Clicks Retailers (Pty) Ltd v Commissioner for the South African Revenue Service

(CCT 07/20) 21 May 2021

A taxpayer’s taxable income in a year of assessment is determined after the allowance of certain deductions.  As a general rule, expenditure incurred in the production of income may be deducted, but those expenses must have been actually incurred in the year of assessment.  Section 24C of the Income Tax Act provides for an exception to this general rule in that it allows a taxpayer to defer paying tax on income if that income accrues in terms of a contract and “such amount will be utilized in whole or in part to finance future expenditure which will be incurred by the taxpayer in the performance of their obligations under such contract.”  In such a case, the tax on the income is deferred until the year of assessment in which the expenditure is incurred. 

The question to be answered by the court in this case was whether the expenditure incurred by Clicks Retailers (Pty) Ltd (“Clicks”) at a future date in the form of loyalty vouchers and the income received from the sale of merchandise arose from the same contract for the purposes of s24C.  More specifically, previous jurisprudence in the case of Commissioner, South African Revenue Service v Big G Restaurants had left open the possibility that s24C could apply where two contracts were “so inextricably linked that they may satisfy this requirement of ‘sameness’”

The question arose in the 2009 tax year.  Clicks had sought to claim its allowance in terms of s24C of the Income Tax Act and, if allowed, Clicks would have been entitled to claim a deduction of R36.18 million for that tax year.  The relevant expenditure on which Clicks relied in this case came in the form of vouchers issued to customers as part of its Clicks ClubCard loyalty programme.  At the time, Clicks returned 2% of all qualifying purchases in the form of vouchers to its ClubCard members.  The two contracts at issue, therefore, were the Clubcard contract entered into with members and the contract for the sale of merchandise which incurred the obligation to issue vouchers when the ClubCard member produced their loyalty card at the point of sale. 

In a unanimous judgment written by Theron J, the Constitutional Court found that while the two contracts were inextricably linked by design, they were not so inextricably linked as to meet the requirement of “sameness” for the purposes of s24C.  Despite the fact that both contracts operated together to give effect to Clicks’ obligations in terms of its loyalty programme, the links between the contracts did not render either contract dependent on the other for its existence.  Furthermore, Clicks could accrue income without the loyalty contract being in place, and similarly Clicks could incur the obligation to issue vouchers under the loyalty programme without accruing income – such as where a ClubCard member spent money at a partner retailer.  The appeal was therefore dismissed with costs.

Section 24C was amended by the legislature in 2015, but such amendment appears to have been for clarity and not to alter the meaning of the section.  The Constitutional Court’s finding in this case therefore has relevance to any retailer wishing to invoke s24C in respect of future expenditure incurred through a loyalty programme.  This judgment also contributes more generally to our jurisprudence on the question of when two contracts may be said to be considered so inextricably linked that they may be treated as the same contract.  

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