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Commissioner SARS v Labat Africa Ltd [2011] JOL 27986 (SCA)

Monday, 21 May 2012   (0 Comments)
Posted by: Stiaan Klue
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The taxpayer, under its former name of Acrem Holdings Ltd, purchased "the entire business operations" of Labat-Anderson (South Africa) (Pty) Ltd in terms of a written agreement dated 15 February 1999. Its effective date was 1 June 1999. The business operations of Labat-Anderson were defined to include all its tangible and intangible assets including, more particularly, the trade mark. In terms of clause 6 of the agreement, under the heading "sale", the taxpayer "purchased" the business "for a consideration" of R120 million, "discharged by the issue to Labat-Anderson" of 133 333 333 Acrem shares "at an issue price of 90 cents per share". (Although called a sale, the agreement was not a sale because a sale requires payment in money and not consideration in kind.)

The clause further provided that the "purchase price" was to be apportioned as to the net tangible assets at the values reflected in the accounts, then to the value of the trade mark and name in an amount as determined by an independent and suitably qualified valuator, and the balance was to be apportioned to goodwill.


The issue before the full bench of the North Gauteng High Court was the question of whether the issue by a company of its own shares in consideration for a trade mark constituted ‘expenditure actually incurred’ by the company for the purposes of s 11(gA)(iii) of the Income Tax Act.

Section 11(gA), as it read during the relevant 2000 tax year, provided for the amortisation of the cost of the acquisition of intellectual property rights at the rate of 4 per cent per annum. Taxpayers who incurred any expenditure in acquiring a trade mark by assignment from any other person, where such trade mark was used by the taxpayer in the production of his income, could claim such expenditure as a deduction.

SARS contended that no expenditure had ‘actually been incurred’ by the taxpayer in acquiring the trade mark as required by s 11(gA)(iii) of the Income Tax Act on the ground that no expenditure had actually been incurred by the respondent in acquiring the trade mark in issue.


The respondent acquired a trade mark through assignment during the tax year and sought to claim the deductible allowance. The agreement resulting in the acquisition of the trade mark involved the respondent purchasing the entire business operations of a company. That included all the company’s tangible and intangible assets including the trade mark. Instead of money, the purchase price was discharged through the assignment to the seller, of shares in the purchasing company. The shares were issued and transferred in terms of the agreement and their value, at the time of transfer, was in excess of the issue price. The trade mark was valued at R44 462 000 and the allowance claimed was based on that valuation. The appellant, the Commissioner of SARS, disallowed the claim but the Income Tax Special Court upheld the respondent’s appeal. The Commissioner’s appeal against the judgment of the special court was dismissed by the high court, leading to the present appeal.


Harms AP (with whom Lewis JA, Heher JA, Maya JA and Plasket AJA concurred) held that the question the court a quo should have posed was whether the issuing of shares by a company amounts to "expenditure” and not whether the undertaking to issue shares amounts to an obligation, which it obviously does.

The term "expenditure” is not defined in the Act and since it is an ordinary English word and, unless context indicates otherwise, its ordinary meaning must be attributed to it. Its ordinary meaning refers to the action of spending funds; disbursement or consumption; and hence the amount of money spent. In the context of the Act, it would also include the disbursement of other assets with a monetary value. Expenditure, accordingly, requires a diminution, 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.

In the present case, the respondent assigned the trade mark as consideration for the shares and did not "expend” any money or assets in acquiring the trade mark. An allotment or issuing of shares does not in any way reduce the assets of the company although it may reduce the value of the shares held by its shareholders, and it can therefore not qualify as an expenditure.

In the premises, the appeal was upheld and the court a quo’s order was replaced with one upholding the Commissioner’s appeal from the Income Tax Special Court with costs.




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