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COMMENTARY: Allow me to disallow your allowable tax expenses!

Published:Wednesday | February 18, 2015 | 12:00 AM
Everald Dewar

The clock is ticking. The March 15 due date for filing and making payments on income tax returns for 2014 and estimated tax returns for 2015 is fast approaching.

This date is significant on the business calendar and, for some, it is troubling.

I am certain all tax practitioners have been bombarded by identical questions, as I have; questions such as: I did a part-time course at the university, can I claim the cost off my tax?; I have bought a car and will use it frequently for business, can you claim the car against my tax, please?; or I have spent $250,000 on my teeth, because my clients will not appreciate working with someone who resembles a certain DJ.

Certainly all these expenses can be duly considered reasonable deductions. Or are they?

Let's take the case of a piece of rented property with a lunchroom that needed repairs, which were long past due and something had to be done before the tenant's staff ended up dining on rubble descending into their plates.

Consequently a builder was called in who demolished, or more precisely, gave the finishing blow and renovated the premises, putting up something similar but slightly different and much improved.

Question: Can the cost be deducted against the rents? Your first thought would be that it is obviously repairs, because what else could it be? Well, an agent from Tax Administration Jamaica took the view that this was improvement as opposed to repairs. The cost was not allowed.

Those who have studied taxation know that no logical answer would have actually squared up with the conclusions reached by the taxman.

The legislation we are dealing with is, of course, Section 13 of the Income Tax Act, which categorically makes available much insight as to what expenses are deductible.

Prohibited categories

Section 15, on the other hand, gives some categories of expenditure which are not allowed. Therefore, it is like asking, 'Can I ride this bike?', but the given answer is, 'You cannot drive that car!'.

Nevertheless, why complain? Many tax advisers have lived happily with this situation. I suppose that by listing what you cannot have, there is a chance or presumption that you can claim everything else.

This presumption, however, is out the window as the TAJ will readily point you to the Section 15 provision, which is used as a weapon to which all others are subordinate. It states that no deductions shall be allowed that are not money 'wholly and exclusively expended' for acquiring the income.

The adverbs 'wholly and exclusively' are taken literally and the approach is to disallow many expenses that may have a dual purpose, including a wife accompanying her husband to a business conference and, recently, meals given to contracted workers. Only heaven knows where this will stop.

There are costs of operation that on a fair, straightforward commercial basis, ought to be allowed as business deductions. However, under this archaic rule, the sacred principle of disallowing reigns.

Wholly commercial expenses will be declared non-deductible. Even where expenditure is incurred only with the intent of benefiting the trade or as justified purpose for future prosperity, it can be denied. The conscious motive of the operator of the business when making the expenditure is not pertinent.

It is extremely difficult to know what is in the mind of the taxman; only he can say, and sometimes he himself cannot. At times, it may take a superhuman effort of mind to fathom the reasoning put forward for disallowing an expense.

This 'wholly and exclusively' rule is immortal and has followed us, dragging, screaming and kicking into the 21st Century. It was perceptibly never written with today in mind nor does it cater for the reality of modern businesses.

It seems to be fodder for the tax agent whose working life is dominated by an obsession with 'add backs', spiced up with interest and penalties.

Perhaps this rule has become unmerited, illogical or inconsistent and we need to stop subjecting businesses to it.

This writer proposes an amendment to the law to include the words 'incurred necessarily for business purpose'. It would recognise that companies carry on not just narrow trades but wider businesses and that some expenditures have necessary and future benefits.

n Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston. everald.dewar@bdo.com.jm