Tax Tuesday: Tax deductions and investment expenses

In Latest, Tax Tuesday by De Wet De Villiers

In The Fat Wallet podcast, Lockdown Money Crisis, Celma wanted to understand why the administration fees on her investments aren’t tax-deductible.

Generally, to assess whether an expense is tax deductible, it needs to be determined whether the expense:

  • Was incurred for the purposes of trade (not for purposes of trading shares, but “trade” as defined for tax purposes);
  • Was incurred in the production of income; and
  • Was not of a capital nature (generally speaking the costs involved when buying assets would be of a capital nature).

Buy-to-let property as a long-term investment

With this in mind, let’s consider the classic scenario of income earned from a rental property:

  • The rental property constitutes the “trade” activity, i.e. a trade that’s conducted with the intent to make a profit.
  • Electricity, water and Wi-Fi expenses sit within the production of income and can be deducted against the rental income.
  • The costs of improvements or additions to the rental property will not be allowed as a deduction against the rental income as it is capital in nature. These costs may, however, be added to the capital asset’s base cost. 

Now, when considering a long-term investment it’s clear that there is no short-term scheme of profit-making. The investment will, therefore, be regarded as a capital asset. Any expenses relating to such an investment will unlikely be allowed as a deduction, as the fees would not have been incurred for the purposes of “trade”.

Other long-term investments 

Security transfer tax and broker fees can be added to the base cost of an investment. This is because these costs are incurred when acquiring shares. The portfolio management/administration fee is not directly linked to acquiring the share, and therefore not added to the base cost. 

What about share traders?

The position for a share trader would be slightly different. The expenses would most likely not be of a capital nature, and if you are actively trading could be argued to be for the purposes of “trade”.

  • Written by Ernst Jordaan

Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday. Don’t miss it!


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