Page 722 - SAIT Compendium 2016 Volume1

CASE DIGEST 2010–2011
a trade mark by assignment from any other person, where such trade mark was used by the taxpayer in the production of his or her income, could claim such expenditure as a deduction.
SARS contended that no expenditure had ‘actually been incurred’ by the taxpayer in acquiring the trade mark as required by s 11 (gA) of the Income Tax Act on the ground that no expenditure had actually been incurred by the respondent in acquiring the trade mark in issue.
Facts
The respondent acquired a trade mark through assignment during the tax year and sought to claim the deductible allowance. The agreement resulting in the acquisition of the trade mark involved the respondent purchasing the entire business operations of a company. That included all the company’s tangible and intangible assets including the trade mark. Instead of money, the purchase price was discharged through the assignment to the seller of shares in the purchasing company. The shares were issued and transferred in terms of the agreement and their value, at the time of transfer, was in excess of the issue price. The trade mark was valued at R44 462 000 and the allowance claimed was based on that valuation. The appellant, the Commissioner for SARS, disallowed the claim but the Income Tax Special Court upheld the respondent’s appeal. The Commissioner’s appeal against the judgment of the special court was dismissed by the High Court, leading to the present appeal.
Decision
Harms AP (with whom Lewis JA, Heher JA, Maya JA and Plasket AJA concurred) held that the question the court a quo should have posed was whether the issuing of shares by a company amounts to ‘expenditure’ and not whether the undertaking to issue shares amounts to an obligation, which it obviously does.
The term ‘expenditure’ is not de ned in the Act. Since it is an ordinary English word, its ordinary meaning must be attributed to it unless the context indicates otherwise. Its ordinary meaning refers to the action of spending funds, to disbursement or to consumption; and hence the amount of money spent. This reading is endorsed by the Afrikaans text, where the word ‘onkoste’ is used. In the context of the Act, it would also include the disbursement of other assets with a monetary value. Expenditure, accordingly, requires a diminution, 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 the present case, the respondent assigned the trade mark as consideration for the shares and did not ‘expend’ any money or assets in acquiring the trade mark. An allotment or issuing of shares does not in any way reduce the assets of the company although it may reduce the value of the shares held by its shareholders, and it can therefore not qualify as an expenditure.
In the premises, the appeal was upheld and the order of the court a quo was replaced with one upholding the Commissioner’s appeal from the Income Tax Special Court with costs.
3. Do materials used (by the taxpayer) for constructing and equipping a prison on land owned by the state constitute trading stock?
[Commissioner SARS v South African Custodial Services (Pty) Ltd 2012 (1) SA 522 (SCA)]
Introduction
In August 2000, the taxpayer (‘SACS’) and the Minister of Correctional Services concluded a concession contract in terms of which the taxpayer would design, construct and operate a prison. The taxpayer would have the right to occupy the land for the duration of the concession but would have no title to, ownership interest in, liens, leasehold rights or any other rights in the land and the state would at all times remain the owner of the land. The taxpayer subcontracted the design, construction and commissioning of the prison, as well as the running thereof to third parties. It earned xed and variable income from its running of the prison in terms of the concession contract, the xed fee income being payment for the construction of the prison.
Facts and Issue
In response to an assessment issued by the appellant for the 2002 year of assessment, SACS requested a reduced assessment in terms of s 79A of the Income Tax Act on the basis that certain expenses that quali ed for deduction had not been claimed as deductions in its tax returns for the relevant period.
On 4 May 2007, SARS sent a letter to the taxpayer which was described as containing revised assessments for the 2002-2004 tax years. SACS subsequently lodged a notice of objection dated 19 September 2007, in which it described the year of assessment to which it applied as ‘2003-2004; alternatively 2002’. In his response, the appellant contended that as no objection to the 2002 assessment was received within the three-year period after the date of assessment, that assessment was nal and conclusive. According to the appellant, the date of assessment was 1 June 2004, the letter of 4 May 2007 was not a revised assessment, and therefore three years after the date of assessment the 2002 assessment became nal. SACS, on the other hand, argued that the letter of 4 May 2007 was indeed a revised assessment and consequently that the assessment for the 2002 year of assessment had not become nal.
The second issue related to the construction of the prison by SACS. The latter contended that in the construction of the prison, it carried out a trade; the materials that were used to construct the prison constituted its trading stock; those materials, when they were built into the prison, acceded to the prison – and hence became the property of the state – and that, as a result, the materials were deemed to be trading stock held and not disposed of by it in terms of s 22 (2A) of the Act; and that consequently, being expenditure actually incurred, and not being of a capital nature, the cost of the construction of the prison was a permissible deduction from SACS’s income in terms of s 11 (a) of the Act.
As SACS incurred a number of fees payable to various parties in order to bid for the tender and to raise the loans that it required to nance the construction of the prison, it claimed to be entitled to a deduction in respect of the various fees and the interest paid on the loans, in terms of s 11 (bA) of the Act.
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