RSM South Africa

Section 24C - Allowance in respect of future expenditure

The tax court recently ruled in the case of ABC (Pty) Ltd v The Commissioner for SARS on the application of section 24C of the Income Tax Act (ITA). The section allows a deduction for future expenditure in relation to any year of assessment by the taxpayer.

Background of the case

The taxpayer applied section 24C to a retail loyalty programme given to customers. The programme requires customers to join the loyalty programme by filling in an application form which sets out the terms and conditions. The customers earns points by swiping the loyalty card at the till when purchasing goods, the points can be converted into free or discounted future purchases by the customer.

The taxpayer included in their gross income for the year of assessment 2009 R58 550 602 as loyalty card deferred income and claimed an allowance of R44 275 965 in terms of section 24C of the ITA. SARS disallowed the taxpayer’s section 24C claimed and raised an additional assessment arguing that section 24C does not apply in respect of the loyalty programme because:

  • The purchasing of goods at the store gives rise to a separate contract to that of the loyalty programme, i.e. income is received from the purchase of goods initially and the loyalty programme does not constitute income in the taxpayer’s hands as it’s free to join and there seem to be no hidden charges to customers who are part of the programme.
  • The taxpayer will likely incur future expenditure when the customers utilise the loyalty points earned. This obligation to perform under the programme is a different contract for that which the income is received. This lead to SARS arguing that the income and the obligation to perform arose under different contracts.

The taxpayer filed an objection on 31 October 2013 which was also disallowed by SARS on 12 February 2015. The taxpayer lodged an appeal against the disallowance of its objection in 29 April 2015 and the matter went to court on 22 May 2017 and again on 14 August 2018. Both the taxpayer and SARS managed to narrow down the issues and advise the court that the issue at hand to be determined by the court is whether the taxpayer is allowed the section 24C claim.

Court ruling

The court found that the income earned is earned on the same contract that gives rise to the obligation to incur future expenditure, ruling that the taxpayer’s section 24C claim met the requirements of section 24C. It was also found by the court that the appeal was successful and there was no order as to costs. In the judge‘s view, it was impermissible for SARS to argue the point relating to contingent liability as it was never raised, never pleaded and the quantum was not in dispute. In addition neither parties had requested for a costs order.

Principles to take from this case

It is imperative when dealing with section 24C to look at the contract under which income is derived and the contract raising an obligation to incur future expenditure to ensure they are the same or linked together. Also to be considered is whether there are any terms and conditions that have to be taken into account when looking at the obligation to incur future expenditure.

Maselaelo Mphela

Corporate Tax Compliance Officer, Johannesburg


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