For many years there has been a debate as to whether a company can incur a cost in relation to the acquisition of an asset or the incurral of operating expenditure, where it pays the supplier by issuing its own shares. The SARS had strenuously taken the view that this was not possible, because the company parted with nothing when it issued its shares. The burden fell on the remaining shareholders, whose interest in the company was diluted, but not on the company itself.
The issue was highlighted in ITC 1783, 88 SATC 373. That case related to the acquisition of an intellectual property, where the purchase price was settled by the company issuing its own shares. Section 11(gA) of the Income Tax Act (the Act) requires, for intellectual property to be amortised for tax purposes, that there be expenditure actually incurred on, in this case, the acquisition of an intellectual property. The question arose whether the company had actually incurred any expenditure when it issued its own shares. The court relied on the dictionary meaning of "expenditure", which involved the spending of money or its equivalent, e.g. time or labour, and involved the resultant diminution of assets of the person incurring the expenditure, and it concluded that the allotment did not in any way reduce the assets of the company.
This finding was despite authority to the contrary in England, such as in Osborne v Steel Barrel Co Limited [1942] 1 All ER 634 (CA) (though these cases were not considered by the court), where it was pointed out that the primary liability of an allottee of shares is to pay for them in cash, but when shares are allotted credited as fully paid, this primary liability is satisfied by a consideration other than cash. Thus the company gives up what would otherwise have been the right to call for cash, which would obviously represent a cost to the company. And there was further judicial authority along the same lines.
The matter came before the Tax Court again in ITC 1801, 68 SATC 57. This English authority was cited in the judgment. But the judge there also analysed the situation in terms of the (South African) Act in concluding that, in that case, the company had incurred expenditure in respect of the acquisition of a trademark, and thus was entitled to the allowance under section 11(gA) of the Act. It is now trite law in South Africa that expenditure is incurred when the taxpayer incurs an unconditional obligation to pay for that expenditure. The court pointed out, moreover, that it is not a requirement that the obligation must also be discharged. In this case, as soon as the purchaser had unconditionally committed itself to acquire the trademark, that expenditure had been actually incurred. The fact that the liability was subsequently discharged by the company issuing its own shares did not in any way alter that fact. In this case, the court declined to follow the decision in ITC 1783 and concluded that the decision there was "clearly wrong and not a reflection of the law." A further interesting comment was made that: "Tax issues should not unnecessarily complicate or frustrate ordinary commercial transactions."
The decision in ITC 1801 was taken on appeal by the SARS to the High Court, in C: SARS v Labat Africa Limited, case number A206/06 (not yet reported in the Law Reports), the judgment having been handed down on 8 December 2009. In a unanimous judgment which, it must be said, was a little over three typed pages long, the court quickly came to the decision that the decision in the court a quo was correct, and the appeal was dismissed. The court observed that if, instead, the seller of the asset to the company had subscribed for shares in cash, and the company had used the cash to acquire the assets, "there could be no doubt that the transaction would constitute or involve an expenditure by the company of a portion of its share capital. It is difficult to see any distinction between this construction of the transaction and that provided for in the agreement with which we are concerned."
It remains to be seen whether the SARS will still appeal this decision to the Supreme Court of Appeal. But what is interesting is that, because the interpretation turned on the expression "expenditure actually incurred", which is the same expression used under the general deduction formula in section 11(a) of the Act, it must surely mean that if expenditure is incurred on ordinary operational costs, and the payment therefor is discharged by an allotment by the company of its own shares, that expenditure (all other requirements having been met) should be allowed as a deduction for tax purposes. It is a well-established rule of construction of statutes that where a word or expression is used in several places in an Act, it ought to be given the same meaning wherever used, unless there are good reasons not to do so.
Of course, in practice, there are not too many circumstances where a supplier of goods or services to a company would be willing to be paid in shares rather than in cash. But it is quite common to remunerate employees by way of share schemes, and if a company were to conclude an agreement with an employee that a portion of the liability for his or her remuneration owing would be discharged by means of an allotment of the company's own shares, there would seem to be no reason why the amount should not be deductible in the ordinary way.
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