Bribes, Penalties, and Fines: Don’t expect SARS to help
30 November 2011
Posted by: Author: Steven Jones
Bribes, Penalties, and Fines: Don’t Expect SARS to help
Section 23(o) prohibits the deduction of bribes, penalties,and fines—but it’s not quite cut and dried…
The meeting went on longer than you expected, and now you’re rushing to get to your next appointment. It’s a new client, and a successful deal will be lucrative both for your company and this month’s commission cheque.But not five minutes after you get onto the freeway, some plod with a hairdryer in his hand is waving you over to tell you what your speedometer already knows—if only you’d bothered to look.
Then the next day your boss comes into your office, informing you that your territory has been extended to include the neighbouring countries as well.The opportunity is great, but on your first visit outside of the country, all the rumours about border post delays are confirmed in graphic detail.To add insult to injury, your product samples are attracting a bit too much information from the man at Customs, so you decide to slip him a hundred bucks rather than risk any further delay.
In the meantime, you’ve been so busy that you forgot all about your income tax return that has been due for the past year. Unfortunately,since SARS does not like being delayed any more than you do, they slap a penalty on you for late submission.
Deciding to turn over a new leaf,you hire an accountant to do your taxes.In amongst your pile of vouchers, you include the traffic fine, your note about the payoff to the customs official, and the SARS penalty notice. However, the accountant does not include any of these as deductions in your income tax return. Exasperated, you get on the ‘phone and fire your accountant on the spot.
But is this justified? As it turns out, the accountant is only doing her job. The fact is that none of these so-called "expenses” are deductible against your taxable income. Section 23(o) specifically prohibits the deduction of any expenditure incurred in respect of "corruption or a corrupt activity, or a fine or penalty imposed as a result of an unlawful activity.
Should be cut and dried,shouldn’t it? Well, not really. Firstly, it may come as a surprise to many that this Section has only been part of our tax law since 1 January 2006; and secondly, if the issue was that simple, why would SARS need to issue a ten-page Interpretation Note (no. 54 dated 26 February 2010) to clarify matters?
It’s interesting to note that before Section 23(o) was enacted,there was no clause in the Income Tax Act that dealt specifically with fines, penalties, and corruption (bribes).The only exception was Section 23(d), which prohibited the deduction of any fine or penalty imposed by SARS under any of the Acts it administers, or by any Regional Services or Joint Services Council.
Commentators (and taxpayers) thus argued that any penalties,fines, and even bribes paid in the course of business should be deductible under Section 11(a) if such payments form a "necessary concomitant” of their trade.For example, it is reasonable for a transport company to expect that their drivers are likely to incur traffic fines from time to time,notwithstanding the hardening of attitudes in the wake of a spate of tragic collisions in recent weeks.
However, this matter was decided in tax case ITC 1490[(1990) 53 SATC 108 (T)]. In the matter before the court, a cartage contractor sought to claim a deduction for traffic fines under Section 11(a). The court held that to allow the fines as a deduction would be contrary to public policy, frustrating the legislative intent and allow a punishment imposed to be diminished or lightened. The court added that the fines did not play any actual part in the earning of the income and were not an inevitable concomitant of the business of a cartage contractor.
Section 23(o) is however clear on the fact that your border post bribe will not be allowed as a deduction. Referring to the Prevention and Combating of Corrupt Activities Act 12 of 2004,the Interpretation Note defines "corrupt activities” as being any" [offence] of receiving or of the offering of an unauthorised gratification” to any "public officer,foreign public official, agent,member of the legislative authority, judicial officer, and member of the prosecuting authority”. This list is however not intended to be exhaustive.
Does this then mean that Section 23(o) prohibits the deduction of any penalty that a taxpayer may incur in the furtherance of their trade? Not necessarily. For example, in the1936 Supreme Court case of Port Elizabeth Electric Tramway Co. Ltd v. Commissioner for Inland Revenue [CPD 241], it was held that compensation paid to the family of a driver who was killed in an accident whilst on duty was allowable as a deduction under what would have been the equivalent of the current Income Tax Act's Section 11(a).The Court found that bus accidents could be seen as a "necessary concomitant” of a bus transport company's trade.
Similarly, the Interpretation Note cites the example of a building contractor who enters into a contract which contains "penalty clauses” for delays in completing the building project after a pre determined date. In such cases,although the amount payable in such circumstances is referred to as a penalty, the action giving rise to such penalty is not, in itself,unlawful.It is therefore possible that such penalties may well be allowable as a deduction under Section 11(a), seeing as delays in completing construction contracts can be considered a "necessary concomitant” of such a taxpayer's trade.
Bear in mind that Section 23(o) deals only with expenditure—it is not concerned with the possibility that the income against which a deduction is sought has been derived through illegal means.Such income will remain taxable ...but that debate is for a different day!
Source: By Steven Jones (Tax breaks)