Will the real 'expenditure' please stand up!

• Date: 01 December 2015
• DOI: 10.10520/EJC181955
• Author: Des Kruger
• Published date: 01 December 2015
• Pages: 6-12

6© SIBER INK

Will the Real ‘Expenditure’

Please Stand Up!

DES KRUGER1

ABSTRACT

The question as to whether, and when, a taxpayer can be said to have

incurred ‘expenditure’ is crucial in the application of a number of provisions

of the Income Tax Act, 1962. Whilst conventional wisdom was always that all

one needed to prove that expenditure had been incurred was to prove that

one had incurred an unconditional obligation to make payment, this conven-

tional view has been turned on its head in a line of cases dealing with the issue

of shares as consideration for the acquisition of assets. It is apparent that the

question of whether one has incurred an unconditional obligation determines

when the relevant expenditure has been incurred, and not whether one has

incurred expenditure. Following the decision of the Supreme Court of Appeal

in CIR v Labat Africa Ltd, it seems to be settled law that a taxpayer will only be

regarded as having incurred expenditure if it can be shown that the taxpayer

has suffered a diminution in its assets in consequence of acquiring an asset

or service.

The article considers the line of court decisions that culminated in the

adoption of the diminution of assets test. While accepting the Supreme

Court of Appeal Labat decision that the question of whether the taxpayer has

incurred an unconditional obligation in respect of the purchase price relates

to when expenditure was incurred, it is submitted that the court erred in not

f‌inding that the company issuing the shares had in fact suffered a diminution

in its assets. The article also explores what this actually means where assets

or services are exchanged under a barter transaction, and concludes that the

diminution of assets test will yield the same result.

Introduction

An interesting conundrum arises in the context of non-cash consideration,

and more particularly where that non-cash consideration is in the form of

services rendered. In essence, the question arises as to whether and when

it can be said that such non-cash consideration constitutes expenditure for

the purposes of the Income Tax Act 58 of 1962 (‘the Act’). Central to the

analysis are the three Labat judgments.2

1

The views expressed by Des Kruger are his personal views and in no way represent

the views of SARS or any other organisation to which he may be aff‌iliated.

2

ITC 1801 68 SATC 57 (Tax Court); CSARS v Labat Africa Ltd, 72 SATC 75 (High

Court) and CSARS v Labat Africa Ltd, 74 SATC 1 (Supreme Court of Appeal).