As the end of the financial year approaches for companies with a February 2025 year-end, business owners and directors are under considerable pressure to ensure their financial records are accurate and compliant. A common pitfall for many business owners is running personal expenses through the company and incorrectly claiming deductions. This practice not only raises red flags with SARS but can also lead to serious legal and financial trouble, including criminal proceedings, potential liquidation and insolvency enquiries.
With SARS scrutinising businesses more closely, it’s important for business owners to understand what qualifies as a valid tax deduction under Sections 11 and 23 of the Income Tax Act. According to PJ Veldhuizen, MD at commercial law firm Gillan & Veldhuizen Inc., “What might seem like a harmless ‘business perk’ can quickly turn into a ticking time bomb when SARS or a liquidator comes knocking.”
Section 11 and 23 of the Income Tax Act lays down clear rules: only expenses incurred in the production of income are deductible. Deductible business expenses include day-to-day operational costs, depreciation on capital assets and set-up costs. However, personal expenses like family dinners, vacations or private school fees are strictly off-limits.
Misusing company funds for personal expenses is not just a compliance issue. “If personal expenses are paid using company funds, they should be logged in a loan account to be repaid by the director or shareholder,” advises Veldhuizen. “Failure to do so risks not only penalties from SARS but also potential criminal liability.”
Recent stats from business insolvency reports indicate that over 1,900 companies in South Africa were liquidated in 2024, many due to financial mismanagement and tax-related offences. “Running a business is not only about chasing revenue but also about adhering to the rules that govern company conduct,” says Veldhuizen. “Blurring the lines between personal and business expenses can lead to significant legal exposure.”
Corporate governance is about ensuring that your business is run in a way that is accountable and transparent. When business owners start using company funds for personal expenses, they undermine this foundation. If a company is liquidated and an insolvency enquiry is convened, liquidators are tasked with recovering assets for creditors and will scrutinise and test transactions to ensure they were legitimate business expenses.
Consider the case of a business owner who charges a luxury family holiday to the company account. While it might seem “harmless” at first, an insolvency enquiry could result in those costs being flagged, reclassified as personal expenses and added to the director’s loan account. A claim would then lie against the director for payment of the debit loan account.
Tips for business owners:
- Understand deductible expenses: Ensure that claimed expenses are directly related to income generation.
- Keep personal and business finances separate: Maintain clear boundaries by logging any personal expenses in a loan account.
- Follow sound corporate governance practices: Ensure proper oversight of company finances to avoid reckless management claims.
- Seek legal advice: Consult with a lawyer and a tax practitioner on best practices for corporate governance and tax compliance.
Business owners must ensure they are fully compliant with tax and corporate regulations to avoid costly pitfalls. “Good governance protects both the company and its directors,” concludes Veldhuizen. “And seeking professional advice on how to run your business effectively is not just smart; it’s essential for long-term success,” he adds.
