Judgment summary
The appellant, a licensed fuel distributor, appealed against an additional income tax assessment issued on 25 May 2018 for the 2015 year of assessment. The respondent had disallowed a deduction of R38 831 547, imposed a 10% understatement penalty, and levied interest under section 89quat of the Income Tax Act 58 of 1962 ('the ITA') [1].
The deduction represented excise duties and levies paid when the appellant purchased fuel for export during the 2011 to 2013 tax periods. The appellant's clearing agent had failed to lodge the refund claims timeously under the Customs and Excise Act 91 of 1964 ('the C&E Act'), and those claims had prescribed [4].
The appellant argued that a deductible loss arose only in 2015, when the refund claims became irrecoverable. The court rejected this characterisation, finding that the expenditure was actually incurred in the years the fuel was purchased and could not be shifted to a later year. The court also confirmed the understatement penalty and declined to waive the interest [30, 31].
The appeal was dismissed and the additional assessment was confirmed [32].
Background
The appellant operated as a licensed distributor of fuel during the 2011 to 2015 tax periods. It purchased fuel from South African manufacturers for resale to customers outside South Africa. On each purchase, the appellant paid excise duties and levies in addition to the purchase price [2].
As an exporter, the appellant was entitled to a refund of those excise duties and levies under the C&E Act, provided it submitted refund claims within two years from the date of entry for export, as required by section 76B(2) of the C&E Act [3].
During 2013, the appellant discovered that its clearing agent had not prepared and forwarded certain refund applications timeously. As a result, refund claims relating to the 2011 to 2013 tax periods had prescribed. The appellant had not claimed the excise duties as a deduction in its 2013 return, nor had it included them in its trading stock costs under section 22 of the ITA [4].
On 12 December 2016, the appellant submitted its 2015 income tax return claiming R38 831 547 as a deduction under section 11(a) of the ITA. The respondent issued an original assessment reflecting a loss and a refund, but following an audit issued an additional assessment disallowing the deduction, imposing a 10% understatement penalty, and levying interest [5].
Core dispute
The three issues before the court were: first, whether the appellant was entitled to deduct R38 831 547 as a loss under section 11(a) of the ITA in its 2015 year of assessment; second, whether the respondent was correct in imposing a 10% understatement penalty; and third, whether the interest levied under section 89quat of the ITA should be waived [6].
The appellant argued that the loss was incurred only in 2015, when the refund claims became irrecoverable upon prescription, and that this was an involuntary and fortuitous deprivation distinct from the original payment of excise duties [11, 12]. The appellant also argued that excise duties do not constitute a 'tax' under the TAA and that section 23(g) of the ITA was therefore inapplicable [13].
The respondent argued that the liability to pay excise duties was incurred unconditionally in the 2011 to 2013 years when the fuel was purchased, that the yearly assessment principle precluded shifting that expenditure to 2015, and that the appellant's failure to lodge timeous refund claims could not convert prior expenditure into a deductible loss in a later year [14, 15].
Court findings
The court found that the payment of excise duties and levies was a voluntary disbursement made in the ordinary course of the appellant's trading operations when it purchased fuel. It was not fortuitous or involuntary. The anticipated recovery through refund claims did not alter the nature of the initial outlay [19].
The court held that the appellant incurred the liability to pay the excise duties in the years when it purchased the fuel, applying the principle from Caltex Oil (SA) Ltd v Secretary for Inland Revenue (37 SATC 1) that 'actually incurred' means a liability has been incurred during the year, whether discharged or not [20].
Relying on Sub-Nigel Ltd v CIR (1948 (4) SA 580 (A)), the court emphasised that no expenditure incurred in a previous year can be deducted in a later year, as tax is assessed on a yearly basis. Permitting the deduction in 2015 would allow the appellant to shift expenditure from the 2011 to 2013 years to the 2015 year, circumventing that principle [22, 23].
The court rejected the argument that the liability to pay excise duties was conditional. Cases dealing with contingent liabilities were distinguished on the basis that the obligation to pay excise duties arose unconditionally upon purchase. The possibility of a later refund was a separate statutory mechanism, not a suspensive condition [24].
The court noted that the Tax Court does not have jurisdiction to determine whether the refund claims would have succeeded but for prescription, as that would require assessment of compliance with the C&E Act. Any recourse lay against the clearing agent [26].
On the understatement penalty, the court found that the appellant had made an incorrect statement in its return by claiming an impermissible deduction. The prejudice to the fiscus was R10,872,833, exceeding R1 million and constituting a 'substantial understatement'. The appellant had not acted inadvertently but had deliberately taken a tax position. The 10% penalty was the lowest applicable in that category, and the respondent had discharged its burden of proof under section 102(2) of the TAA [27, 28].
On interest, the court found that the normal tax payable exceeded the credit amount as envisaged in section 89quat(2) of the ITA. The circumstances that led to the position were not beyond the appellant's control, as the appellant was responsible for its own tax affairs and for engaging clearing agents to lodge refund claims. No waiver was warranted [29].
Outcome
The appeal was dismissed. The additional assessment issued on 25 May 2018 for the appellant's 2015 year of assessment was confirmed. The appellant was ordered to pay the costs of the appeal [32].
Major issues / areas of contention
- Whether excise duties and levies paid in the 2011 to 2013 tax years, which were not refunded because the refund claims prescribed under the C&E Act, could be deducted as a 'loss' under section 11(a) of the ITA in the 2015 year of assessment.
- Whether the character of the amount claimed was properly described as 'expenditure' or 'loss' for purposes of section 11(a) of the ITA, and whether the distinction assisted the appellant.
- Whether the yearly assessment principle precluded the shifting of expenditure incurred in the 2011 to 2013 years to the 2015 year of assessment.
- Whether the payment obligation for excise duties was conditional, such that the expenditure was incurred only when the possibility of a refund was extinguished.
- Whether the 10% understatement penalty under section 222 of the TAA was correctly imposed, including whether the appellant's conduct amounted to a 'substantial understatement' and whether a bona fide inadvertent error was present.
- Whether interest levied under section 89quat of the ITA should be waived on the basis that the circumstances arose beyond the appellant's control.