South Africa: Tax deferral when separate contracts address accrual of income and future expenditures

The Constitutional Court addressed whether the taxpayer was entitled to claim a deferral of income under section 24C.

Whether the taxpayer was entitled to claim a deferral of income under section 24C

The Constitutional Court addressed whether the taxpayer was entitled to claim a deferral of income under section 24C when one contract concerns the accrual of income and a second contract concerns future expenditures to be incurred under a loyalty programme.  

The judgment concludes that a section 24C allowance to defer paying income tax is only available when a single contract exists or when the accrual of income and obligation to incur future expenditure are contained in inextricably linked contracts that are not capable of being applied independently of one another.

The case is: Clicks Retailers Proprietary Ltd. v. Commissioner, South African Revenue Services (case CCT 07/20 (21 May 2021))

Background

Section 24C of the Income Tax Act allows a taxpayer to defer paying tax on income that accrues in terms of a contract, when such income will be used to finance future expenditure in terms of that contract (i.e., expenditure incurred in a subsequent tax year). However, the South African Revenue Services (SARS) must be satisfied that such amount will be used to finance (in whole or part) a future expenditure that will be incurred by the taxpayer in performing its obligations under the contract before SARS can grant the taxpayer a section 24C allowance in respect of such future expenditure.

When the accrual of income and the obligation to incur the future expenditure are contained in a single contract, the scope of section 24C generally poses no problem. However, taxpayers have sought to extend the scope of section 24C to cover arrangements when the accrual of income and the obligation in respect of the future expenditure are contained in separate but inextricably linked contracts.

Previously, the Constitutional Court accepted that section 24C requires the same contract contain the terms about the accrual of income and the obligation to incur the future expenditure. In that case—Big G Restaurants (Pty) Ltd v CSARS 2020 (6) SA 1 (CC)the court held that two or more contracts may be so inextricably linked that they may satisfy the “sameness” requirement.

Constitutional Court’s decision

In the Clicks judgment, the Constitutional Court expanded on when the requirements of “sameness” is met.

The Constitutional Court held that it was not sufficient for a taxpayer to show that the contract under which the income was earned and the loyalty programme contract under which the future expenditure would be incurred, were inextricably linked. The taxpayer must also show that an inextricable link between the contracts—that is, the contracts meet the section 24C requirement for sameness. The court explained it is unlikely that the sameness requirement would be met when the contracts were not inextricably linked.

The decision continues to explain that an “inextricable link” would be established when an issue, claim, contract or conduct cannot be determined or assessed without another, or the legal consequence of the one contract cannot be understood or measured without reference to another. In contrast, the concept of “sameness” requires at a minimum that both the earning of income and the obligation to finance future expenditure must depend on the existence of both contracts. If either contract can be entered into and exist without the other, the requirement would not be met.

In the instant case, it was noted that income could be earned on sales contracts with customers who had not joined the loyalty programme. In addition, the loyalty programme card holders could earn loyalty points on transactions with third-party “infinity partners.” Therefore, based on these findings, the court held that the link between the sales contracts under which the income was earned and the loyalty programme contract under which the future expenditure would be incurred—while inextricably linked—did not meet the requirements of sameness as both the sales contract and the loyalty programme contract were too independent.
 

Read a May 2021 report [PDF 488 KB] prepared by the KPMG member firm in South Africa

 

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