Introduction
The Supreme Court of Appeal delivered its judgement for the case between Commissioner for the South African Revenue Service v Mobile Telephone Networks Holdings (Pty) Ltd (966/12) [2014] ZASCA 4 on the 7th of March 2014. This case concerns itself with the apportionment of audit fees incurred for a dual or mixed purpose in terms of section 11(a) read with section 23(f) and (g).
Facts
The group structure were as follows: the respondent, Mobile Telephone Network Holdings (Pty) Ltd (Holdings), is a wholly owned subsidiary of the MTN Group Limited and is the holding company of five directly held and numerous indirectly held subsidiaries and joint ventures. Holdings’ only business activities and gross income consisted out of the following:
1. Dividends received for its shareholding in the subsidiaries; and
2. Interest received from loaned funds to subsidiaries (the majority interest-free) and from its group employee debenture scheme whereby it borrowed funds through debentures which were then loaned to group companies at a higher interest rate.
Holdings employed auditors to perform statutory audits on their financial statements for the 2001 – 2004 financial years for which the audit fees amounted to R 1 674 932. In addition to this, Holdings also paid an amount of R 878 142 to KPMG for a ‘Hyperion’ computer system in 2004. Both the audit fees and the fees for the ‘Hyperion’ computer system were claimed as deductions by Holdings during the respective tax years. The Commissioner of SARS disallowed the computer system’s fee entirely and apportioned the deduction of audit fees by permitting a deduction (based on the ratio of Holdings’ interest income as against its total revenue which consisted out of dividends and interest) between two and six per cent.
On objection to the Special Income Tax Court (ITC), the ITC upheld the disallowance of the computer system’s fee in that it constituted expenditure of a capital nature and held that 50 per cent of the audit fees are deductible (based on the ITC’s apportionment). Holdings thereafter appealed those findings to the full court of the South Gauteng High Court where it sought a 94 per cent deduction of the audit fees based on an alleged time basis. The Commissioner cross-appealed the 50/50 apportionment order. The High Court allowed the computer system’s fees to be deductible in full and ordered the Commissioner to allow a 94 per cent deduction of the audit fees, thereby effectively dismissing the Commissioners cross-appeal.
On appeal to the Supreme Court of Appeal, it was held that the audit fees was a part of Holdings’ general overhead expenses enabling it to carry out all of its activities, and that it therefore necessarily attached to the performance of Holdings’ income-earning operations. The court however held that an apportionment needs to be made and again reiterated that an appropriate apportionment would depend on the facts of each case. Section 11(a) of the Income Tax Act provides a deduction for the following:
‘… expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature…’Section 11(a) must be read with section 23.
Section 23(g) prohibits a deduction of moneys, to the extent that such moneys weren’t laid out or expended for purposes of a trade, whilst section 23(f) effectively prevents a deduction of expenditure in respect of amounts received or accrued which do not constitute income as defined.
Held
In determining whether the computer system’s fee was deductible, the general manager: group tax within the MTN group was unable to give evidence that the computer system was owned by Holdings and he was also not aware of how much was paid for the system. Due to the inadequate evidence produced by Holdings, it was impossible to determine whether the computer system’s fee was deductible (whether it was incurred by Holdings, used in the production of income or capital or revenue in nature). The SCA therefore held that the order given by the Tax Court that the deduction of the KPMG fee must be allowed in full, must to be set aside.
The appeal was upheld with costs, such costs to include those consequent upon the employment of two counsel. The cross appeal is upheld with costs, including those of two counsel. The order of the Tax Court that “50% of the audit fees incurred for the 2001, 2002, 2003 and 2004 tax years is deductible from “income” (as defined) for those tax years” is amended by the deletion of “50” and the substitution therefor of “10”.’