He went on further:
the amount of expenditure actually incurred for the purpose of
s11(a) can only be the amount required in rands to discharge
that liability in the tax year in which it was incurred.
With regard to the second larger liability which was still outstanding at the
end of 1967;
It was at the end of the 1967 tax year that the amount of the
expenditure actually incurred during the year had to be determined
and brought into account The appellant never incurred a liability
to pay an amount of R9,353,920 to Caltex UK Ltd, but was an amount
expressed in sterling which, for the purposes of the Income Tax Act,
had to be reflected in the equivalent thereof in rands converted at
the date at which the expenditure actually incurred is required
to be quantified and brought into account for the purposes of
s11(a) of the Act, or at the date of the discharge of that
liability within that fiscal year.
To sum it up simply, with regard to the debt paid during the year, the amount
actually incurred was the amount paid in settlement thereof. In respect of the
liability unsettled at the year end, only the amount calculated as being payable
at the end of the year, was the amount actually incurred. The balance of the
amount claimed was dependant upon an uncertain future event, and had not been
actually incurred.
In Nasionale Pers vs KBI the appellant undertook to pay its employees a 13th
cheque after the completion of a full year of service, or pro rata thereof for
shorter service. The bonuses were paid on 30 September of each year. It was a
condition of the payment thereof that the company was entitled to recover
bonuses from employees not still in the employ of the company on the 31 October
following. The financial year of the company ended on 31 March of each earth
company sought to claim a pro rata portion of the bonuses (6/12) as a deduction
in the year ending March previously. The appeal was based on two contentions:
I. The issue of bonuses was a commercial reality – they would have to be paid;
the majority of the workforce would qualify.
ii. The taxpayer s liability to pay a bonus for each month of service existed
subject only to a resolutive condition in the event of him/her leaving the
employ of the taxpayer before 31 October. Thus the expenditure had been actually
incurred. Hoexter J.A. , held that:
The obligations to employees were individual and not collective.
Thus the liability to the employees as a group was no more than the
liability would be to each individual employee. The future
uncertain event (whether the employee would be in the appellants
employ on 31 October) which would give rise to the obligation to
pay a holiday bonus, was an event which fell outside the tax year
of the applicant.
In simple words, the conclusion drawn, was that at the end of March, there was
no unconditional obligation to pay a bonus to any employee. Whilst it was
probable that the company would be required to pay bonuses of the quantum
calculated, to the majority of the workforce, there was no unconditional
liability to pay any single employee a bonus ,in existence at the end of the
financial year in question. Thus the expenditure could not have been actually
incurred in the year in question.
The appellant in ITC 1531, had received R360,000, on 1 August 1983, being the
proceeds of a loan raised in Germany. The loan was repayable in Deutschemarks
(DM)in the future. Between 1 August 1983 and 31 December 1983, the Rand had
declined against the DM. The effect of the devaluation was that the indebtedness
to the lender, expressed in SA Rands as at 31 December 1983, was R370,509.16.
During 1984 a further loan was raised in Germany. The proceeds in SA Rands was
R200,000. The further loan was also repayable in DM.
On the last day of the 1984 year of assessment, the indebtedness of the
appellant, based on the rate of exchange rate prevailing amounted to,
R730,382.65. In effect, the adverse movement in the exchange rates, the
appellant s liability had been increased in the 1984 year by R159,873.49. No
further loans were made. On the last day of assessment for 1985, the amount,
owed by the appellant, according to the exchange rates then prevailing, amounted
to R1,195,199.33. A further fall in the value of the Rand against the DM during
the 1985 year had increased the liability of the appellant by R464,816.68. The
appellant claimed the R464,816.68 as a deduction from income in the 1985 year.
The appellant contended that he was entitled as a matter of principle, to claim
a deduction in respect of an unrealised loss resulting from a variation in the
rates of exchange during the year of assessment in issue. No part of the loan
was paid or discharged during the 1985 year.
The Commissioner contended that the words actually incurred in s11(a) do not
mean that the expenditure must be due and payable at the end of the year in
question. There must be a clear liability to pay existing at the end of the year
in question, even though the payment thereof may only fall due in later years.
For such a liability to be incurred, it must not be subject to a contingency, ie
an uncertain future event. It was contended that the foreign exchange losses,
were notional losses and were conditional upon the rate of exchange prevailing
at the time of payment.
In the judgement handed down it was held that:
When a taxpayer owes an amount expressed in a foreign currency, the amount is
owed unconditionally and uncontingently. There is with certainty, an amount of
expenditure incurred. Fluctuations in the rate of exchange can only effect the
amount or quantification of the certain liability. It is only the quantification
that is contingent. The liability itself is absolute. The unrealised foreign
exchange loss incurred by the appellant was deductible from its income under
s11(a). The appeal was allowed.
The case was taken on appeal. The issue before the court depended on whether the
unrealised foreign exchange loss constituted an expenditure or loss actually
incurred in the Republic in the production of income as envisaged by s 11(a).
Corbett CJ pointed out that the real question was whether by reason of currency
fluctuations the taxpayer had actually incurred in the Republic in the
production of the income, during the year of assessment concerned any outgoing
or liability in respect of its foreign loan that could be classed as either an
expenditure or a loss in the production of the income.
It was held that the loss would only be deductible in the year in which the loan
was repaid, because only then would such a loss have been actually incurred. The
conversion of the loan proceeds into local currency was merely part of the
practical mechanics of giving effect to the loan. The decision in the Caltex
case was distinguished as being different because it was in respect of the
acquisition of stock in trade which had to be quantified at the end of the year
of assessment. The appeal was allowed.
In ITC 1444 a manufacturer of products entered into agreements with overseas
suppliers of raw materials to supply fixed amounts of raw materials at fixed or
determinable prices at future dates. This was done to protect the manufacturer
against price fluctuations and to guarantee the availability of supply. Payment
for the goods was to be cash against documents .
The taxpayer deducted from its 1983 year of assessment amounts in respect of
contracts concluded for the purchase of future supplies of materials. In the
judgement handed down, McCreath J. held that:
The question to be determined in the instant case is therefore
whether it can be said that by concluding the contracts to which
I have referred the taxpayer, during the year of assessment ending
31 December 1983, incurred an absolute and unqualified legal
liability in respect of the expenditure arising out of the said
contracts or whether such expenditure was conditional upon the
happening of some future event.
the taxpayer was only required to pay the purchase price of the
production materials forming the subject matter of the said
contracts, against receipt of the bills of lading and invoices
relating to the production materials to be supplied in terms thereof
the taxpayer was not required to effect payment until the bills
of lading and invoices in respect of each quantity of the
production materials had in fact been received by the taxpayers
agent abroad.
it is clear from the evidence of Mr A that no unconditional legal
obligation rested upon the taxpayer to effect payment prior to
the receipt of the said documents.
In essence the judgement took the view that the only time that an unconditional
obligation arose, was at t