Future allowances on contracts : section 24C and the impact of recent case law

• Author: Des Kruger,Liesl Kruger
• Pages: 11-20
• DOI: 10.10520/ejc-btclq-v11-n3-a3
• Published date: 01 September 2020
• Date: 01 September 2020

11

© Siber ink

Future allowances on

Contracts:

SECTION 24C AND THE IMPACT OF RECENT

CASE LAW

LIESL KRUGER* • des kRugeR†

AbstrAct

Section 24C of the Income Tax Act 58 of 1962 was introduced in 1980, osten-

sibly to cater for the situation that often arises in the construction industry,

and sometimes in manufacturing concerns, where a large advance payment

is made to a contractor before the commencement of the contract work,

to enable the contractor to purchase materials, equipment etc. It will be

evident that in these circumstances such advance payments are not matched

by deductible expenditure, resulting in the full amounts of the advance

payments being subjected to tax, and perhaps later when the expenditure

is incurred, a tax loss. Section 24C of the Act provides for an allowance in

relation to moneys received in advance in terms of a contract where expendi-

ture will be incurred at a future stage as provided for in that contract.

The provisions of section 24C are clearly not limited to construction, or

any type of manufacturing, but essentially apply to many industries where

income is derived in advance of expenditure that is required to be incurred

that relates to such income. Many taxpayers have accordingly availed them-

selves of the benef‌it of deferral provided by section 24C over the years since

its introduction. The South African Revenue Service (SARS) has clearly recently

adopted a narrow view of the application of the provisions as regards the

situation where income is earned in terms of one contract, but the obligation

to incur future expenditure is incurred under another contract, insisting that

the accrual of income and obligation to incur future expenditure must be

contained in one contract.

Assessments were raised by SARS on Big G Restaurants and Clicks Retailers

denying their claim for section 24C allowance. In both instances the contracts

in terms of which their income was earned (sales to customers) was separate

from the contracts in terms of which they are obliged to incur related expend-

iture. The taxpayers had argued that the two contracts were so inextricably

linked as to be the single contractual arrangement contemplated in section

24C. Both taxpayers were successful on appeal to the Tax Court.

However, both taxpayers lost on appeal by SARS to the Supreme Court of

Appeal (SCA), the court similarly adopting a narrow view as regards the same-

contract requirement of section 24C.

In an important development, the Constitutional Court agreed to hear an

appeal by Big G from the decision of the SCA, on the grounds that the matter

transcends the narrow interests of Big G and implicates the interests of a

* Off-site Consultant, ENS.

† Consultant, Webber Wentzel.