Although Judge Mali marked her judgment in the recent IT 24852 Tax Court case as neither reportable nor of interest to other judges, the decision provides important clarification regarding the deductibility of ‘losses’ under section 11(a) of the Income Tax Act (‘the IT Act’). This is particularly relevant to taxpayers, practitioners and courts alike, given the complexity surrounding what constitutes a deductible ‘loss’ in these circumstances and the timing of when such a deduction may properly be claimed.

The case examines whether the loss of a statutory refund claim through prescription can amount to a deductible loss for income tax purposes.

The matter concerned a fuel distributor that exported fuel products outside South Africa and, in the ordinary course of business, paid excise duties and levies on fuel purchased from local manufacturers. Under the Customs and Excise Act (‘the C&E Act’), exporters are entitled to claim refunds of those duties and levies, provided the claims are lodged within the prescribed two-year period under section 76B of the C&E Act.

The Broader Customs and Excise Context

The dispute in IT 24852 also fits within a broader line of South African customs and excise jurisprudence dealing with statutory refund claims and prescription.

In 3M South Africa (Pty) Ltd v CSARS, the Supreme Court of Appeal confirmed that refund claims under section 76B of the C&E Act are strictly limited by the statutory time periods prescribed by the legislation. The Court emphasised that taxpayers cannot escape those statutory limitations merely because of delays occasioned by SARS or because an earlier determination was incorrect. The onus rests upon the claimant to ensure that such claims are submitted timeously.

Similarly, in Distell Ltd v CSARS, the Supreme Court of Appeal again dealt extensively with the operation of customs and excise refund mechanisms, tariff determinations and retrospective corrections. The Court recognised that although taxpayers may succeed in correcting erroneous determinations, the statutory framework governing refunds remains decisive in determining the extent and timing of any recovery.

Against this backdrop, the taxpayer in IT 24852 faced a fundamentally different difficulty. Unlike 3M and Distell, the taxpayer no longer sought recovery under the C&E Act itself. Instead, after the refund claims had prescribed, it attempted to claim the irrecoverable amounts as a deductible ‘loss’ under section 11(a) of the IT Act.

IT 24852

In IT24852, the taxpayer’s clearing agent failed to submit certain refund applications timeously, resulting in refund claims of about R38.8 million being prescribed. Instead of claiming the excise duties as deductible expenditure in the tax years in which the fuel purchases occurred, the taxpayer later attempted to claim the prescribed refund amount as a ‘loss’ in its 2015 year of assessment under section 11(a) of the ITA.

SARS disallowed the deduction, imposed a 10% understatement penalty, and levied interest. The Tax Court ultimately dismissed the taxpayer’s appeal in its entirety.

The Central Issue

At the heart of the dispute was whether the prescribed refund claims constituted a deductible ‘loss’ actually incurred during the 2015 year of assessment, or whether the amounts represented expenditure incurred in earlier years that could not subsequently be shifted into a later assessment period.

Section 11(a) permits deductions in respect of ‘expenditure and losses actually incurred in the production of income, provided such expenditure and losses are not of a capital nature’.

The taxpayer argued that the loss only crystallised once the refund claims were prescribed under the C&E Act. Until that point, the taxpayer maintained that the claims remained recoverable. The prescription of the claims, according to the taxpayer, represented an involuntary and fortuitous deprivation capable of qualifying as a deductible loss.

SARS, however, contended that the liability to pay the excise duties arose when the fuel was originally purchased during the 2011 to 2013 years of assessment. Consequently, the expenditure had already been incurred in those years and could not later be re-characterised as a deductible loss.

Expenditure Versus Loss

The Tax Court undertook a detailed analysis of the distinction between ‘expenditure’ and ‘loss’. Relying on established authority, including Sentra-Oes Koöperatief Bpk v Kommissaris van Binnelandse Inkomste and Joffe & Co Ltd v CIR, the Court confirmed that expenditure generally involves voluntary disbursements made in the course of trade, whilst losses usually arise from involuntary or fortuitous events.

Importantly, the Court focused on the true nature of the transaction rather than the eventual financial consequence. The excise duties were paid voluntarily as part of the purchase price of the fuel. The fact that the taxpayer expected to recover those amounts through statutory refunds did not alter the original character of the payments.

Accordingly, the Court held that the expenditure was ‘actually incurred’ at the time the fuel purchases took place, not when the refund claims later prescribed.

A key aspect of the judgment is its reaffirmation of the principle that income tax is assessed annually. Expenditure must generally be deducted in the year in which it is incurred.

Penalties and Interest

The Tax Court further upheld SARS’ imposition of a 10% understatement penalty under the Tax Administration Act. The taxpayer’s conduct was found to constitute a ‘substantial understatement’, because the tax prejudice exceeded R1 million.

The Court rejected the suggestion that the error was inadvertent. Instead, the taxpayer had consciously adopted a legal position that SARS and the Court ultimately found to be incorrect.

Interest imposed under section 89quat of the ITA was likewise upheld. The Court found that the circumstances giving rise to the additional tax liability were not beyond the taxpayer’s control, particularly since the taxpayer bore responsibility for appointing and overseeing its clearing agents’ conduct.

Practical Implications

The judgment serves as an important reminder that taxpayers must carefully distinguish between the timing of expenditure and subsequent commercial consequences arising from failed recoveries or lost claims.

Businesses operating in refund-driven regulatory environments, particularly in customs and excise matters, should ensure strict compliance with statutory time limits and requirements. Failure to do so may result not only in the permanent loss of the refund itself, but also in the inability to secure any compensating income tax deduction.

The case also highlights the importance of accurate tax treatment in the correct year of assessment. Taxpayers cannot ordinarily remedy omissions from earlier years by attempting to recast those amounts as losses in later years.