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Constitutional court ruling puts section 24C allowances under the spotlight again

By Andrew Lewis

It is not often that the Constitutional Court of South Africa (ConCourt) is required to make judgement on tax matters. It is even less common to have two separate Supreme Court Of Appeal (SCA) tax decisions on similar issues taken on appeal to the ConCourt.

In December 2019 the SCA ruled in favour of the South African Revenue Service (SARS) denying Clicks Retailers (Pty) Ltd (Clicks) the deduction of deferred income allowances, under section 24C of the Income Tax Act No 58 of 1962 (the Tax Act), in relation to its Clicks ClubCard programme with customers1.

On 21 May 2021, the December 2019 decision of the SCA was taken on appeal by Clicks to the ConCourt2 (Clicks (CC)). Incidentally, the ConCourt has recently heard arguments on the legislative interpretation of section 24C in Big G Restaurants (Pty) Ltd v Commissioner, South African Revenue Service3 (Big G).

Although the facts in Clicks (CC) and Big G are different, the ConCourt applied the principles established in Big G to the Clicks case.

Facts under Clicks (CC)

Clicks runs a Clicks ClubCard programme which rewards ClubCard members with points for (i) making a purchase above the stipulated value threshold at a Clicks store and (ii) presenting their ClubCard at checkout. A contract of sale is concluded and income accrues to Clicks. By doing so, the loyalty points which are earned by the member can later be redeemed for Clicks merchandise.

Dating back to 2009, Clicks has argued that it is entitled to claim a section 24C allowance on the basis that its loyalty programme imposes an obligation on it to finance future expenditure, as envisioned in section 24C, against income from a contract of sale.

SARS disallowed Click’s allowance on the basis that section 24C only permits an allowance when the income and the obligation to finance future expenditure arise under the same contract. In Clicks’ case, according to SARS, the income and the obligation to finance future expenditure arise from different contracts. Each transaction in terms of which a customer purchases goods at a Clicks store represents a separate contract, which is independent and distinguishable from the ClubCard contract. The obligation to finance future expenditure arises under the ClubCard contract whereas the income accrues to Clicks in terms of the contract of sale.

ConCourt Judgement in Clicks (CC)

Consistent with the principles that had been established in the Big G case and the finding of the Click SCA case, the ConCourt determined that the contract under which income accrues (the contract of sale) and the contract under which the obligation to finance future expenditure arises (the ClubCard contract) are simply too independent of each other to meet the requirement of “contractual sameness”.

Whilst they may operate together within the context of the loyalty programme, and in that sense are inextricably linked or connected, this link is not sufficient to render the contracts the same for the purposes of section 24C. The contracts therefore fall short of the sameness that is required by section 24C of the Tax Act and the appeal by Clicks was unsuccessful.

Key takeaways

While it is rare for the ConCourt to be called upon to consider tax disputes, it was satisfied that the application by Clicks had reasonable prospects of success and involved issues of general public importance – so leave to appeal was granted on both cases.

The requirement of section 24C(2) will only be met if either –

  1. the income and paired obligations to finance future expenditure arise under the same contract; or
  2. the income and paired obligation to finance future expenditure are guaranteed by different inextricably interlinked contracts, as long as those contracts satisfy the requirement of “sameness”.

On the second point, for two contracts to satisfy the “sameness” principle, both the earning of income and obligation to finance future expenditure must depend on the existence of both contracts. If either contract can be entered into and exist without the other, they will fall short of this requirement.

As these case have demonstrated, determining whether a taxpayer may be entitled to a section 24C allowance can be a complicated analysis. Taxpayers claiming such allowances should consider whether they have been claimed in accordance with these principles and we suspect SARS will scrutinise these allowances through a closer lens in future.

1Commissioner, South African Revenue Service v Clicks Retailers (Pty) Ltd [2019] ZASCA 187; 2020 (2) SA 72 (SCA)
2Commissioner, South African Revenue Service v Clicks Retailers (Pty) Ltd [2021] ZACC 11
3[2020] ZACC 16; 2020 (6) SA 1 (CC); 2020 (11) BCLR 1297 (CC)