Section 24C allowance for future expenditure : navigating the maze

• DOI: 10.10520/EJC-14cea675af
• Record Number: btclq_v10_n1_a3
• Pages: 11-19
• Date: 01 March 2019
• Author: Michael Rudnicki
• Published date: 01 March 2019

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Section 24C Allowance for

Future Expenditure:

NAVIGATING THE MAZE

MICHAEL RUDNICKI*

AbstrAct

This article examines some of the peculiarities of the provisions of section

24C of the Income Tax Act 58 of 1962. The primary focus of the article is to

analyse two key aspects of the section: (i) whether the section is restricted

to the receipt of income as opposed to the accrual of income generated

by a contract; and (ii) the correlation between the contract generating the

advance income and the contractual obligations to incur future expenditure.

In respect of the f‌irst focus point, the section contemplates the receipt

or accrual of income. The words must be given meaning and accordingly

the accrual of income, it is submitted, will be suff‌icient to trigger a section

24C allowance. The accrual will be monetised, which then will fund future

expenditure. If income is not received or accrued in a particular year, SARS

argues that the deemed inclusion in income of a previous year’s allowance is

suff‌icient for a section 24C allowance. It is submitted that this interpretation is

questionable, but is the interpretation of SARS. It is submitted that this inter-

pretation is not required as the section refers to income received or accrued

in ‘any’ year of assessment, and provided that an obligation to incur future

expenditure in a particular year exists, an allowance should be permissible.

The relationship between future expenditure to be incurred in terms of a

contract obligation and income earned in terms of a contract is often a prob-

lematic analysis. A number of recent cases have considered this point, particu-

larly a recent Supreme Court of Appeal decision. The taxpayer argued that

future expenditure incurred under a franchise agreement was funded with

income derived in terms of the franchise agreement. The taxpayer argued

that the franchise agreement was the source of its income as it was in terms of

this agreement that the franchisee was obliged to provide meals to its patrons

thereby generating income. The court concluded that the performance of the

obligations giving rise to future expenditure must be interpreted in a narrow

sense. The court also concluded that the contract which generated income

was the contract with patrons and not the franchise agreement. The franchise

agreement was considered not to be inextricably linked with the contract

with the patrons. The taxpayer argued that there was an implied obligation

in terms of the franchise agreement to sell meals to customers. The appeal

was upheld in favour of SARS.

* Director, Bowmans Attorneys.