Share Issue Costs are not “Expenditure Incurred”
01 December 2011
Posted by: TaxFind™
Share Issue Costs Are Not "Expenditure Incurred”
While Section 24B supersedes the judgement when an asset is acquired in exchange for the issue of shares, it still applies where services are rendered in exchange for shares.
The important judgement of the Supreme Court of Appeal in the case of Commissioner: SARS v Labat Africa held that a company does not incur expenditure when it issues its own shares—but the time frame in which the transaction took place , and the nature of such transaction, is critical.
In cases where an asset is acquired in exchange for the shares,it should be noted that Section 24B of the Income Tax Act supersedes this judgement, and deems the company to have incurred expenditure on the asset acquired equal to the lesser of the market value of the asset or the market value of the shares issued by the company.
The enactment of Section 24B has rendered the judgment superfluous where an asset is acquired in exchange for shares issued.However the judgment is of importance where services are rendered in exchange for the issue of shares.
Section 11(gA) of the Act (as it read during the relevant 2000 tax year) provides for allowable general deductions for determination of a taxpayers taxable income as follows:"11.For the purpose of determining the taxable income derived by any person from carrying on any trade within the Republic, there shall be allowed as deductions from the income of such person so derived—... (3A)(iii) an allowance in respect of any expenditure ... actually incurred by the taxpayer ... in acquiring by assignment from any other person any ... trade mark ...if such ... trade mark ... is used by the taxpayer in the production of his income or income is derived by him there from …”
Labat Africa Limited purchased the entire business operations of Labat-Anderson (South Africa) (Pty) Ltd, including the tangible and intangible assets (including the trade mark).The business was acquired for a consideration of R120 million, discharged by the issue of the Labat shares at an issue price of 90 cents per share.
Critical to note, though, is that although the transaction was called a sale, the agreement was not a sale because a sale requires payment in money and not consideration in kind.The main issue within the context was therefore whether 'any expenditure' had been 'actually incurred' by the taxpayer.The Supreme Court of Appeal indicated that the true question was whether the issuing of the shares by a company amounts to expenditure,and not whether the undertaking to issue the shares amounts to an obligation.
The term 'obligation' or 'liability' and 'expenditure' are not synonyms.A liability or obligation must be discharged by means of expenditure in order for a Section 11(a) deduction to arise.
The terms 'consideration' is also not the same as 'expenditure'.Expenditure requires a diminution (even if only temporary) or at the very least movement of assets of the person who expends.This does not mean that the taxpayer will, at the end of the day be poorer because the value of the counter performance may be the same or even more than the value expended.The appeal was upheld with costs.
Source: By BDO (Tax breaks)