South Africa: So A Company Can Pay For Its Expenditure By Issuing Its Own Shares!

Last Updated: 28 July 2010
Article by Ernest Mazansky

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions