|The Supreme Court of Appeal (the “SCA”) recently upheld an appeal against the decision of the Tax Court that had upheld an appeal by Clicks Retailers Ltd (the “Respondent”) against the refusal by the Commissioner for the South African Revenue Service (the “Appellant”) to approve an allowance in terms of section 24C of the Income Tax Act No. 58 of 1962 (the “Act”). |
The Respondent’s claim arose from its loyalty programme, the Clicks ClubCard, in terms of which customers could sign up as members of the loyalty programme in terms of a contract that provided that for every purchase exceeding R10 (ten Rand) for which the member presented a ClubCard, the member would receive 1 (one) point for every R5 (five Rand) spent. For every 100 points accumulated, ClubCard members received a R10 (ten Rand) rewards voucher, which could be exchanged in part payment for subsequent purchases. The rewards vouchers could not be exchanged for cash and would lapse after 1 (one) year.
During the 2009 financial year, the Respondent claimed an allowance to be deducted from its gross income based on s 24C of the Act. The Respondent contended that it received revenue from the sales generating the points and was obliged to use that revenue to finance its obligations to provide rewards vouchers. As the revenue was used to finance its future obligations under those sales contracts, the Respondent contented that it was entitled to claim an allowance under s 24C of the Act.
On appeal to the Tax Court, the Tax Court directed the Appellant to partially allow the Respondent’s claim in terms of s 24C of the Act and revise the allowance, for, inter alia, the following reasons:
1.It was artificial and factually incorrect to regard the expenditure the Respondent would incur when a customer redeemed a voucher as arising under a ‘different contract’ to the first purchase and sale contract concluded with the same customer and pursuant to which the points concerned were generated;
2.the first purchase and sale agreement incorporated the terms of the ClubCard contract but, despite this, the first purchase and sale contract remained the contract that triggered both the earning of income by the Respondent as well as an obligation by the Respondent to incur future expenditure; and
3.the obligation to incur future expenditure was therefore incurred under the same contract from which the income was earned, and the expenditure would be incurred in the performance of that contract. Consequently, the Respondent’s claim in terms of section 24C of the Act, met the requirements of the said section.
In coming to its decision, the SCA considered CSARS v Big G Restaurants 2018 (Pty) Ltd   ZASCA 179wherein this court held that in order to qualify for an allowance, the income received and the future expense to be incurred, must arise from the same contract. Further, this court expressly rejected the notion that the section applies where the different contracts are ‘inextricably linked’.
The SCA held that while the revenue arose in terms of the sale contracts, the allocation of points and the issue of rewards vouchers arose under the loyalty programme agreement. Accordingly, the revenue and expenditure did not arise under the same contract as required by section 24C of the Act and, as such, the Appellant was correct to refuse the allowance.
The appeal succeeded and the decision of the Tax Court was set aside and replaced by an order dismissing the Respondent’s appeal.
In order to qualify for an allowance in terms of section 24C of the Act, the income received and the future expense to be incurred, must arise from the same contract.
Written by Kerry Theunissen and Ashleigh Butler