Page 666 - SAIT Compendium 2016 Volume2

IN 78 Income Tax acT: InTeRPReTaTIon noTes IN 78
course of purchasing the business as a going concern on this basis it would follow that the liabilities would be discharged by the purchaser. The journal entries relied on by the appellants do not equate to expenditure actually incurred. On the contrary, the mechanism employed in the agreement of sale resulting in the journal entries was to facilitate the sale.
The fact that Ackermans rid itself of liabilities by accepting a lesser purchase price than it would have received had it retained the liabilities, does not mean in fact or in law that it incurred expenditure to the extent that the purchase price was reduced by the liabilities. At the effective date no expenditure was actually incurred by Ackermans.’
A taxpayer seeking to claim a section 24C allowance will not have incurred the expenditure at the end of the year of assessment. However, the taxpayer will need to satisfy the Commissioner that the expenditure will be incurred in a subsequent year of assessment – this aspect is discussed further in 4.2.1(b).
(b) Will be incurred in a subsequent year of assessment
Applying the expenditure principles discussed in 4.2.1(a) to section 24C, taxpayers will need to demonstrate that an amount will be outlaid or expended in the future, or that an unconditional legal liability to outlay or expend an amount will be incurred, before the Commissioner will be satis ed that expenditure will be incurred in a subsequent year of assessment.
The words ‘will be incurred’ indicate that the Commissioner must be satis ed that there is a high degree of probability and inevitability that the expenditure will be incurred by the taxpayer. A taxpayer must therefore be able to demonstrate that, although the expenditure is contingent at the end of the year of assessment in question, there is a high degree of certainty that the expense will in fact be incurred in a subsequent year. The position was explained in ITC 1601* as follows:
‘Counsel for the Commissioner, in my view, correctly contended that the Commissioner will not be satis ed that future expenditure will be incurred where there is only a contingent liability. There must be a clear measure of certainty as to whether the expenditure in contention is quanti ed or quanti able. The onus that the appellant bears here is to satisfy the Commissioner that the agreements relied upon will lead to deductible expenditure, in the following year. The appellant’s contention that the use of the word ‘will’ relates only to time and not to the certainty of the expense, cannot in my view be correct. Since a deduction is sought, this must arise from an obligation and must be quanti able.
It was also, in my opinion, correctly submitted that s 24C was not enacted to provide a deductible reserve fund for possible ‘comebacks’, unforeseen contingencies or latent defects in the res vendita. This would be contrary to the provisions of s 23(e) of the Act ...
....
S24C is an exception to the general rule and as such the court, having regard always to its speci c ambit is entitled to take a strict rather than a liberal view in its application to the facts in issue. The Commissioner, provided he too has full regard to the available facts, is entitled to adopt the same approach in exercising his discretion.’
The facts and circumstances of each case vary signi cantly and it is therefore not possible to specify the industries or particular circumstances in which taxpayers will always be able to demonstrate and prove the required level of certainty. The facts of each case are critical. However, the degree of certainty required is unlikely to be met if the performance is not contractually obligatory but is only potentially contractually obligatory because of an act or event other than just the taxpayer’s client or customer taking action. This position is phrased as follows in Income Tax in South Africa:†
‘It is submitted that there must be in existence an enforceable and uncontingent obligation to perform under a contract, which performance will lead to the incurral of expenditure.’
The distinction can be a ne one, for example, in the case of a construction contract under which a builder is contractually required to build a house which includes tiling the oors (that is, performance is obligatory) the cost of the tiles will be included in the future expenditure calculation. The degree of certainty required to satisfy the Commissioner that the expenditure will be incurred exists in such a situation. The fact that the client has not yet decided on, for example, the colour of the tiles at the end of the year of assessment does not per se disturb the degree of certainty although it may affect the quanti cation of the amount of future expenditure if the cost of the tiles is dependent on the colour chosen.
Generally an obligation to perform remains unconditional when performance is merely dependent on the client taking action (for example, the client choosing the colour of the tiles) but not when performance is dependent on further events which may or may not occur. The application of the concept of ‘certainty’ in relation to warranties and maintenance contracts is discussed in 4.2.5 and 4.2.6.
At a principle level, whether the costs are variable or xed or of an operational or infrastructural nature is not critical; what is important is that the costs ow from an unconditional obligation to perform‡ under the contract which gave rise to the advance income and that the Commissioner is satis ed that the expenditure will be incurred in a subsequent year of assessment. Each case must be considered on its own facts.
The Commissioner will not be satis ed that future expenditure will be incurred after a point in time when a taxpayer’s obligation to perform falls away at that point in time. However, even if the taxpayer’s obligation to perform has not legally fallen away, it may happen that at some point in time the Commissioner will not be satis ed that the taxpayer will ever perform under the contract and under such circumstances the Commissioner will no longer be satis ed that future expenditure will be incurred. For example, historical data may show that gift vouchers not redeemed within two years are never redeemed.
(c) In performing the taxpayer’s obligations under the contract in terms of which the income was received
The future expenditure must be incurred by the taxpayer in the performance of the taxpayer’s obligations under the same contract as the contract under which the income was received by or accrued to the taxpayer.§ The contract does not have to (and rarely will) stipulate the exact expenditure that the taxpayer will incur. However, the taxpayer’s obligations under the contract must be apparent or determinable and it is the expenditure which the taxpayer will incur in performing and meeting those obligations which is of relevance.
* (1995) 58 SATC 172 (C) at 179.
† In 11.11.7, Authors David Clegg and Rob Stretch.
‡ An unconditional obligation to perform does not mean the taxpayer has unconditionally incurred the expenditure,
the expenditure will only be incurred when the taxpayer actually performs.
§ ITC 1667 (1999) 61 SATC 439 (C); ITC 1697 (1999) (1999) 63 SATC 146 (N) and ITC 1527 (1991) 54 SATC 227 (T).
658 saIT comPendIum oF Tax LegIsLaTIon VoLume 2