ABC (Pty) Limited v CSARS (Case No. 13356)
19 May 2014
Posted by: Author: Erich Bell
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terms of the now repealed sec 11(bA) of the Act (the SCA was of the view that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  –  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  –  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  –  are deductible (the guarantee fee, introduction fee
and other finance charges) and that it does not include a ‘further cost’
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 , 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  –  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  –  where the following was held:
‘ … 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.
 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.’
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