Section 24C of the Income Tax Act[1] (hereinafter referred to as “the Act”) allows a deduction, from income, received by or accrued to a taxpayer in terms of any contract, to finance future expenditure which will be incurred by the taxpayer in fulfilling its obligations in the performance of such contract.

On 3 December 2019, the Supreme Court of Appeal delivered judgment in a matter on appeal from the Tax Court, sitting in Cape Town, providing some clarity on the deduction (allowance) provided for in Section 24C of the Act.[2] From the outset, it is important to note that this matter had been running since 2009, and the Court had to decide the matter on the wording of the section as it was at the time of objection. The section was amended in 2016.

Clicks’ claim stems from its Clicks Clubcard loyalty program. Customers could sign up as Clubcard loyalty program members. The sign-up process was free and involved the customer signing a contract that stated that for every purchase made, exceeding R10, for which a Clubcard was presented by the customer at the till, the customer would receive 1 point for every R5 spent at the till. For every 100 points that the customer accumulated in a three-month period (quarter), said customer would receive a R10 reward voucher. This voucher could then be used in part payment of a purchase. These vouchers were not to be exchanged for cash and lapsed after 1 year from the date that it was earned.

Clicks claimed deductions from its gross income in an amount of R44,275,965.00, being the cost of sales to clicks in honouring vouchers that were expected to be redeemed in the following tax year. The contention was that as it received the income from sales which generated the points and as such it was entitled to use that revenue to fund the obligations to provide further vouchers in subsequent years. This in turn entitled it to claim the section 24C allowance. SARS subsequently disallowed the allowance claim by Clicks, and the further objection to the disallowance.

On appeal to the Tax Court, Clicks’ claim to the allowance was partially allowed. The Commissioner, with leave of the Court, appealed to the Supreme Court of Appeal (“SCA”).

The main point of departure for the SCA was to determine whether the deduction claimed by Clicks was as a result of one contract or whether there were three different contracts in the cycle. In regard thereto, the Court referred to its previous decision in CSARS v Big G Restaurants[3] where it held that in order to qualify for the allowance, the income received and future expenses to be incurred should arise from the same contract.[4]

Arguments by SARS were that three different contracts existed, namely;

• the contract for the Clubcard program entered into by the customer, where no income was derived;
• the first contract of sale with the customer which Clicks earned Income from, and the Customer earned the points, but no obligation arose to honour vouchers and thus no future expenditure incurred; and
• the second contract of sale which Clicks earned income from, and against which the customer in question was entitled to redeem vouchers as partial payment.

As a result, the section 24C allowance should be refused as the future expenditure did not stem from the same contract for which the income as earned.

Clicks, on the other hand, contended that the qualifying purchase was obligation imposing, as found by the Tax Court, and that there was a direct and immediate connection between each sale, and Clicks’ obligation to issue rewards to the customer as a result thereof. Clicks’ argument is thus that the qualifying sale was the “same contract” for which rewards were issued.

Dlodlo JA, in his judgment (Wallis, Swain, Mbah and Hughes AJA concurring), held that, while revenue arose in terms of sale contracts with customers, the reward points and vouchers, awarded to customers, arose out of the loyalty program contract. The Court found that the revenue earned, and expenditure claimed, did not arise under the same contract as required by section 24C of the Act and that the Commissioner was correct in refusing the allowance claim by Clicks. The appeal was upheld with costs.

The judgement goes some way in clarifying the position the Court first took in the Big G case. This, however, puts organisations in a predicament when planning the future funding of loyalty programs, as these funds have to stem from the same contract, and not subsequent contracts, for the section 24C deduction to be allowed by SARS.

• [1] Act 58 of 1962.
• [2] Reported as the Commissioner for the South African Revenue Service v Clicks Retailers (Pty) Ltd    (58/2019) [2019] ZASCA 187.
• [3] CSARS v Big G Restaurants (Pty) Ltd [2018] ZASCA 179, 2019 (3) SA 90 (SCA).
• [4] Para 7 of Clicks case.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)