Page 506 - SAIT Compendium 2016 Volume2

IN 54 Income Tax acT: InTeRPReTaTIon noTes IN 54
4.2.1 Payments of nes and penalties as a result of an unlawful act [section 23(o)(ii)]
Section 23(o)(ii) prohibits the deduction of a ne charged or penalty imposed as a result of an unlawful activity carried out—
• in the Republic; or
• in any other country if that activity would be unlawful had it been carried out in the Republic.
Claassen* describes a ne as—
‘a nancial penalty imposed for a crime committed’.
In Rex v Laughton Matthews J described a penalty as follows:†
‘ ‘Penalty;’, when used in a statute – though it may not always import a punishment for a criminal offence – does at least imply some form of sanction declared or operating by order of a court of law.’
Black’s Law Dictionary‡ de nes ‘unlawful act’ as—
‘[c]onduct that is not authorized by law; a violation of a civil or criminal law’.
Statutory offences
Most statutes create offences and corresponding penalties in order to enforce compliance with their provisions. The Act also contains various penalty provisions, such as—
• paragraph 5(5) of the Fourth Schedule to the Act which applies to an employer that fails to deduct the correct
amount of employees’ tax;
• sections 75 and 104 under which the courts can impose criminal penalties; and
• section 76, which imposes ‘additional tax’, which in essence is a penalty (Israelsohn v CIR)§ and is not a tax on
income (CIR v McNeil),¶ although it is collected via the machinery of assessment (see Israelsohn’s case above).** The main purpose of such additional charges is to ensure the accuracy of returns upon which the whole income tax system is based, and to thus avoid the loss of revenue to the scus.
The deduction of such scal penalties is prohibited by section 23(d) (see 2). On the other hand, nes imposed for tax offences will be denied as a deduction under section 23(o)(ii).
Other examples of an unlawful act may include the following:
• Practices prohibited by the Competition Act 89 of 1998 – Under sections 4 to 9 of this Act certain restrictive
practices, as well as the abuse of a dominant position, are prohibited. Restrictive practices include—
• horizontal or vertical relationships between parties which prevent or lessen competition;
• restrictive horizontal practices, including price- xing, market division between rms and collusive tendering;
and
• minimum resale price maintenance.
• Unfair marketing – The Consumer Protection Act 68 of 2008, which comes into operation on 24 October 2010, protects a number of fundamental consumer rights, including the right to fair and responsible marketing and the right to restrict unwanted direct marketing. A consumer’s rights under that Act will be able to be enforced through referral of a matter to the National Consumer Tribunal, an ombudsman with jurisdiction, or a court with competent jurisdiction. Contravention of the Consumer Protection Act, 2008 may result in civil or criminal liability as well as the possible imposition of an administrative penalty.
• Unfair discrimination, harassment, hate speech – This is dealt with by the equality courts. Equality courts are courts designed to deal with matters covered by the Promotion of Equality and Prevention of Unfair Discrimination Act 4 of 2000, also known as the Equality Act.
• Violation of traf c laws.
• Contravention of municipal by-laws.
Common law
Companies are capable of being prosecuted and sentenced, for crimes committed on their behalf, such as culpable homicide. In the Rhodesian case of S v Joseph Mtshumayeli (Pvt) Ltd,††a charge arose from the negligent driving of a bus in the course of the company’s business. The appellant, a limited liability company operating an omnibus company, was convicted in a magistrate’s court of culpable homicide and sentenced to a ne of $200. Under equivalent circumstances in South Africa today, the company would not be allowed a tax deduction for the ne under section 23(o).
A ne or penalty imposed by a foreign country will also be denied as a deduction under section 23(o)(ii) if that activity would be unlawful had it been carried out in the Republic. A ne or penalty imposed by a foreign country for an offence that would not be unlawful in South Africa will not be debarred as a deduction by section 23(o)(ii), but will still have to pass the requirements for deductibility of section 11(a) read with section 23(g).
4.2.2 Penalties falling outside section 23(o)
Not all penalties payable result from an ‘unlawful act’ and will thus not be barred as a deduction by section 23(o)(ii). Nevertheless such commercial penalties still need to meet the requirements of sections 11(a) and 23(g) in order to be deductible.
A typical example is found in the building industry. In concluding building contracts, the owner and the contractor would normally agree on the completion of work on or before a certain date. A penalty clause is added under which the
* R D Claassen Dictionary of Legal Words and Phrases [CD-ROM] (My LexisNexis: 31 May 2007) LexisNexis Butterworths, Durban.
† Rex v Laughton 1930 NPD 47 at 53.
‡ 8 ed 2004.
§ 1952 (3) SA 529 (A) at 539 – 540, 18 SATC 247. ¶ 1959 (1) SA 481 (A) at 487F, 22 SATC 374.
** At 539G.
†† 1971 (1) SA 33 (RA).
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