Apportionment of audit fees – Commissioner for the South African Revenue Service v Mobile Telephone Network Holdings (Pty) Ltd
This appeal considered the deductibility of statutory audit fees incurred by a holding company that derived income comprising interest and dividends. The audit fees incurred in relation to exempt income, in the form of dividends, were held to be non-deductible for income tax purposes and the court had to decide the relevant method of apportionment.
The general deduction formula set out in section 11(a) of the Income Tax Act allows deductions incurred in the production of income. The deductibility of amounts so incurred is curbed by sections 23(f) and (g), which prohibit the deduction of amounts incurred in relation to exempt income or not incurred in the conducting of a trade.
The appeal court confirmed that audit fees incurred in relation to exempt income, such as dividends, are not deductible for income tax purposes. However, where a single fee is incurred for a dual or mixed purpose, the court held that apportionment is appropriate. The court did not lay down a formula for apportionment, merely indicating that it is dependent on the facts of each case and must be determined objectively. The court found that 10% of the audit fee in question was incurred in relation to interest and was therefore deductible.
The company also incurred fees in respect of training employees on the operational capabilities of a new computer system. The deduction was disallowed due to the lack of evidence showing that the fees rightly fell to be deducted by the Appellant.