One often encounters arguments that the year in which something is taxed or deducted does not really matter: as long as SARS taxes the amount or a deduction is claimed only once, the fiscus suffers no real loss. This position is, of course, not correct. A recent Johannesburg Tax Court judgment (IT 24852) illustrates the importance of timing in the context of deductions. This article briefly discusses the judgment.
Facts and dispute
The taxpayer paid excise duties and levies when acquiring fuel. In 2013 it discovered that the claims to recover some of those duties had prescribed. This was because its clearing agent had not submitted the necessary documentation in time. In its 2015 return the taxpayer claimed a deduction for the loss it said it had suffered when those refund claims expired. It argued that this was a deduction under section 11(a) of the Income Tax Act, 58 of 1962, for a loss actually incurred.
SARS argued that the taxpayer was conflating two separate things. The first was the loss it suffered when the refund claims prescribed. The second was the original expenditure, that is, the excise duties and levies it had paid when it acquired the fuel. On the SARS view, the deductible amount was the original expenditure, and it had to be claimed in the year that expenditure was incurred.
Judgment
Mali J agreed with SARS. Section 11(a) allows a deduction for expenditure and losses actually incurred. The court read expenditure incurred as any voluntary disbursement of cash or resources, or a liability to make a payment in the course of trade. On the facts, the outflow happened when the taxpayer paid the duties and levies to acquire the fuel. That was the year of incurral, and that was the year in which the deduction had to be claimed.
The taxpayer also argued conditionally around the expenditure. The court held that the conditionality did not attach to the expenditure. When it acquired the fuel and paid the duties and levies, the outflow was complete. The conditionality related to the refund, not to the original payment, so it did not postpone the year of incurral. (The court did not deal with the possible recoupment that may then arise upon obtaining a refund).
Timing matters
The same principle applies to other aspects of income tax too. In the context of income, the definition of gross income requires a taxpayer to include an amount at the earlier of receipt or accrual. An amount can therefore accrue to a taxpayer, and become taxable, before it is received. Provisions such as section 24 may give some relief for the cash flow strain where the amount has not yet been received, but they do not change the year in which the amount falls into gross income.
Allowances follow the same logic. As a general rule the Income Tax Act, with limited exceptions such as section 24M, does not allow catch-up allowances. A taxpayer who does not claim an allowance in the year it should have been claimed cannot simply claim it in a later year. The allowance has to be claimed in the correct period, which means going back to that correct year of assessment.
Take-home message
Timing matters. It matters for expenses, as this judgment shows, but equally for income and allowances. The risk of getting timing wrong may well be losing the deduction, depending on the ability to re-open or dispute the appropriate tax period’s assessment. As illustrated in this case, getting timing wrong could also result in exposure to understatement penalties and interest.
You can listen to the episode 79 of my podcast, where I discuss this topic in more detail:
