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IN 54 Income Tax acT: InTeRPReTaTIon noTes IN 54
• The Constitution places a duty on the State to respect, protect, promote and ful l all the rights as enshrined in the Bill of Rights.
• Corruption and related corrupt activities undermine those rights, endanger the stability and security of societies, undermine the institutions and values of democracy and ethical values and morality, jeopardise sustainable development, the rule of law and the credibility of governments, and provide a breeding ground for organised crime.
• The illicit acquisition of personal wealth can be particularly damaging to democratic institutions, national economies, ethical values and the rule of law.
• There are links between corrupt activities and other forms of crime, in particular organised crime and economic crime, including money-laundering.
• Corruption is a transnational phenomenon that crosses national borders and affects all societies and economies, and is equally destructive and reprehensible within both the public and private spheres of life, so that regional and international cooperation is essential to prevent and control corruption and related corrupt activities.
• A comprehensive, integrated and multidisciplinary approach is required to prevent and combat corruption and related corrupt activities ef ciently and effectively.
• It is the responsibility of all States to prevent and combat corruption and related corrupt activities, and this requires mutual cooperation.
• The United Nations has adopted various resolutions condemning all corrupt practices, and urged member states to take effective and concrete action to combat all forms of corruption and related corrupt practices.
• The Southern African Development Community Protocol against Corruption, adopted on 14 August 2001 in Malawi, reaf rmed the need to eliminate the scourges of corruption through the adoption of effective preventive and deterrent measures and by strictly enforcing legislation against all types of corruption.
• The Republic of South Africa desires to be in compliance with and to become Party to the United Nations Convention against Corruption adopted by the General Assembly of the United Nations on 31 October 2003.*
• It is desirable to unbundle the crime of corruption in terms of which, in addition to the creation of a general, broad and all-encompassing offence of corruption, various speci c corrupt activities are criminalised.
The Organisation for Economic Co-operation and Development (OECD) 1996 Recommendation on the Tax Deductibility of Bribes to Foreign Public Of cials† sought to put an end to the claiming of bribes paid to foreign public of cials as tax-deductible expenses. Many countries (including South Africa) have gone one step further and have prohibited the deductibility of all bribes, irrespective of the identity or status of the recipient.
Section 23(o) was introduced into the Act by section 28(1)(e) of the Revenue Laws Amendment Act 31 of 2005 with effect from 1 January 2006. It applies to any year of assessment commencing on or after that date.
Before the introduction of section 23(o), the Act did not speci cally address the non- deductibility of expenses incurred on bribes or nes resulting from unlawful activities, and the matter had to be considered under the general deduction formula [section 11(a) taking into account section 23(g)]. A notable exception is section 23(d) that prohibits the deduction of—
‘any tax, duty, levy, interest or penalty imposed under this Act, any additional tax imposed under section 60 of the Value-Added Tax Act, 1991 (Act 89 of 1991), and any interest or penalty payable in consequence of the late payment of any tax, duty, levy or contribution payable under any Act administered by the Commissioner, the Regional Services Councils Act, 1985 (Act 109 of 1985), the KwaZulu and Natal Joint Services Act, 1990 (Act 84 of 1990), the Skills Development Levies Act, 1999 (Act 9 of 1999), and the Unemployment Insurance Contributions Act, 2002 (Act 4 of 2002)’.
Some commentators argued that bribes, nes and penalties actually incurred in the course of carrying on a trade were deductible for income tax purposes if they were an inevitable concomitant of the trade of the taxpayer. On that basis the nature of the payment itself was relevant only to the question whether, in the circumstances, the expense could be said to have been actually incurred in the course of a trade and in the production of the taxpayer’s income. The issue as to whether the amount is prohibited as a deduction under section 23(o) does not arise if an expense does not pass the positive test in section 11(a).
In ITC 1490‡ a cartage contractor sought to claim a deduction for traf c nes under section 11(a). The court held that to allow the nes as a deduction would be contrary to public policy, frustrating the legislative intent and allow a punishment imposed to be diminished or lightened. The court added that the nes did not play any actual part in the earning of the income and were not an inevitable concomitant of the business of a cartage contractor.
Although the court in the above case and in a number of others§ found in favour of the scus, it was considered desirable to introduce a speci c legislative provision barring the deduction of nes and penalties as a matter of good governance and to reinforce South Africa’s anti-corruption drive. From a policy perspective the deduction for income tax purposes of nes and penalties relating to unlawful activities cannot be justi ed. The granting of a deduction for nes and penalties would reduce the burden of the penalty or ne and be contrary to the rationale of the law under which it is imposed.
Section 23(o) is solely concerned with expenditure. It is not concerned with whether income has been derived by a taxpayer through legal or illegal means.
* South Africa rati ed the convention on 22 November 2004 and it became part of South African law (as contemplated in section 239 of the Constitution) on 14 December 2005.
† Available at [Accessed 24 February 2010].
‡ (1990) 53 SATC 108 (T).
§ ITC 1199 (1973) 36 SATC 16 (T); ITC 1212 (1974) 36 SATC 108 (R).
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