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South Africa: Refurbishment expenditures required under franchise agreement, tax treatment

South Africa: Refurbishment expenditures

The Supreme Court of Appeal overturned an earlier Tax Court decision and rejected the taxpayer franchisee’s claim for a section 24C allowance relating to a franchise agreement that required the franchisee to incur certain refurbishment expenditures. The franchisee had sought to apply those costs as a section 24C allowance against the income it earned from sales to customers.


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The case is: Commissioner for SARS v. Big G Restaurants (Pty) Ltd.


The taxpayer was required under a franchise agreement to pay a franchise fee to the franchisor and to upgrade and refurbish its restaurants at regular intervals (as determined by the franchisor). 

The taxpayer identified the refurbishment obligations as future expenditures to be incurred in the performance of its obligations under the franchise agreement, and thus claimed a section 24C allowance against income earned from its sales to customers. The taxpayer asserted that while its income came directly from ad-hoc sales (and hence contracts) with customers, it was required to conclude those sales under the franchise agreement and that the income was earned “in terms” of the franchise agreement. 

The Supreme Court of Appeal noted that the phrase “in terms of” (as it appears elsewhere in legislation) has not been interpreted in a consistent manner by the courts. Some courts have given a narrow interpretation and held that the phrase implies a direct causal link, whereas other courts have seen it as indicating a loose and indirect relationship. 

However, in the context of section 24C, the Supreme Court of Appeal found that the phrase “in terms of” has a narrow meaning. The direct cause of the income was the contracts with customers—a contract that was separate from the franchise agreement containing the obligation to incur refurbishment expenditures. The appellate court, thus, concluded that the income was not earned in terms of the contract under which the taxpayer was required to incur the future expenditures. 

Read a January 2019 report [PDF 78 KB] prepared by the KPMG member firm in South Africa

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