Case Comments: Cactus Investments (Pty) (Ltd) v Commissioner for Inland Revenue: Some thorny issues, and the new dispensation under section 24H of the Income Tax Act

• Jurisdiction: South Africa
• Pages: 465-484
• Date: 25 May 2019
• Citation: (2000) 12 SA Merc LJ 465
• Author: GJ Swart
• Published date: 25 May 2019

CACTUS INVESTMENTS (PTY) LTD V COMMISSIONER FOR INLAND REVENUE

465

Cactus Investments (Pty) (Ltd) v Commissioner

for Inland Revenue:

Some Thorny Issues, and

the New Dispensation under Section 24H

of the Income Tax Act

GJ SWART

University of South Africa

Introduction

An amount which constitutes gross income in a taxpayer's hands for

purposes of Income Tax Act 58 of 1962 (see s 1 sv 'gross income') is

recognized as such in the tax year in which it is received by, or accrues to

or in favour of the taxpayer, or is deemed so to accrue (for example,

under s 24J), while an amount which qualifies as an allowable deduction

under the general deduction provisions (ss 11

(a)—(b),

23

(f)—(g),

and

23B(3)) is recognized in the tax year in which the relevant expense is

(2000) 12 SA Merc LJ 465

© Juta and Company (Pty) Ltd

466



(2000) 12 SA Merc LJ

actually incurred. The recognition of an amount as an accrual in the

hands of a taxpayer, or as an expenditure actually incurred by a taxpayer,

occurs, generally, when an unconditional entitlement to a right arises in

the taxpayer's favour, or when the taxpayer incurs an unconditional

liability

(Mooi v Secretary for Inland Revenue

1972 (1) SA 675 (A) at 693-

694;

Commissioner for Inland Revenue v People's Stores (Walvis Bay)

1990 (2) SA 353 (A) at 365A—D;

Edgars Stores Ltd v Commissioner for

Inland Revenue

1988 (3) SA 876 (A) at 888-889). So a conditional liability

is recognized as an expense only in the tax year in which the condition is

fulfilled

(Edgars Stores

(supra) at 889C). Whether a right or an obligation

is conditional has a direct bearing on the time of recognition of the

accrual or expense, and on issues such as the tax consequences of cession.

In

Cactus Investments v Commissioner for Inland Revenue

1999 (1) SA 315

(SCA), the Supreme Court of Appeal considered the time of accrual of

interest before the introduction of s 24J. The judgment is, therefore,

mostly of academic interest as far as money-lending transactions are

concerned. But it would be a mistake to ignore the wider ramifications of

this judgment. The real issue underlying the judgment



whether

performance in terms of a contract can be a prerequisite for the accrual

of an amount under the contract (and for the corresponding incurral of

an expense by the other contracting party)



remains relevant to other

contracts involving continuing obligations which must be performed over

more than one tax year. This issue arises, for example, in the case of a

lease for a fixed period which cannot be terminated before the lapse of

that period. Can the total amount of the rent payable over the term of the

lease accrue to the lessor (and be incurred as an expense by the lessee)

upon the conclusion of the lease, or does the accrual of the rent depend,

for tax purposes, on the continued performance of some obligation on the

lessor's part? In other words, can a party's contractual obligation to

perform, or to tender performance, be characterized for tax purposes as a

condition? Should the possibility that performance might be rendered

only partly, or not at all (for example, as a result of the debtor's inability,

a contractual dispute, or the later variation or cancellation of the

contract) be treated as a contingency which renders a right to claim such

performance conditional? So the real issue is whether a 'condition' should

be understood in the true contractual sense as a term specifying an

uncertain future event which determines the existence of a right or

obligation

(Jurgens Eiendomsagente v Share

1990 (4) SA 664 (A) at

674E-4 or whether it bears a wider meaning for tax purposes. The

reasoning in

Cactus Investments

throws some light on the matter.

The recent amendments effected to the general deduction formula,

and the provisions governing the deduction of legal expenses and the cost

of repairs (see s

11(a)—(d))

also impact on the issue. My analysis of

Cactus Investments

and the relevant principles governing this issue will be

followed by a brief discussion of the possible import of these

amendments.

© Juta and Company (Pty) Ltd