The meaning of 'expenditure' (CSARS v Labat Africa case)
The meaning of 'expenditure'
In the recent decision of the Supreme Court of Appeal in C:SARS v Labat Africa Ltd (to be reported in the South African Tax Cases Reports Vol 74 Part 1) the court had to grapple with 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) of the Income Tax Act 58 of 1962.
The Commissioner for SARS contended that no expenditure had actually been incurred by the taxpayer in acquiring the trade mark as required by s 11(gA) of the ActThe facts were that the respondent had acquired the trade mark ‘Labat-Anderson’ through assignment during the relevant tax year and sought to claim a deductible allowance in terms of s 11(gA) of the Act in respect of the ‘expenditure actually incurred’ on the acquisition of the trade mark in its 2000 year of assessment.
The respondent, under its former name of Acrem Holdings Ltd, had purchased ‘the entire business operations’ of Labat-Anderson (South Africa)(Pty)Ltd in terms of a written agreement dated 15 February 1999 and 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 aforesaid agreement, under the heading ‘sale’, the respondent ‘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.
’Clause 6 of the aforesaid agreement 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.An increase and subdivision of the authorized share capital of the respondent was necessary in order to create these shares and the terms of the agreement were approved and the necessary special resolutions were taken to give effect to the transaction.
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 this valuation and its correctness was not in dispute.The sole issue between the parties was whether, within the context and meaning of the statutory provision, ‘any expenditure’ had ‘actually’ been ‘incurred’ by the respondent.
The appellant, being the Commissioner for SARS, had disallowed the respondent’s claim in terms of s 11(gA) of the Act on the ground that no expenditure had actually been incurred by the respondent in acquiring the trade mark in issue as required by s 11(gA) of the Act and the respondent then appealed to the Pretoria Tax Court (see ITC 1801 (2005) 68 SATC 57 per Jooste AJ) which upheld its appeal whereupon the appellant then appealed to a full bench of the North Gauteng High Court (see C:SARS v Labat Africa Ltd 72 SATC 75 per Sapire AJ) which dismissed the appellant’s appeal against the judgment of the Tax Court which resulted in the present appeal with special leave of the Supreme Court of Appeal.
The Tax Court found that the issuing of the shares with a value equal to the value of the trade mark meant that the respondent did actually incur expenditure in obtaining assignment of the trade mark.The court a quo was of the view that if the agreement for the acquisition of the trademark had been that the seller would purchase an agreed number of the unissued shares of the purchaser at an agreed price, and that the proceeds of such sale would be applied to payment of the purchase consideration of the asset, there could be no doubt that the transaction would constitute or involve an expenditure by the company of a portion of its share capital and hence it confirmed the conclusion of the Tax Court that the issue of shares by a company for the acquisition of an asset constituted expenditure for the purposes of s 11(gA) of the Act.
Harms AP (with whom Lewis JA, Heher JA, Maya JA and Plasket AJA concurred) stated that although called a sale, the agreement in issue had not been a sale because a sale requires payment in money and not consideration in kind.He continued that the sole issue between the parties was whether, within the context and meaning of the statutory provision, ie s 11(gA) of the Act, ‘any expenditure’ had ‘actually’ been ‘incurred’ by the respondent and the Tax Court, in coming to its conclusion that the respondent did actually incur expenditure in obtaining assignment of the trade mark, had relied on Edgars Stores Ltd v CIR 50 SATC 81 which, in turn, had been based on Nasionale Pers Bpk v KBI 48 SATC 55 in holding that
the expression ‘expenditure actually incurred’ meant in the present context that the respondent must have incurred an unconditional legal obligation in respect of the amount concerned and it was not required that the obligation be discharged and once the obligation had been incurred the expenditure became deductible.
However, although the Tax Court stated the principle to be deduced from these judgments correctly, the problem was that they did not deal with the meaning of ‘expenditure’ but with the question when the expenditure had actually been incurred and it was never an issue in the instant case as to when liability arose as the transfer of the shares took place against the assignment of the trade mark and the respondent sought to claim the allowance in the year the obligation was incurred.
Moreover, the question the Tax Court should have posed was whether the issuing of shares by a company amounted to ‘expenditure’ and not whether the undertaking to issue shares amounted to an obligation, which it obviously did; the terms ‘obligation’ or ‘liability’ and ‘expenditure’ were not synonyms and this was apparent from what was said by Botha JA in Caltex Oil(SA)Ltd v SIR 37 SATC 1, namely that the expression ‘any expenditure actually incurred’ meant ‘all expenditure for which a liability has been incurred during the year, whether the liability has been discharged during that year or not’.In other words, the liability or obligation must be discharged by means of expenditure- timing is not the question.
The court noted however that the Tax Court did seek to pose the correct question when it referred to some English judgments that dealt with the effect of a transaction in terms of which a company acquires assets ‘in consideration’ of the issue of fully-paid shares and the High Court likewise asked whether the issue of a company’s own authorized share capital in exchange for a trade mark ‘represents real consideration given by the company’ but it escaped the court how these decisions had any bearing on the meaning of ‘expenditure’ as used in s 11 of the Act.
The court observed that the term ‘expenditure’ was not defined in the Income Tax Act and since it was an ordinary English word and, unless the context indicated otherwise, this ordinary meaning had to be attributed to it.The ordinary meaning of the term ‘expenditure’ referred to the action of spending funds; disbursement or consumption; and hence the amount of money spent- the Afrikaans text, in using the term ‘onkoste’, endorsed this reading and in the context of the Income Tax Act it would also include the disbursement of other assets with a monetary value.
Expenditure, accordingly, required a diminution (even if only temporary) or at the very least movement of assets of the person who expends but this did not mean that the respondent would, 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.
The court noted that Labat-Anderson had assigned the trade mark as consideration for the shares and the respondent did not ‘expend’ any money or assets in acquiring the trade mark and, as Goldblatt J said in ITC 1783 66 SATC 373, an allotment or issuing of shares did not in any way reduce the assets of the company although it may reduce the value of the shares held by its shareholders, and that it could therefore not qualify as an expenditure and it would have been more correct if he had said that it did not involve a shift of assets of the company even though it might, but not necessarily, dilute or reduce the value of the shares in the hands of the existing shareholders.
The court added that if authority was needed for the self-evident statement of Golblatt J that an allotment of shares did not diminish a company’s assets, one may refer to CIR v Estate Kohler and Others 18 SATC 354 which was followed by Estate Furman and Others v CIR 25 SATC 4.
The full court in C:SARS v Labat Africa Ltd 72 SATC 75 had stated that if the agreement had been that Labat-Anderson would have purchased the shares at an agreed price and that the proceeds of the sale would be applied to the purchase price, there could be no doubt that the transaction would constitute an expenditure by the company of its share capital, and that it was difficult to see the difference between this construction and the present agreement; however, whether or not the premise of the full court was correct, the conclusion missed the point.
Because there was no suggestion that the contract was in any way simulated we have to take it as we find it and the fact that the parties may have constructed their agreement differently and tax-efficiently was entirely beside the point.Accordingly, no expenditure had actually been incurred by the respondent in obtaining assignment of the trade mark and it was therefore not permitted an allowance in terms of s 11(gA) of the Act.In the result the appeal was upheld with costs.