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Future expenses deductible now – a judgment about Section 24c of the Income Tax Act

05 March 2018   (0 Comments)
Posted by: Authors: Louis Botha and Louise Kotze
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Authors: Louise Kotze and Louis Botha (CDH)

Section 24C of the Income Tax Act, No 58 of 1962 (Act) provides for an allowance in respect of future expenditure to be incurred under a contract. On 3 November 2017, the Tax Court handed down its decision in B v The Commissioner for the South African Revenue Services (Case No: IT 14240) (as yet unreported). The case dealt with an appeal brought by B (Taxpayer) against the additional assessments raised by the South African Revenue Service (SARS). The taxpayer had claimed a s24C allowance during each of its 2011 to 2014 years of assessments, which allowance was disallowed by SARS.


The Taxpayer was a franchisee, operating various chain restaurants under various franchise agreements between itself and the franchisor (Agreements). The terms of the Agreements are virtually identical. The Agreements required the franchisee to have as its main objective the operation of the restaurants, more specifically the sale of food to customers. The Taxpayer also had to pay a monthly franchise and service fee to the franchisor in respect of each of the restaurants operated by it. In terms of the Agreement, failure by the Taxpayer to actively operate the business would constitute breach of contract and would entitle the franchisor to cancel an agreement. The Agreements further obliged the Taxpayer to refurbish or upgrade the restaurants at reasonable intervals and the specifications in connection with such upgrades or refurbishments were subject to the franchisor’s approval.

The Taxpayer claimed a s24C allowance in respect of future expenditure, that was to be incurred to finance the refurbishments or upgrades required by the Agreements.

Issues to consider

With regard to s24C, the Tax Court indicated that there were two questions of law to consider:

Firstly, whether the income received by the Taxpayer from operating its franchise businesses includes or consists of any amount received by or accruing to it in terms of the Agreements; and

Secondly, whether the expenditure required to refurbish or upgrade is incurred by the taxpayer “in the performance of the taxpayer’s obligations under such contract” as envisaged in s24C.

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