Supreme Court of Appeal curbs abuse of Section 24C

13 March 2020 00:00 by Thomas Lobban

Supreme Court of Appeal curbs abuse of Section 24C

Written by Thomas Lobban LLB, who is a Tax Associate at Tax Consulting SA, authors of the recently released Expatriate Tax, South African Citizens Working Abroad and Foreigners in South Africa.

[Durban, 07 March 2020] In the recent case of CSARS v Clicks Retailers (Pty) Ltd (58/2019) [2019] ZASCA 187, the Supreme Court of Appeal (“the SCA”) sided with SARS in its interpretation of section 24C of the Income Tax Act, No. 58 of 1962. Contractors and others who avail themselves to this provision should heed the permutations set by this judgment, which was delivered on 3 December 2019.

Purpose of section 24C

Taxpayers who carry on a trade are entitled to deduct their expenses from their income for tax purposes. However, such deductions will only be permitted if they have actually been incurred during the year of assessment in question.

Practically, however, the nature of a taxpayer’s business, such as those in the construction and manufacturing industry, may be such that they receive amounts under a contract that will be used to finance expenditure to be incurred in future. An anomaly arises where income is received in one year of assessment and the expenditure is incurred in subsequent years of assessment.

Section 24C thus exists to provide relief to these taxpayers. The provision allows for a deviation from the general rule and permits a taxpayer to deduct amounts paid to them under a contract, for expenses that the taxpayer will be required to incur in a following year(s) of assessment.

In order to claim a deduction under section 24C, a taxpayer will need to satisfy the following requirements:

  • Income for the particular year of assessment includes or consists of an amount which is received or accrued under a contract; and
  • The Commissioner is satisfied that all, or part of that amount, will be used to finance expenditure which will be incurred by the taxpayer in a subsequent year of assessment, in performing the obligations under the contract.

This is an important mechanism to provide relief to contractors, to ensure that the timing of the receipt of amounts and the timing of the deduction of the concomitant expenditure are aligned.

CSARS v Clicks Retailers

In the present case, the taxpayer (“Clicks”) sought to claim this allowance in respect of expenditure it had to incur under its ClubCard Loyalty Programme (“the Programme”). Clicks customers may apply to become a member of the Programme and would then receive a ClubCard. ClubCard holders of would then earn points with every purchase, with Clicks would issuing vouchers at the end of reward cycles. The customer may then redeem the voucher when they make a subsequent purchase, as part payment for a basket of goods.

The future expenditure that Clicks was likely to incur was that which relates to the redemption of vouchers, where the customer would acquire goods at no cost or at a reduced cost. The amount received in advance is that which was received upon the initial purchase generating the loyalty points, which Clicks contended it was obliged to use to provide reward vouchers.

Clicks claimed the allowance on the basis that there was a “direct and immediate connection” between the qualifying contract of sale and the obligation to issue rewards pursuant thereto.

SARS disallowed these deductions on the basis that the “expense” incurred to provide vouchers did not arise from the same contract of sale that generated the income, thereby adopting a formalistic interpretation of section 24C.

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