The following question was recently received from one of our readers:
I see myself as an independent contractor as I do contract work (project management) for different companies. In the 2023 income tax year, I worked for four companies, of which only one indicated on their IRP5 under code 3616 that the income I earned was that of an independent contractor.
I also relocated from Cape Town to Gauteng during 2022, as one of these companies indicated that they would employ me in Gauteng – but in the end, I had to pay the relocation costs myself. However, before relocating to Gauteng, I had to travel to Gauteng on a few occasions for projects for one of above four companies. Furthermore, I am placed at clients of the companies I work for, and have to use my own cell phone, computer, printer, etc.
My questions are as follows:
- Can I claim expenses earned in the production of income (motor expenses, cell phone, computer, etc) on the IRP5s where the income code only indicates amounts received under 3601?
- Can I claim the relocation expenses paid by myself?
- What expenses can I claim if I use a home office at the home I rent?
- I assume I can claim the costs of travelling to Gauteng for work purposes?
Answer
As you have pointed out, the characteristics of an ‘independent contractor’ include having multiple clients, as well as being required to use your own equipment, telephones, and vehicles.
Additional requirements include not being a member of any benefit fund run by one of your clients and not being subjected to direct control concerning the manner in which work is performed. In other words, there must be no elements to the relationship that bear the signs of being one of employer/employee.
Unfortunately for many such independent contractors, clients tend to err on the side of caution when it comes to the requirement to deduct employees’ tax. This is because the client itself (and possibly its directors as well) becomes liable for the tax if they fail to deduct tax under circumstances where such deduction is in fact required.
That the rules allow a client to rely on an affidavit in good faith seems to have little impact, and many independent contractors still face the prospect of having PAYE deducted from payments for work performed.
If employees’ tax is in fact deducted, then it is mandatory for the contractor to be issued with an IRP5 certificate at the end of the tax year. However, what is critical is that the gross income paid to the independent contractor must be disclosed under code 3616 (independent contractors), and not 3601 (income – taxable).
The reason for this is that if the gross income is shown under 3601, the independent contractor will not be able to claim any expenses, because income shown under this code is regarded as salary. This means that if you are in fact, an independent contractor, you must go back to your client and get them to cancel the IRP5 and issue a fresh one indicating the income under code 3616.
As far as the relocation costs are concerned, if you can prove to SARS’ satisfaction that such relocation costs were in fact incurred in the production of income, there is no reason why you should not be able to claim these costs as a deduction.
However, such costs must be reasonable, and normally include the physical costs of relocating yourself, your family, and your personal goods and effects, as well as costs incurred as a direct consequence of relocating (such as costs of selling your old house, purchase costs on the new house, re-registration of vehicles, electricity and telephone connection fees, etc.).
If you are using a portion of your rented premises as office space, the norm is to claim a portion of the rental based on the ratio of floor space used by the office as a proportion of the total floor space. However, costs incurred directly in the business (such as stationery, telephones, etc.) can be claimed in full.
Finally, since you would normally have been conducting your business in the Cape Town area at the time, the costs of travelling to Gauteng to see clients would be deductible.
Bear in mind that certain SARS offices have argued that your first and last trips of the day should be regarded as private if you go directly from home to the client. According to this reasoning, if your office is 4 km from your home, but you travel directly to a client that is 150 km away, the full 150 km would be regarded as private.
Such reasoning is clearly over the top, and it can surely not be the intent of the legislature to penalise genuine business travel in this manner. If one really wanted to split hairs, the reasonable approach would be to deduct the 4 km from the actual distance travelled, thereby claiming the difference (146 km) as being business travel.
Naturally, if you fly to another city for business travel, and hire a car in that city, the full cost is deductible as business expenditure provided that you don’t try to combine the business trip with a holiday. SARS scrutinises such travel rather closely, particularly when it comes to overseas travel.
WRITTEN BY STEVEN JONES
Steven Jones is a retired tax practitioner and member of the South African Institute of Professional Accountants.
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