"The contracts therefore fall short of the sameness that is required by section 24C: Constitutional Court held in the Clicks case".

Customer loyalty programmes have been around as early as the 1980's, and are widely known to be used as business marketing tools. Broadly, under a customer loyalty program, customers are rewarded for their loyal support towards the supplier who provides the loyalty program.

Section 24C was inserted into the Income Tax Act (ITA) as a relief measure to taxpayers who, due to the special circumstances and nature of the taxpayers' businesses, receive advance income under a contract during a year of assessment, but only incur related future expenditure in a subsequent year of assessment in performing any of their obligations under that contract. Had section 24C been absent the income would be fully taxable in the year it is received without any deduction for future expenditure.

The following requirements must be met to claim the section 24C deduction in terms of the ITA:

  • Income for the specific year of assessment includes or consists of an amount which is received or accrued under a contract.
  • All or part of that amount will be used to finance expenditure which will be incurred by the taxpayer in a subsequent year of assessment in performing the obligations imposed by that contract.
  • That expenditure, referred to as "future expenditure", must either be expenditure which will be allowed as a deduction from income when incurred in a subsequent year of assessment or is expenditure which will be incurred in a subsequent year of assessment on the acquisition of an asset for which any deduction will be allowed under the ITA ("future expenditure"). ' 58 of1962

Section 24C(3) states that an allowance deducted in any year of assessment is deemed to be income in the succeeding year of assessment.

In regards to the tax treatment of retail customer loyalty programmes in South Africa, the Constitutional Court (ConCourt) clarified the interaction between section 24C of the ITA and Clicks' ClubCard customer loyalty programme, and whether Clicks was eligible to claim the section 24C allowance. It is important to take note of the term contract referred to herein in the first and second requirements of section 24C, but the meaning of what 'contract' entails is, however, more crucial as is evident from the Clicks case.

The relevant facts of the Clicks case are as follows:

  • Clicks Retailers (Pty) Ltd (Clicks) is a retailer that sells merchandise, mainly in the pharmacy, health and beauty categories, to the public, and runs the Clicks ClubCard programme, one of the better known customer loyalty programs in South Africa.
  • Clicks' customers become members of its ClubCard programme after completing and submitting a Clicks ClubCard application. A ClubCard contract between Clicks and a customer is only concluded when Clicks accepts a customer's application and issues a ClubCard to a customer.
  • All ClubCard programme participating customers receive loyalty points for shopping at Clicks which are not redeemable for cash, but translated into cash back vouchers, and can be off-set against Clicks' merchandise provided a customer accumulates the requisite number of loyalty points.
  • Clicks deducted from its income during the 2009 tax year the cost of merchandise that it was going to provide to its ClubCard programme customers by claiming an allowance for future expenditure in terms of section 24C of the ITA.
  • Clicks maintained that it was allowed to claim the section 24C deduction on the basis that a single composite contract came into existence when a customer joined its loyalty programme, which it said comprised of the ClubCard contract and the sale contract concluded when a member uses their ClubCard at the time of a transaction, and thus that it met the income accrual and future expenditure incurral obligation requirements under section 24C of the ITA.
  • SARS disallowed the deduction that Clicks claimed for its 2009 tax year on the basis that the requirements had not been met. Both Clicks and SARS approached the Supreme Court of Appeal before the ConCourt had to decide on this dispute. Of relevance is what does the term contract entail as envisaged under the section 24C allowance requirements.

Legal issue

At issue was whether the ClubCard contract and sale contract that Clicks concluded with its ClubCard loyalty programme customers, constituted the same contract or different contracts (that met the income accrual and future expenditure incurral obligation contract requirement) that allowed Clicks to claim the section 24C allowance under the ITA.

Clicks contended it could claim the section 24C allowance on the basis that it earned income and incurred an obligation to finance future expenditure under the same contract, namely the sale contract when a customer uses their ClubCard to make a qualifying purchase.

SARS contended that Clicks' income accrual and the obligation to finance future expenditure under Clicks' ClubCard loyalty programme arose from different contracts consequently disqualifying Clicks from claiming the section 24C deduction.

Supreme Court of Appeal decision

The Supreme Court of Appeal (SCA) applied the same-contract test that it endorsed in the Big G case, meaning the income earning contract and expenditure obligation imposing contract had to constitute the same contract, as that case also dealt with the interpretation and application of section 24C of the ITA.

Just like the SCA had done in the Big G case, it confirmed that section 24C(2) of the ITA does not envision different income earning and future expenditure obligation imposing contracts, and the section 24C allowance cannot be claimed where two or more different contracts are inextricably linked.

The SCA ruled that Clicks' income received and the future expenditure sought to be deducted did not arise from the same contract and hence it did not satisfy the same contract test required under section 24C(2) of the ITA.

3 Commissioner, South African Revenue Service v Big G Restaurants (Pty) Ltd 2019 (3) SA 90 (SCA).

Constitutional Court decision

It is noteworthy that the ConCourt had also decided the Big G case, and it emphasized that the section 24C allowance may be claimed either when the same-contract test is met (as already discussed herein), or when the income earned and the obligation to finance future expenditure arise from two or more contracts that are so inextricably linked that they meet the requirement of sameness.

The ConCourt in Clicks' case pointed out that an inquiry into what it means for two or more contracts to be inextricably linked must be done. In this regard, it noted that under South African law an inextricable link exists when an issue, claim, contract or conduct cannot be determined or assessed without another or the legal consequence of the one cannot be understood or measured without the reference to another.

The ConCourt noted that the ClubCard contract as well as the sale contract, which Clicks relied on as its basis to claim the section 24C allowance, had functioned together thereby creating an inextricable link, to give effect to Clicks' loyalty programme. Of important note, however, the ConCourt also said that this link was inadequate, because the specific features of each contract showed that the income-earning sale contract and the future expenditure obligation-imposing ClubCard contract were too independent of each other, and therefore had not met the contractual sameness requirement for purposes of section 24C of the ITA. The ConCourt therefore ruled in favour of SARS and that Clicks could not claim a section 24C allowance on either a same contract basis or on a sameness basis.

Evidently from the above, it is abundantly clear that as regards customer loyalty programmes in South Africa, it should be understood that the contractual arrangement between a customer and a provider of a customer loyalty programme is of paramount importance for the provider to claim a section 24C allowance under the ITA for its loyalty programme. The ConCourt's decision in the Clicks case is commendable and appears sound in view of its punctilious approach taken in interpreting the contracts in question as evidenced from the case.

From the Clicks case it can be concluded that the income earning and future expenditure obligation must both arise from the same contract or if there is more than one contract, then both the income earning and future expenditure obligation must depend on and arise from both contracts.

This means providers of customer loyalty programs in South Africa should ensure that the contractual arrangements they have with participating customers under their loyalty programs conforms fully with the Clicks case as highlighted herein, otherwise there is a high likelihood that an allowance claimed by that provider in terms of section 24C of the ITA for their loyalty program could be disallowed by SARS.

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.