Taxpayer v Commissioner for the South African Revenue Service (IT24614) [2019] ZATC 3 (15 November 2019)

/ / 2020, Tax Law


The taxpayer namely, B (Pty) Ltd (the Appellant) instituted appeal proceedings in the Tax Court against the Commissioner for the South African Revenue Service (SARS) (the Respondent).  


The Court in this matter was called upon to decide on whether the expenditure or loss of R18,273,271.26 (Eighteen Million Two and Seventy-Three Thousand Two Hundred and Seventy-One Rand and Twenty-Six Cents) incurred by the taxpayer, for income tax purposes, was of a capital or revenue nature in terms of section 11(a) of the Income Tax Act 58 of 1962 (the ITA).   Section 11(a) of the ITA, stipulates that: – For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall be allowed as deductions from the income of such person so derived – expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature;    


K (Pty) Ltd (“K”) was a subsidiary of the Appellant, and both conducted the business of purchasing fruit locally and selling it to the overseas market. In 2014, the Appellant acquired a major supplier of fruit for overseas trade namely, F (Pty) Ltd (“F”).   Aztec Exchange provided finance, for the purchase of F, against the production of pro forma invoices. Since the Appellant was not able to deal directly with Aztec Exchange given current its relationship with Sasfin Bank, an agreement was entered into between the Appellant and K that the Appellant would sell the fruit of F to K on a consignment basis and that K would then sell the fruit to the overseas market. The Appellant would receive whatever revenue K was able to generate in the market, after deduction of its costs.

K lacked the infrastructure to enable it to market the fruit and make logistical arrangements in relation to the sale of goods. The Appellant would provide the necessary resources and would charge K an equivalent amount for doing so.
The main components of expenditure were recorded as logistical costs, fruit purchase costs, personnel costs, professional and accounting fees, legal fees and Telkom expenses. The result was a net indebtedness of R18,273,271.26 (Eighteen Million Two and Seventy-Three Thousand Two Hundred and Seventy-One Rand and Twenty-Six Cents) on the part of K to the Appellant at the end of the 2014 year of assessment. 
Financial difficulties occurred, and the Appellant recognized that K had no resources to settle its indebtedness to it and the amount was written off. This resulted in a loss in the hands of the Appellant, in which the Appellant claimed as a deduction. SARS took the view that the amount was of a capital nature, rather than a revenue nature, because the net debt of K to the Appellant was accounted for as a loan.


A loss suffered by a taxpayer as a result of writing off can be categorised as either capital or revenue in nature and there is no definitive yardstick as reiterated in Sub-Nigel Limited v CIR 1948 (4) SA 580 (A). Each case falls to be decided on its own facts, having regard to the substance and reality of the transaction, or may be set off from taxable income in a year of assessment in terms of section 102(1)(b) of the Tax Administration Act 28 of 2011 (the TAA).
In ITC 167 5 SATC 87, it was found that the losses were incurred not for the purpose of assisting the subsidiary company, but for the purpose of developing and assisting the appellant’s own trade. These losses were incurred in the course of trading and were found not to be capital in nature, but of a revenue nature and is deductible.
There was no money advanced by the Appellant to K, as would usually happen where a loan had been advanced. The expenditure was incurred by the Appellant for purposes of providing logistical support to K to ensure the success of the Appellant’s own business. This was not concerned with supporting an extraneous business of K. The nature of the expenditure related to a trade debt on the sale of fruit. The loss or expenditure was of a revenue nature and should have been permitted as a deduction.


The appeal was accordingly granted and accordingly, the Court held that there is no single yardstick for distinguishing between capital and revenue expenditure, and that each case has to be determined on its own facts.  

In this regard, a loan is not determinative of the capital or revenue nature of loss or expenditure and that expenditure was incurred for purposes of providing logistical support to ensure success of the taxpayers own taxable business and its revenue stream via the sale of fruit. The Court found that the expenditure was accordingly not a loan.


The case highlights the importance of ascertaining the “true nature” of a transaction in terms of a section 11(a) deduction, since the accounting treatment is not definitive of either the legal position or tax position. The expenditure was closely related to the taxpayer’s own business, as the indebtedness arose from trading activities, and was a clear example of floating capital, insofar as it was not intended to remain outstanding, but intended to be converted back into cash in the ordinary course of business.  

Written by Ayanda Katjitae and Wade Jacobs

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