Two court decisions in South Africa concern the application of section 24C of the Income Tax Act—the provision that allows taxpayers to claim a deduction for an expenditure to be incurred in future tax years for the performance of the taxpayer’s obligations under a contract.
In one case (concerning additional assessments when the South African Revenue Service (SARS) refused the taxpayer’s claim of deductions as allowances in respect of future expenditures for refurbishing and upgrading its chain of restaurants), the court concluded that the refurbishment expenditures will be incurred at reasonable intervals determined by the franchisor and that the expenses to be incurred in making the refurbishments were sufficiently certain to warrant an allowance in terms of section 24C. The court therefore found in favour of the taxpayer.
In the second case (concerning the application of section 24C allowances to a retail loyalty programme granted to customers by the taxpayer), the court found that income is earned on the same contract that gives rise to the obligation to incur future expenditures and that the future expenditures meets the requirements of section 24C.
Both cases show that in dealing with section 24C allowances, taxpayers need to consider whether the contract under which income is earned and the contract giving rise to the obligation to incur future expenditures are the same or are at least inextricably linked. In addition, taxpayers need to consider whether the obligation to incur any future expenditures is subject to certain conditions or not.
Read a January 2019 report [PDF 82 KB] prepared by the KPMG member firm in South Africa
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.