How to differentiate between business and personal expenses?

In a recent case reported by IRAS, a company was penalised for wrongful claims of private expenses. The company directors were also charged in court for tax evasion by wilfully preparing false invoices to support their fictitious expense claims. These private expenses included luxury goods purchases such as handbags and jewellery, as well as family holidays.

They were both sentenced to 4 weeks & 6 months imprisonment and also ordered to pay a combined penalty of $1,027,388, which is 4 times the amount of tax evaded.

IRAS take a serious view on tax evasion by claiming private expenses to reduce the company tax.  So the question is how do we differentiate what is private or business expenses?

Basically, the nature of the expenses will be the determining factor. For example, the company director who is in Thailand for a business meeting have incurred cost such as accommodation, meals and air ticket during the 4 days trip.

Ultimately, those costs are arise due to the business meeting. Therefore it can be treated as allowable expenses under tax deductible items. Given that the nature of the expense is relevant to the cost for driving the business then it is safe to say they are not private expenses. Of course if the director purchase gift or souvenir for his family and friends, then this is consider a private expense which cannot be claim under business expense. 

Some example of Private Expenses

  • Club subscriptions and entrance fees paid for the sole-proprietor’s or partner’s membership
  • Cost of travelling to and from your home
  • Food, household and entertainment expenses for yourself, family members, and friends
  • Insurance premiums for policies taken on the sole-proprietor’s or partner’s life
  • Medical expenses incurred on the sole-proprietor or partner
  • Personal income tax of sole-proprietor or partner
  • Travelling expenses for personal trips
  • Training expenditure incurred by sole-proprietor or partner, except for non-equity salaried partner (who is considered an employee) 
    (Note: Sole-proprietor/partner may claim the course fee as course fee relief in his Personal Income Tax Return if he meets the qualifying conditions)

General Rules for Claiming Allowable Business Expenses

  • Expenses must be incurred. An expense is ‘incurred’ when the legal liability to pay has arisen, regardless of the date of actual payment of the money.
  • Expenses must be related to your business. You must be able to show why you need to incur the expenditure to earn the income.
  • Expenses that are personal and private in nature are not allowable as they do not relate to your business.
  • Expenses that are capital in nature (e.g. purchase of fixed assets such as plant and machinery) are not allowable business expenses. However, depreciation of fixed assets may be claimed as capital allowances.
  • Expenses should be supported by proper and complete source documents that should be kept for at least five years to substantiate your claims.

Ace Success team of professionals have diverse experience in Corporate and Personal tax computation and advisory. Do drop us an enquiry to find out more.

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