n Business Tax and Company Law Quarterly - Will the real 'expenditure' please stand up!

Volume 6, Issue 4
  • ISSN : 2219-1585


The question as to whether, and when, a taxpayer can be said to have incurred 'expenditure' is crucial in the application of a number of provisions of the Income Tax Act, 1962. Whilst conventional wisdom was always that allone needed to prove that expenditure had been incurred was to prove that one had incurred an unconditional obligation to make payment, this conventionalview has been turned on its head in a line of cases dealing with the issue of shares as consideration for the acquisition of assets. It is apparent that the question of whether one has incurred an unconditional obligation determineswhen the relevant expenditure has been incurred, and not whether one has incurred expenditure. Following the decision of the Supreme Court of Appeal in CIR v Labat Africa Ltd, it seems to be settled law that a taxpayer will only be regarded as having incurred expenditure if it can be shown that the taxpayer has suffered a diminution in its assets in consequence of acquiring an asset or service.The article considers the line of court decisions that culminated in the adoption of the diminution of assets test. While accepting the Supreme Court of Appeal Labat decision that the question of whether the taxpayer hasincurred an unconditional obligation in respect of the purchase price relates to when expenditure was incurred, it is submitted that the court erred in not finding that the company issuing the shares had in fact suffered a diminution in its assets. The article also explores what this actually means where assets or services are exchanged under a barter transaction, and concludes that thediminution of assets test will yield the same result.

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