Page 754 - SAIT Compendium 2016 Volume1

CASE DIGEST 2013–2014
in Part I of the Ninth Schedule to the Income Tax Act; and must comply with the formal requirements set out in s 30 (3) of the Income Tax Act.
In its application for approval as a public bene t organisation, the Trust stated the following activities as the basis upon which it applied for approval as a public bene t organisation: provision of poverty relief; community development for poor and needy persons and anti-poverty initiatives; the advancement, promotion or preservation of the arts, culture or customs; and conservation of the environment and animal welfare.
Held
• The decision of the Commissioner not to approve the Trust’s application for approval as a public bene t organisation in terms of s 30 of the Income Tax Act and a subsequent disallowance of the Trust’s objection was overruled and set aside.
• The appeal by the Trust against the refusal by the Commissioner to approve the Trust’s application for approval as a
public bene t organisation was upheld.
• The appeal relating to the authority sought to issue tax deductible receipts in terms of s 18A of the Income Tax Act
was dismissed.
• Each party is liable for its own costs.
3. ABC (Pty) Limited v CSARS (Case No 13356)
Introduction
In this case, the Special Tax Court (hereinafter referred to as ‘the court’) had to interpret a judgment handed down by the Supreme Court of Appeal in the case between CSARS v South African Custodial Services (Pty) Ltd 74 SATC 61 (SCA), where the SCA referred the interest and other costs back to the Commissioner to determine if it had in fact been incurred in the relevant tax year in terms of Caltex Oil SA Limited v Secretary for Inland Revenue 1975 (1) SA 665 (A).
Facts
ABC concluded a public-private partnership with the Department of Correctional Services to design, construct, operate and maintain a prison on state-owned land in Makhado for a period of 25 years. The total expenditure for the contract amounted to R464 376 824, which ABC attempted to deduct. SARS disallowed the deduction which caused the matter to go to the court, where it was held that the total expenditure is income in nature and that it is deductible in terms of s 22 (2A), read with s 11 (a) of the Income Tax Act 58 of 1962 (hereinafter referred to as ‘the Act’).
The CSARS appealed the matter to the SCA, where the following three issues were considered with their respective ndings:
1. Whether ABC’s objection for the ’02 period fell within the prescription period, which it did.
2. Whether the construction costs and the costs for equipping the prison may be deducted in terms of s 22 (2A), read with s 11 (a) of the Act – the SCA held that ABC had never carried on a construction trade or delivered materials to the premises where the prison was to be erected as this was outsourced by ABC to a third party. The SCA therefore
disallowed the deduction to ABC.
3. The deductibility of interest and other costs, which the SCA allowed in terms of the now repealed s 11 (bA) of the
Act (the SCA was of the view that the various fees incurred on the loans were closely connected to the obtaining of the loans and were incurred in the furtherance of ABC’s trade and that they therefore qualify as ‘related nance charges’ for purposes of s 11 (bA)).
The SCA consequently referred the interest and ‘other costs’ back to the CSARS to determine whether the expenses have in fact been incurred during the relevant tax year (not to determine if the expenses were in fact deductible), by making the following order:
‘The assessment is referred back to the Commissioner for him to determine the amount that is deductible from the appellants income in terms of s 11 (bA) of the Income Tax Act 58 of 1962’.
The CSARS, upon carrying out the order of the SCA, disallowed all fees in connection with these loans as well as the further costs on the basis that these expenses weren’t explicitly listed in paras [14] – [17] of the SCA judgment (presumably due to the fact that they may have been capital in nature or not incurred in the production of income).
ABC disputed this application by the CSARS and the court therefore needed to determine whether the ‘further costs’ of R64 346 528, consisting out of bid expenses, developer fees, legal fees, insurance, lenders technical advisors costs etc, would be deductible in terms of the SCA judgment. In other words, whether the SCA judgment relating to the s 11 (bA) deduction applied to the ‘further costs’ or only to the expenses listed in paras [14] – [17] of the SCA judgment.
ABC contended that the further costs were incurred for the furtherance of the project and that they have the character of ‘related nance charges’ for purposes of s 11 (bA) and that the role of the CSARS was to determine whether the expenses had been incurred in the relevant year of assessment as per the Caltex case supra – not to disallow deductions as he deems t. ABC further contended that, should the costs not have formed part of trading stock, the costs were in fact deductible in terms of s 11 (a) or 11 (bA) of the Act and, lastly, that the SCA in its judgment did not undertake line-item scrutiny, but dealt with principles.
The CSARS on the other hand, contended that the ‘further costs’ is a new issue and that it was not raised during the dispute resolution stages in terms of s 81 of the Act and the rules 4, 5, 6, 10 and 12 stages. He also contended that the ‘further costs’ was not raised as a separate issue before the SCA and that it formed part of the trading stock issue. The CSARS interpreted the SCA judgment that only the fees listed in paras [14] – [17] are deductible (the guarantee fee, introduction fee and other nance charges) and that it does not include a ‘further cost’ category.
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