Shifting tax deductions back to the future : the evolving implications of section 23H of the Income Tax Act

• DOI: 10.10520/ejc-btclq-v11-n3-a2
• Date: 01 September 2020
• Published date: 01 September 2020
• Author: Michael Rudnicki,Julia Choate
• Pages: 1-10

1

© Siber ink

Shifting Tax Deductions Back

to the Future:

THE EVOLVING IMPLICATIONS OF SECTION 23H

OF THE INCOME TAX ACT1

MICHAEL RUDNICKI* • Julia choate†

AbstrAct

The application of section 23H of the Income Tax Act 58 of 1962 was rela-

tively uncontroversial until the recent dispute between Telkom SA SOC Ltd

and the Commissioner for the South African Revenue Service (SARS) in which

the application of this section was considered. In deciding whether section

23H was applicable to the deduction of cash incentive bonus payments made

by the taxpayer to a service provider for securing the conclusion of f‌ixed-term

contracts with customers, the Supreme Court of Appeal found that the prin-

cipal enquiry in determining whether or not section 23H applies to deductible

expenditure incurred to procure any other benef‌it is the period over which

the benef‌it is enjoyed. Although the incentive bonuses in question were

specif‌ically payable by Telkom in respect of the conclusion of new contracts

with subscribers, the Court found that the true benef‌it procured by the

expenditure was the subscription fees that would accrue to Telkom over the

24-month period of the contract, and that the deduction should therefore

be spread over this period. This judgment does not precisely align with the

manner in which SARS has applied section 23H in the past, and is therefore

likely to have far-reaching implications for taxpayers, particularly regarding

the way in which the Court interpreted the term ‘benef‌it’ in the context of

this case. This article critically analyses the Tax Court and SCA judgments in

the Telkom dispute in light of the construction and purpose of section 23H,

and evaluates the grounds on which the SCA judgment could potentially be

distinguished in different factual scenarios.

Introduction

Section 23H of the Income Tax Act 58 of 1962 (the ITA) applies where

the taxpayer incurs deductible expenditure2 for the purpose of supplying

goods, rendering services, or procuring any other benef‌it, in circumstances

where the supply of such goods, rendering of such services, or enjoyment

1

*

Tax Executive, Bowman Gilf‌illan Inc.

†

Senior Associate, Bowman Gilf‌illan Inc.

The authors’ thanks and acknowledgement go to Michael Dunton and Mbali

Mnyandu (Candidate Attorneys, Bowman Gilf‌illan Inc.) for their assistance in

compiling the resources necessary to write this article.

2

Def‌ined in section 23H(1)(a) and subject to the specif‌ic exclusions set out in pro-

visos (bb)–(dd) to section 23H(1)(b).