XYZ (Pty) Ltd v CSARS (IT 24790)

Facts

The appellant and taxpayer, XYZ, provides outsourced staffing services and payroll administration for clients. In doing so, it enters into a staffing services contract with its client and a separate contract of employment with each of its employees. XYZ’s charge-out rates to clients includes a component for accrued leave and bonus liabilities.

XYZ declared an amount as “other current liabilities” in its 2015 income tax return, as it had done in previous years, which it claimed as deductible from its taxable income in terms of section 11(a) of the Income Tax Act for notice pay, severance pay, accrued leave and accrued bonus liability. Alternatively, XYZ claimed the leave payment and bonus liability as deductible in terms of section 24C, in the event that the accrued amounts in respect of the leave pay and bonus categories did not qualify for deduction under section 11(a).

SARS disallowed the deduction.

An additional assessment was issued against XYZ in respect of the 2015 year of assessment. Interest was levied by SARS in terms of section 89quat(2) on the amount deducted, on the basis that XYZ had underpaid its provisional tax and that this was not as a result of circumstances beyond its control.

The taxpayer lodged an objection against the additional assessment, which was disallowed by SARS. XYZ thereafter approached the tax court to appealthe objection.

Issues

In issue are the following:

1. Whether XYZ was entitled in its 2015 income tax return to deduct from gross income the amounts it contends it incurred pertaining to accrued leave and bonus pay, notice pay and severance pay and whether a deduction of the leave and bonus pay liabilities in 2015 is precluded by section 7B of the Income Tax Act;
2. If the amounts owing to employees in respect of leave pay and bonus pay in 2015 are not deductible under section 11(a) or section 7B, whether XYZ is entitled to an allowance under section 24C of the Income Tax Act; and
3. If some part of the assessment is upheld on appeal, whether the interest incurred was, in terms of section 89quat(3), as a result of “circumstances beyond XYZ’s control” in which case XYZ should not be liable for the payment of interest.

Finding

Assessment (Issue 1 and 2)

SARS disallowed the deduction pertaining to accrued leave and bonus pay on the basis that the leave and bonus payments are not deductible in terms of section 11(a) or section 7B since there is no unconditional obligation to pay these amounts and as leave and notice pay are deductible when paid to employees and PAYE is deducted; and that leave pay and bonus expenses are only deductible in terms of section 7B at the time that the taxpayer makes payment of such amounts as remuneration to its employees. Furthermore, it was determined that notice and severance pay did not constitute expenditure incurred in the production of income as contemplated in terms of section 11(a).

For these reasons the appeal against the additional assessments raised by SARS against XYZ were dismissed and the assessments confirmed.

Interest (Issue 3)

In terms of the additional assessment, XYZ had for many years calculated its deductions in the manner which SARS adversely assessed in the 2015 tax year of assessment. SARS had in previous years accepted XYZ’s tax return and had not disputed the deduction method adopted. XYZ relied on the advice of its auditors, who signed off on its annual tax returns. Since XYZ had been given no indication that the method of deduction adopted was defective, it could not reasonably have been expected to have taken steps to remedy the situation. It follows that in terms of section 89quat(3) circumstances beyond the control of XYZ appear to have existed on the facts of the matter. Interest imposed in respect of the additional assessments raised against the taxpayer should therefore be sent back to SARS for reconsideration.

The appeal against interest imposed must succeed, with the issue of interest to be reconsidered by SARS. Costs were not sought and no order as to costs is made.

Find a copy of the court case here.

14/01/2022