ABC (Pty) Limited v The Commissioner for the South African Revenue Service

• Jurisdiction: South Africa
• Judge: Nuku J
• Judgment Date: 01 November 2018
• Docket Number: 13988
• Court: Tax Court
• Hearing Date: 14 August 2018
• Citation: 2019 JDR 0144 (Tax)

Nuku J:

[1]

This matter concerns a claim for an allowance in respect of future expenditure on contracts under section 24C of the Income Tax Act 58 of 1962, as amended ("the ITA"). The appellant is a wholly-owned subsidiary of New ABC South Africa (Pty) Ltd, and a member of the ABC Group of Companies. It owns and operates the ABC retail business, which is to sell, through ABC stores nationwide, merchandise under the following categories: Health and Pharmacy; Beauty; Fragrance; Toiletries; Baby; Men; Electrical; and Household.

[2]

The appellant conducts a loyalty programme in terms of which it awards points to members on presentation of an ABC loyalty card when making purchases. The loyalty programme does not apply automatically to all ABC customers: A customer has to apply either in writing, online or telephonically to become a member of the loyalty programme. Upon acceptance of the customer's application, the appellant issues an ABC loyalty card to

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the customer. For ease of reference I refer to the agreement entered into between the Appellant and the customer upon acceptance of the customer's application as "the loyalty card contract".

[3]

The terms and conditions of the loyalty card contract include, inter alia, the following:

3.1

A customer earns points when making purchases above R10 at any of the ABC stores. In order to earn such points, a customer must present his or her loyalty card at checkout when making the said purchase. No points are earned by the customer who does not present his or her loyalty card at checkout when making a purchase, despite the fact that the customer is a member of the loyalty programme.

3.2

A Customer must spend at least R10 in order to earn points and, thereafter, for every R5 spent, one point is earned.

3.3

Customers qualify for vouchers by earning at least 100 loyalty card points during a qualification period. A qualifying period is a cycle of three months and there are four qualification periods in a year during which the minimum points have to be earned. The appellant advised that for the relevant period these qualifying periods were from 6 October – 5 January; 6 January – 5 April; 6 April – 5 July; and 6 July – 5 October. At the end of each qualifying period, the appellant issues vouchers to all members who have earned 100 points or more during that qualifying period.

[4]

Every 100 points earned by a customer will entitle that customer to a voucher to the value of R10 which can be used in payment or part payment of a future purchase at one of the appellant's stores. The value of the reward, in turn, equates to 2% of the customer's actual spend, i.e. one point is earned for every R5 spent and this is subject to a minimum transaction value of R10.

[5]

Vouchers may be redeemed by the customer for merchandise in any of the ABC stores, i.e. when the customer makes a subsequent purchase and presents his or her loyalty card and voucher at checkout. The voucher cannot be redeemed for cash. Thus, if a member presents a voucher at checkout, the appellant is obliged to supply the member with selected goods that have a retail value up to the value of the reward.

[6]

When a customer presents his or her loyalty card at checkout, the customer's loyalty card membership number and the number of loyalty points he or she has earned as a result of that transaction are reflected on the till slip. When a customer does not present his or her loyalty card, the till slip merely reflects the number of points that the customer could have earned had the customer presented the loyalty card. For ease of reference, I refer to all the

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purchases in respect of which the customer earns points and without any redemption of the voucher as "the first purchase and sale contract/s".

[7]

The appellant issues vouchers to all its customers who are members of the loyalty programme and who have earned 100 or more points. Typically a voucher will indicate a number of points accumulated and the rand value thereof. A customer is then able to redeem the voucher by purchasing goods equal to the rand value of the points indicated in the voucher. For ease of reference, I refer these purchases as "the second purchase and sale contract/s". There is also a hybrid of the first and second purchase and sale contract/s where the customer earns points in respect of that purchase and also redeems the voucher as part payment for the goods. These are however not relevant for the purposes of the determination of this matter.

[8]

The appellant included amounts received of R58 550 602 in its gross income for tax purposes in the 2009 tax year. These amounts received had been disclosed as 'Loyalty card deferred income' on the appellant's balance sheet for accounting purposes. The appellant claimed an allowance of R44 275 965 in terms of section 24C of ITA ("the section 24C claim"). Both the deferred income and the section 24C claim related to the loyalty programme. The section 24C claim was calculated on the value of loyalty card points the appellant expected to convert into free or discounted purchases in future.

[9]

On 20 August 2013, the respondent disallowed the appellant's section 24C claim and raised an additional assessment contending that section 24C of the ITA is not applicable in respect of the loyalty programme in that:

"9.1

The transaction whereby a customer purchases goods at an ABC store (and in terms of which income is received) gives rise to a separate contract to the loyalty programme;

9.2

The loyalty programme itself does not directly give rise to any income in the appellant's hands (it is free to join and there do not appear to be any hidden charges to members under the loyalty programme);

9.3

The appellant's obligation to award the member points based on qualifying sales and issue rewards when the specified number of points has been earned arises under the loyalty programme;

9.4

The appellant is likely to incur future expenditure when a customer redeems a reward and the appellant supplies the customer with goods equal to the value of the reward at no cost to the customer - this obligation to perform arises under the loyalty programme which is a different contract to that under which the income is received.

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9.5

Section 24C only permits an allowance when income and the obligation to perform which will result in the appellant incurring future expenditure, arise under the same contract. In the present matter, the income and the obligation to perform arise under different contracts."

[10]

The appellant filed an objection on 31 October 2013, and the respondent disallowed the appellant's objection on 12 February 2015. On 29 April 2015, the appellant lodged this appeal against the disallowance of its objection. The matter came before me on 22 May 2017 when it was postponed sine die. The matter came before me again on 14 August 2018 by which time the parties had managed to narrow the issues and advised the court that the only issue to be determined by this court is whether the appellant is entitled to an allowance of its section 24C claim having regard to the basis on which the respondent raised the assessment and disallowed same.

[11]

The appellant contends that it is entitled to a deduction under section 24C in that:

11.1

In applying section 24C, it is artificial to regard the future expenditure the taxpayer will incur when a customer redeems a voucher as arising under a "different contract" to the first purchase and sale contract concluded with the same customer (i.e. and pursuant to which the points concerned were generated).

11.2

The first purchase and sale contract entered into pursuant to the loyalty card contract (i.e. on presentation of the loyalty card) cannot be treated as a completely separate contract from the loyalty card contract, given the close and inextricable connection between these two contracts.

[12]

It is necessary to set out the provisions of section 24C at the time relevant to the assessment which is the subject of this appeal. At the relevant time section 24C stated that:

"24C Allowance in respect of future expenditure on contracts—(1) For the purposes of this section, 'future expenditure' in relation to any...