Tax Court Disallowed Deduction: Personal Expenses Disguised as Business Costs
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Case: SARS v DRJ [2025] ZATC BFN (14 April 2025)
The Background
This case involved DRJ, a business owner who claimed a range of expenses as tax deductions. SARS disallowed many of these, arguing they were not incurred in the production of income or were of a capital nature. DRJ objected, saying the expenses were necessary for his business operations.
The Dispute: Did the Expenses Occur "In the Production of Income"?
The main issue was whether the disallowed expenses were genuinely linked to DRJ's income-generating activities. SARS argued that several deductions, such as payments made from a personal bank account, legal fees for a private matter, and fees paid to a financial advisor, were not connected to earning income or were personal in nature. DRJ insisted these costs were business-related.
Under South African tax law (specifically section 11(a) of the Income Tax Act), an expense can only be deducted if it is:
Actually incurred, and
Incurred in the production of income—meaning there must be a direct link between the expense and income-earning activities.
How It Applied in This Case
DRJ had claimed a range of deductions, including:
Payments made from his personal bank account
Legal fees relating to personal matters
Financial advisor fees not clearly connected to business operations
SARS challenged these, and the court upheld the challenge. The judge explained that for an expense to qualify, it must be closely tied to the taxpayer’s trade or business, not just incurred during the general course of their life. Even if an expense is helpful or convenient, if it doesn’t directly assist in earning income, it can’t be deducted.
For example:
Legal fees for a private dispute don’t help generate business income.
Payments from personal accounts, without clear business links, are hard to justify.
Vague or poorly documented advisory fees fail the “income production” test if there's no evidence they relate to business strategy, operations, or compliance.
The Ruling
The court agreed with SARS. It found that DRJ failed to provide sufficient proof linking the expenses to his income-producing activities. Many of the payments were made from a personal account or lacked supporting documentation, while others were clearly for private purposes. The judge noted that for an expense to be deductible, there must be a clear, provable link to income generation. DRJ didn’t provide adequate proof of this link. The expenses were either personal, capital in nature, or simply not tied clearly enough to his income-generating activities.
Takeaway for Accountants
Clients often blur the line between personal and business expenses, but SARS won’t. This case is a clear reminder: if it’s not linked to earning income, or if there’s no paper trail, it won’t fly as a deduction. Make sure clients maintain clean records and separate personal and business finances.
