THE MEANING OF “EXPENDITURE” FOR PURPOSES OF SECTION 11(A) AND (GA) OF THE INCOME TAX ACT 58 OF 1962 CSARS v Labat Africa Ltd [2011] ZASCA 157

It is trite that a taxpayer may deduct, from his/her gross income, any expenditure or losses that were actually incurred, in the year of assessment, in relation to the taxpayer’s trade and in the production of income, provided that the expenditure is not of a capital nature. Section 11(a) does not require that the expenditure must have been incurred in the year of assessment. The courts have, however, interpreted this provision as restricting the deductibility of expenditure to expenses incurred in the year of assessment. It often happens that a taxpayer will engage in a transaction where goods are exchanged for services, or services for other services, or goods for rights. Conversely, barter, or agreements akin thereto, are still a common phenomenon in modern-day business. The question often arises whether or not payment in kind satisfies the requirement of “expenditure” actually incurred to determine the deductibility of the “expense” in terms of the general-deduction formula. The term “expenditure” is not defined in the Act. The Supreme Court of Appeal was recently called on in CSARS v Labat Africa Ltd to interpret the meaning of “expenditure” and to determine whether or not the allotment and issuing of shares in a company in exchange for intellectual property rights, satisfies the “expenditure” requirement in terms of the general deduction formula (or in terms of s 11(gA)), and if so, what value would be attached to such expenditure. This case discussion will also critically discuss the application of the judgment on modern-day barter transactions or where substitutive performance is made to satisfy an obligation.