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ABC (Pty) Limited v CSARS (Case No. 13356)

19 May 2014   (0 Comments)
Posted by: Author: Erich Bell
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Author: Erich Bell (the SAIT)


In this case, the Special Tax Court (hereinafter referred to as ‘the court’) had to interpret a judgement handed down by the Supreme Court of Appeal in the case between CSARS v South African Custodial Services (Pty) Ltd 74 SATC 61 (SCA) where the SCA referred the interest and other costs back to the Commissioner to determine if it had in fact been incurred in the relevant tax year in terms of Caltex Oil SA Limited v Secretary for Inland Revenue 1975 (1) SA 365 (A) at 3748-F.


ABC concluded a public-private partnership with the Department of Correctional Services to design, construct, operate and maintain a prison on state owned land in Makhado for a period of 25 years. The total expenditure for the contract amounted to R 464 376 824 which ABC attempted to deduct. SARS disallowed the deduction which caused the matter to go to the court where it was held that the total expenditure is income in nature and that it is deductible in terms of sec 22(2A) read with sec 11(a) of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’).

The CSARS appealed the matter to the SCA where the following three issues were considered with their respective findings:

1. Whether ABC’s objection for the ’02 period fell within the prescription period, which it did.
2. Whether the construction costs and the costs for equipping the prison may be deducted in terms of sec 22(2A) read with sec 11(a) of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’) – the SCA held that ABC had never carried on a construction trade or delivered materials to the premises where the prison was to be erected as this was outsourced by ABC to a third party. The SCA therefore disallowed the deduction to ABC.
3. The deductibility of interest and other costs, which the SCA allowed in terms of the now repealed sec 11(bA) of the Act (the SCA was of the view that the various fees incurred on the loans were closely connected to the obtaining of the loans and were incurred in the furtherance of ABC’s trade and that they therefore qualify as ‘related finance charges’ for purposes of sec 11(bA)).

The SCA consequently  referred the interest and ‘other costs’ back to the CSARS to determine whether the expenses have in fact been incurred during the relevant tax year (not to determine if the expenses were in fact deductible),  by making the following order:

‘The assessment is referred back to the Commissioner for him to determine the amount that is deductible from the appellants income in terms of s11(bA) of the Income Tax act 58 of 1962’.

The CSARS, upon carrying out the order of the SCA, disallowed all fees in connection with these loans as well as the further costs on the basis that these expenses weren’t explicitly listed in par [14] – [17] of the SCA judgement (presumably due to the fact that they may have been capital in nature or not incurred in the production of income).

ABC disputed this application by the CSARS and the court therefore needed to determine whether the ‘further costs’ of R 64 346 528, consisting out of bid expenses, developer fees, legal fees, insurance, lenders technical advisors costs etc. would be deductible in terms of the SCA judgment. In other words, whether the SCA judgement relating to the sec 11(bA) deduction applied to the ‘further costs’ or only to the expenses listed in par [14] – [17] of the SCA judgement.

ABC contended that the further costs were incurred for the furtherance of the project and that they have the character of ‘related finance charges’ for purposes of sec 11(bA) and that the role of the CSARS was to determine whether the expenses had been incurred in the relevant year of assessment as per the Caltex case supra – not to disallow deductions as he deems fit. ABC further contended that should the costs not have formed part of trading stock, that the costs were in fact deductible in terms of sec 11(a) or 11(bA) of the Act  and lastly, that the SCA in its judgement did not undertake line-item scrutiny, but dealt with principles.

The CSARS on the other hand, contended that the ‘further costs’ is a new issue and that it was not raised during the dispute resolution stages in terms of sec 81 of the Act and the rules 4, 5, 6, 10 and 12 stages. He also contended that the ‘further costs’ was not raised as a separate issue before the SCA and that it formed part of the trading stock issue. The CSARS interpreted the SCA judgement that only the fees listed in par [14] – [17] are deductible (the guarantee fee, introduction fee and other finance charges) and that it does not include a ‘further cost’ category.

The court held that determining whether the ‘further costs’ was properly raised as a justifiable issue before the SCA is a factual issue which it can decide upon and that it is permissible for the court to consider extrinsic evidence such as the heads of argument of the parties.

The court held that given the history of the classification of the expenses in the legal process leading up to the SCA, that the SCA must have considered the ‘further costs’. At par 18, the court states the following in this regard:

‘In the absence of a line by line scrutiny by the SCA, I accept that the categorisation of 'further costs' is not a rigid category. It is nomenclature used as a tool of convenience by auditors. The label of this category does not place a rigid limitation on the legal interpretation of tax principles when considering the various items within it.’

Victor, J referred to several judgements to point out the principles for interpreting orders and judgements of courts with specific reference to Firestone South Africa (Pty) Ltd v Genlicuro AG 1977 (4) Sa 298 (A) where it was reiterated that a judgement must be construed from its language as a whole and only if there is uncertainty should extrinsic evidence be investigated. Reference was also made to Finishing Touch 163 (Pty) Ltd v BHP Billiton Energy Coal South Africa and Others 2013 (2) Sa 204 (SCA) where it was held that ‘… one must examine the purpose of the judgement or order and consider the context’ and to Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) where at par [18], Wallis JA stated the following:

‘consideration must be given to the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed and the material known to those responsible for its production. Where more than one meaning is possible each possibility must be weighed in the light of all these factors. The process is objective, not subjective. A sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results or undermines the apparent purpose of the document. Judges must be alert to, and guard against, the temptation to substitute what they regard as reasonable, sensible or businesslike for the words actually used.'


The court held that it would seem as if all the procedural information, heads of argument and the contract were considered by the SCA to arrive at a decision and the fact that the SCA at par 18 dealt with related finance charges in a short conclusion without doing line-item scrutiny would indicate that a broad approach was adopted by the SCA in interpreting the deductibility principle. The court subsequently held that should only the guarantee fee, introduction fee and other finance charges (as listed in par [14] – [17] of the SCA judgement) have been allowed as a deduction by the SCA, that the SCA would have specifically referred to it in its judgement and that it wouldn’t have taken a broad approach with regards to the three categories it considered (i.e. the prescription issue, trading stock issue and the interest and other costs issue). The court subsequently held that in the absence of an express reference disallowing ‘further costs’ that the SCA judgement must be interpreted to include ‘further costs’. No cost order was made.

The principle of this case can be found at par [41] – [42] where the following was held:

‘[41] … Principles emanating from judgments are meant to be applied to different facts otherwise the law would be a static process. A sensible objective observer looking at the judgment in its entire context would note the import of the principles of allowing the deductions of a wide variety of fees and the like. The category 'further costs' is but a descriptive outline or a convenient label perhaps for accountants. On the whole the items listed in 'further costs' are a 'close connection' to the furtherance of the project.

[42] Once that is so, in the absence of an express reference to disallowing 'further costs', I conclude that the judgement must be interpreted to include further costs.’

Please click here to access the full judgement.


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