The Income Tax Act 58 of 1962, as amended(“Income Tax Act” or “Act”),provides that expenditure is deductible from income, if it is incurred in the production of income, provided of course, that it is not of a capital nature.

 

BBBEE (broad-based black economic empowerment) as outlined in the Broad-Based Black Economic Empowerment Act 53 of 2003 as amended and the prevailing Broad-Based Black Economic Empowerment Codes of Good, are computed (generally speaking) based on a company’s spend percentage and measured against Net profit after tax.  

 

Elements such as employment equity, skills development and procurement are straightforward in relation to tax. Salaries and spend on training are deductible as they are typically incurred in the production of income. Funds spent on buying goods and services also qualify for deduction under section 11(a) of the Income Tax Act, and if they are capital in nature deduction of the depreciation of those assets over a period of time may also be possible.

 

On the other hand, section 18 allows a deduction for contributions to public benefit organisations (PBO). The organisation must be a registered PBO meeting the requirements prescribed by SARS to qualify. Interestingly, in 2003, a case, Warner Lambert SA (Pty) Ltd v Commissioner for SARS[2003],65 SATC 346a High Court ruling increased the probability for deduction of BBBEE expenditure for socio-economic and enterprise development.

 

The South African company of US multinational Warner-Lambert claimed corporate social investment (CSI) as deductible expenditure under section 11. SARS rejected the claim. The court ruled in their favour on the following grounds: in the US, under the Sullivan Code, firms were legally obligated to make positive contributions to CSI. If these were not made, the firm’s directors were penalised, and that group would potentially lose business. Accordingly, the court interpreted the South African contribution as a necessary fee in the production of income, which makes it deductible under section 11.

 

According to tax experts, the view of the ruling is clear: “Expenditure incurred in respect of the CSI programmes for purposes of earning BEE scorecard points will be deductible under section 11(a) read with section 23(g).”

 

In the period between 28 August 2009 to 27 August 2013, many taxpayers sought to rely on the ruling in deducting similar expenditure. In light of the above, it was explicitly limited to a class of taxpayers and could not be seen to be generally applicable to every taxpayer. It is, therefore, best to seek professional advice in complying with BBBEE and planning your tax.

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