Ticktin Timbers CC v Commissioner for Inland Revenue

• Jurisdiction: South Africa
• Judge: Hefer JA; Grosskopf JA; Marais JA; Zulman JA; Madlanga AJA
• Judgment Date: 10 September 1999
• Citation: 1999 (4) SA 939 (SCA)
• Docket Number: 443/97
• Hearing Date: 16 August 1999
• Counsel: T S Emslie for the appellant. O L Rogers for the respondent.
• Court: Supreme Court of Appeal

Hefer JA:

[1] This appeal is against the judgment in Commissioner for Inland Revenue v Ticktin Timbers CC 1997 (3) SA 625 (C) (1997 (1) JTLR 1) in J

Hefer JA

which the Full Court of the Cape Provincial Division upheld the A Commissioner's refusal to allow the appellant, a close corporation, to deduct interest on capital borrowed from its only member from its income for the purpose of determining its taxable income during the 1985 to 1989 years of assessment. What has to be decided is whether the Full Court's finding that the interest did not B constitute expenditure incurred in the production of the corporation's income as envisaged in s 11(a) of the Income Tax Act 58 of 1962, as amended, is correct.

[2] The general deduction formula of the Act and its precursors has received the attention of the Courts on many occasions and, although problems arising from its application in particular cases C still present themselves, its ambit is well-defined. For present purposes it suffices to record the following:

(a)

Section 11(a) which allows the deduction of non-capital 'expenditure . . . actually incurred . . . in the production of the income' is subject to s 23(g) which (before its amendment during 1992) prohibited D the deduction of moneys 'not wholly or exclusively laid out or expended for the purposes of trade'.

The combined effect of the two sections is that

'. . . (i)f expenditure is incurred ''in the production of income'' and ''wholly and exclusively for the purpose of trade'' it is deductible, otherwise not' E

(per Watermeyer AJP in Port Elizabeth Electric Tramway Co v Commissioner for Inland Revenue 1936 CPD 241 at 245). The enquiry must accordingly proceed by examining, on the facts of each case, firstly, whether the expenditure in question can be classified as expenditure actually incurred in the production of income and, secondly, whether its deduction is prohibited by s 23(g) F (Commissioner for Inland Revenue v Nemojim (Pty) Ltd 1983 (4) SA 935 (A) at 947A).

(b)

The purpose for which the expenditure was incurred is the decisive consideration in the application of s 23(g). As far as s 11(a) is concerned, Corbett JA said in Commissioner for Inland Revenue v G Standard Bank of SA Ltd 1985 (4) SA 485 (A) at 500H - J:

'Generally, in deciding whether money outlayed by a taxpayer constitute expenditure incurred in the production of income (in terms of the general deduction formula) important and sometimes overriding factors are the purpose of the expenditure and what the expenditure actually effects; and in this regard the closeness of the connection between the expenditure and the income-earning operations must be assessed.' H

(c)

There can be no objection in principle to the deduction of interest on loans in suitable cases. Loan capital is the lifeblood of many businesses but the mere frequency of its occurrence does not bring about that this type of expenditure requires different treatment. (Compare the Standard Bank case I supra and Natal Laeveld Boerdery (Edms) Bpk v Kommissaris van Binnelandse Inkomste 1998 (1) SA 639 (SCA) (1997 (5) JTLR 115.)

[3] The interest which concerns us in the present case was credited J

Hefer JA

annually on the accumulated balance in the loan account of the A corporation's member, Dr David Ticktin. The sole issue is the purpose for which the loan was made. In order to decide it, it is necessary to deal briefly with the facts.

[4] The appellant came into being during 1985 when Dr Ticktin B acquired the shares in a private company and converted the company into a close corporation. Among the company's assets was a substantial amount of distributable reserves which, in terms of s 40A of the Act (as it then read), were deemed to have been distributed to the corporation. In the first entry in the loan account the balance of the reserves after tax was credited to Dr Ticktin. Thereafter the C corporation's net income until 30 June 1985 was also credited to him; and so was its net trading income for every ensuing year until 1989. Dr Ticktin's explanation is...