Page 665 - SAIT Compendium 2016 Volume2

IN 78 Income Tax acT: InTeRPReTaTIon noTes IN 78
the satisfaction of the Commissioner. SARS recognises that not all contracts are reduced to writing, for example, certain implicit unilateral contracts that are evidenced by a ticket, stamp or voucher. Nevertheless, when possible, it is recommended that taxpayers reduce contracts to writing, for example, in a negotiated contract between two parties.
4.2 Future expenditure
As noted above, future expenditure is expenditure which the Commissioner is satis ed will be incurred by the taxpayer in a subsequent year of assessment (in performing the taxpayer’s obligations under the contract)* in such a manner that the expenditure –
• will be allowed as a deduction in a subsequent year of assessment; or
• will, in the case of the acquisition of an asset, qualify for any deduction under the Act.
4.2.1 Expenditure which the Commissioner is satis ed will be incurred in a subsequent year of assessment (in performing the taxpayer’s obligations under the contract)
(a) Expenditure
The word ‘expenditure’ is not de ned in the Act;† however, it has been considered in a number of court cases, some of which will be discussed below. In considering what constitutes expenditure it is also important to distinguish expenditure from ‘losses’; the two are different and section 24C only applies to future expenditure. In Joffe & Co (Pty) Ltd v CIR,‡ Watermeyer CJ explained the distinction between the words ‘loss’ and ‘expenditure’ as follows:
‘In relation to trading operations the word [loss] is sometimes used to signify a deprivation suffered by the loser, usually an involuntary deprivation, whereas expenditure usually means a voluntary payment of money.’
A similar distinction was drawn between ‘disbursements’ or ‘expenses’ on the one hand and ‘losses’ on the other in the English case of Allen (HM Inspector of Taxes) v Farquharson Brothers and Co,§ in which Findlay J explained that the word ‘disbursements’ –
‘means something or other which the trader pays out; I think some sort of volition is indicated. He chooses to pay out some disbursement; it is an expense; it is something which comes out of his pocket. A loss is something different. That is not a thing which he expends or disburses. That is a thing which, so to speak, comes upon him ab extra’.
In COT v Rendle¶ Beadle CJ distinguished between ‘designed expenditure’ and ‘fortuitous expenditure’ as follows:
‘For the purposes of this case, expenditure incurred for the purpose of trade may be grouped broadly under two heads. First, money voluntarily and designedly spent by the taxpayer for the purpose of his trade; and second, money which is what I might call involuntarily spent because of some mischance or misfortune which has overtaken the taxpayer. For the sake of convenience, I will refer to the rst type of expenditure as ‘designed expenditure’, and to the second as ‘fortuitous expenditure’.’ In C: SARS v Labat Africa Ltd** the Supreme Court of Appeal was also called upon to consider whether there had been any expenditure when the purchase price for a trademark, which was acquired as part of the acquisition of a business, was settled by the taxpayer issuing its own shares. The court held that irrespective of the fact that the issue of shares for the acquisition of assets amounted to ‘consideration’ given by the company and that the consideration appeared to be fairly valued, there had been no expenditure. Harms AP noted that –††
‘[t]he term ‘expenditure’ is not de ned in the Act and since it is an ordinary English word and, unless context indicates otherwise, this meaning must be attributed to it. Its ordinary meaning refers to the action of spending funds; disbursement or consumption; and hence the amount of money spent. ... In the context of the Act it would also include the disbursement of other assets with a monetary value. Expenditure, accordingly, requires a diminution (even if only temporary) or at the very least movement of assets of the person who expends. This does not mean that the taxpayer will, at the end of the day, be poorer because the value of the counter-performance may be the same or even more than the value expended’.
In Ackermans Ltd v C: SARS‡‡ the court was required to consider the meaning of ‘expenditure incurred’ in the context of contingent liabilities which had reduced the net purchase price. The taxpayer sold its retail business which included the business assets, the liabilities and the contracts as a going concern. The purchase price was de ned as the amount equal to R800 million plus the rand amount of the liabilities. The purchase price was to be discharged by the purchaser assuming agreed liabilities (including contingent liabilities) and the creation of a loan account. The taxpayer claimed a section 11(a) deduction equal to the amount of the contingent liabilities on the basis that by foregoing a portion of the purchase price it had incurred expenditure equal to the amount of the contingent liabilities. Cloete JA disagreed, stating the following:§§
‘To my mind, ‘expenditure incurred’ means the undertaking of an obligation to pay or (which amounts to the same thing) the actual incurring of a liability. No liability was incurred by Ackermans to Pepkor in terms of the sale agreement. The manner in which the purchase price was discharged by Pepkor did not result in the discharge of any obligation owed by Ackermans to Pepkor. Ackermans owed Pepkor nothing in terms of the sale agreement and one looks in vain for a clause in that agreement that has this effect. ....
It is clear that what occurred, as is usually the case in transactions of this nature, is that the nett asset value of the business - the assets less the liabilities - was calculated and that this valuation dictated the purchase price. In the ordinary
* Performing under the contract is not part of the de nition of the term ‘future expenditure’ in section 24C(1) but an interlinked requirement noted in section 24C(2).
† Collins Essential English Dictionary (Collins Publishers 1989) de nes ‘expenditure’ as ‘the total amount of money that is spent on something’ and ‘loss’ as ‘the fact of no longer having something or of having less of it than you had before’.
‡ 1946 AD 157, 13 SATC 354 at 360.
§ 17 TC 59 at 64.
¶ 1965 (1) SA 59 (SRAD), 26 SATC 326 at 329. ** 2013 (2) SA 33 (SCA), 74 SATC 1.
†† 74 Above 21 at 6 (paragraph 12).
‡‡ 2010 (1) SA 1 (SCA), 73 SATC 1
§§At 5 and 6.
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