income the tax payer earned from its trade in such companies was tax-free dividends. With the change, only deductions earned in the production of taxable income are allowable for tax purposes. In the deduction formula in Section 11(a) of the present Income Tax Act, the word “exclusively” is not used. Instead, expenditure has to be “actually” incurred in the production of income.

In addition, the deduction has to be apportioned between taxable and non-taxable income. Thus, if a farmer were to go abroad to buy stock necessary for producing taxable income, the expenses associated with that purchase would be allowable as a deduction.

Money spent on a holiday enjoyed at the same time would not be expenses that went into the production of income and would be disallowed. So, if you’re planning a dual purpose trip, get separate invoices for yourself and your family to make claiming easier.

Peter O’Halloran is head of tax at BDO, Gaborone. Call 00267 390 2779 or email [email protected] with the heading “Farmer’s Weekly tax issues”.