Page 667 - SAIT Compendium 2016 Volume2

IN 78 Income Tax acT: InTeRPReTaTIon noTes IN 78
In ITC 1667* the taxpayer entered into rental and maintenance agreements (which the court assumed, without deciding, were one contract) under which the customer agreed to rent copy machines for an agreed monthly rental and the taxpayer agreed to maintain the copy machines. Subsequently, the taxpayer entered into a discounting agreement under which it ceded its rights to the future rental income in return for an up-front lump sum. The court held that the rental and maintenance agreements were legally independent and separate from the discounting agreement. The taxpayer was therefore not entitled to a section 24C allowance as performance of the taxpayer’s obligations (that is, maintaining the copy machines) was not under the same contract under which the lump sum income was received.
In ITC 1697† the taxpayer, a share block company, received up-front levy income‡ from the share block holders under a usage agreement and in return was required to ful l certain obligations. These obligations included attending to the repair, upkeep, control, management and administration of the company, the property and the immoveable property and attending to the payment of any related obligation such as salaries, rates and local authority charges like water and electricity. The court con rmed that the relevant agreement for section 24C was the usage agreement under which the income was received and the obligations were incurred, it was not the contracts that the taxpayer had or would conclude with the suppliers of goods and services in order to perform under the usage agreement.
In ITC 152726§ the taxpayer sold furniture on instalment sale and subsequently incurred expenditure in complying with the requirements of the Limitation and Disclosure of Finance Charges Act and the Usury Act. The court held that the future expenditure to be incurred in complying with those Acts was not incurred under the instalment sale contract (that is, the contract under which the income arose) and did not therefore qualify for a section 24C allowance.
4.2.2 Expenditure is incurred in such a manner that the expenditure will be allowed as a deduction in a subsequent year
Under this criteria, the expenditure, when incurred, must be deductible expenditure for purposes of the Act in order to qualify as an allowance under section 24C. In Sub-Nigel Ltd v CIR¶ the Supreme Court of Appeal con rmed the principle that in considering the deductions to which a taxpayer is entitled, one should have regard to the wording of the Act and not the treatment of the deduction for accounting purposes. The court held as follows:**
‘At the outset it must be pointed out that the Court is not concerned with deductions which may be considered proper from an accountant’s point of view or from the point of view of a prudent trader, but merely with the deductions which are permissible according to the language of the Act. See Joffe & Co., Ltd. v Commissioner for Inland Revenue (1946, A.D. 157 at p. 165).’
In evaluating whether a taxpayer will be entitled to a deduction, consideration must be given to the deductions allowable under section 11 and more particularly section 11(a) which contains the general deduction formula. However, section 24C is not prescriptive on the section under which the deduction must be granted and is not limited to section 11.
In addition to considering sections which may permit a deduction, it is important to consider section 23 which deals with the circumstances in which a deduction will not be allowed in spite of meeting the requirements for a deduction under another section. Section 23(g) is particularly relevant although all the provisions of section 23 must be considered.
4.2.3 Expenditure on the acquisition of an asset
Under this criteria, the future expenditure†† must relate to expenditure which will be incurred on the acquisition of an asset for which any deduction will be admissible under the Act. Applicable assets include assets which will be acquired in order to perform under the speci c contract giving rise to the advance income. The acquisition of assets generally used in the taxpayer’s trade will not qualify for an allowance under section 24C.
This type of future expenditure relates to the expenditure which will be incurred in acquiring an asset. It does not relate to the deduction of, for example, a capital allowance on an asset which has already been acquired and the expenditure already incurred. A similar issue arises with trading stock when a taxpayer has incurred expenditure in acquiring items of trading stock. Once the expenditure has been incurred it does not constitute future expenditure even if the trading stock is included in the taxpayer’s closing stock. Juta Law explains the position as follows:‡‡
‘Where the advance payment received or accrued is utilised to purchase a capital asset which is subject to wear and tear (in terms of s 11(e) or s 12C, as to which see notes) or other allowances in terms of the Act, no allowance under the section can be available once the asset concerned has been purchased, since there is no longer any relevant future expenditure. The cost of the asset should therefore be allowed in the year in which the advance payment is received, and in any subsequent years until the asset is purchased. Once this takes place, however, no further allowances should be granted. Meyerowitz (at 12.83) suggests a different approach, in terms of which the cost of the asset, as reduced by the wear and tear or other allowances claimed on that asset, is granted as an allowance throughout the relevant period. This allowance therefore declines year by year as it is reduced by the cumulative allowances claimed on that asset. This approach is not supported by the wording of the provision.’
The position is correctly stated by Juta Law; wear-and-tear on capital assets does not qualify as ‘future expenditure’ as de ned in section 24C(1).
* ITC 1667 (1999) 61 SATC 439 (C).
† ITC 1697 (1999) 63 SATC 146 (N).
‡ Under the applicable legislation at the time, section 24C was relevant to the determination of the exemption of
exempt income under section 10(1)(e) and the off-setting of ‘losses’ against other income § (1991) 54 SATC 227 (T).
¶ 1948 (4) SA 580(A), 15 SATC 381.
** At SATC 389.
†† Section 24C(1)(b).
‡‡ Juta Law Online Publications, Comments on Section 24C.
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