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S.Africa: No trade, no deduction: Tax Court issues Section 11(a) judgment

No trade, no deduction: Tax Court issues Section 11(a) judgment


South Africa December 15 2017

On April 20 2017 the Tax Court issued its decision in X Group (Pty) Ltd v The Commissioner for the South African Revenue Service (SARS).(1) The case concerned X Group’s(2) claim for R90 million as an expense or loss during the 2007 assessment year, the deduction of which was prohibited by SARS.


X Group concluded two separate agreements concerning the delivery of coal to ABC during the 2002 and 2003 calendar years. During 2003, subsequent to concluding these agreements, X Group sold its business to a private company, Z Entity. X Group sold its assets and sale contracts, including the coal agreements, to Z Entity through a sale of business agreement. In 2004, after Z Entity had delivered coal to ABC in accordance with the agreements, a dispute arose between the two entities.(3) ABC alleged that:

  • Z Entity had breached the agreements; and
  • it had suffered a loss as a result of the breach.

On September 5 2007 X Group concluded a settlement agreement, under which it paid R90 million to ABC and its managing director. X Group was no longer carrying on the trade of selling coal at this time.

X Group’s auditor testified that the R90 million paid to ABC had concerned coal purchased in 2002, which would only be delivered later. He also testified that ABC had not consented to the assignment of rights and obligations from X Group to Z Entity, as required under the sale of business agreement, which is why X Group had accepted liability for ABC’s loss.


Among other things, the court had to consider whether:

  • X Group had been carrying on the trade of selling coal when it had paid the R90 million; and
  • the expense had been incurred in the production of income or for trade purposes.

With reference to the judgment in Caltex Oil (SA) Ltd v CIR,(4) the court held that:

  • the 2007 assessment year was the year in which the expense had been incurred; and
  • it was therefore deductible only in that year.

The court rejected X Group’s argument that the expense was a contingent liability that concerned the production of income in the 2003 assessment year. It held that ABC’s claim had arisen due to the deliberate decision of X Group’s managing director, who was also Z Entity’s managing director, to cause Z Entity to breach the coal agreements.

When the sale of business agreement was concluded, X Group had not breached the coal agreements. At that time, a future intentional breach of contract had not been contemplated as a contingent liability for which X Group would remain liable after concluding the sale of business agreement.

With regard to the production of income requirement in Section 11(a) of the Income Tax Act (58/1962), the court held that a deduction claimed must have been:

  • necessary or essential; or
  • incurred to enable the taxpayer to produce the income that it had aimed to generate.

The court held that this requirement had not been met in the case at hand because, among other things, there was no causal link between X Group’s income and Z Entity’s repudiation of the contract.

The court concluded that X Group could not claim the R90 million expense paid to ABC as a deduction in terms of Section 11(a) of the act for the 2007 assessment year. It also made a costs order in favour of SARS.

For further information on this topic please contact Louis Botha at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email ( The Cliffe Dekker Hofmeyr website can be accessed at


(1) Case 13671, as yet unreported.

(2) In the name of the judgment, the taxpayer is referred to as X Group (Pty) Ltd. In the main text of the judgment, the judgment refers to an entity named Z Group (Pty) Ltd, which appears to refer to the taxpayer. This update has been written with the understanding that references to Z Group (Pty) Ltd refer to the taxpayer.

(3) The judgment refers to Z, but is presumably meant to refer to Z Entity.

(4) 1975 (1) SA 665 (A).

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