Farmer's Weekly (South Africa)
Tax Advice
An August 2018 decision of the full bench of the Western Cape High Court contains some tax principles well worth noting.
Amining group sold coal to a US firm at a fixed price. Two agreements were concluded: the first essentially covered the year 2002; the second, 2003.
At some stage, the sale price no longer proved beneficial to the seller and the business owner decided to stop supplying the purchaser with coal. A better price could be obtained on the open market.
The purchaser was then approached with a view to renegotiate the sale price of the coal, but stood its ground, and the coal was subsequently sold to others.
During the currency of the second agreement, the coal business was sold to a related company.
The purchaser went to law, and an arbitration, held in the UK, determined that the seller had to pay R90 million damages to the purchaser due to the dishonouring of the sale of coal agreement.
The original owner paid the damages and tried to write them off as a tax deduction against taxable income in the 2007 tax year.
no tax deduction
SARS disallowed the deduction of the R90 million in an assessment raised in 2012. The taxpayer was required to pay tax and interest on the deduction it had specified in its tax return.
The taxpayer took the assessment to the Tax Court, which found against it. It then appealed to the full bench of the Western Cape High Court. Under law, if a deduction or liability is closely related to the income-generating activities of a taxpayer, then these costs are allowed as a deduction. For example, an accident resulting in damage and loss could qualify and the loss be deducted from the taxable income of the unfortunate taxpayer.
In this instance, however, the taxpayer knowingly caused the damage. It took a decision to repudiate an agreement because higher prices were obtainable elsewhere. And this was why the damages awarded at the arbitration were held to be non-deductible.
Expenses caused due to negligence are ‘ probably not deductible’
judgement upheld
After close examination of the case authorities, the High Court was of the same view, noting that expenses caused due to unlawfulness or negligence were “probably not deductible”.
In addition, by the time the damages claim was settled, the coal business had been sold. It was thus held to be highly questionable whether the deduction was rightly that of the taxpayer in any event.