Corrupt Expenditure and the Teductions Prohibited by Section 23

---

Corrupt Expenditure and the Teductions Prohibited by Section 23

• 30 September 2026
• Tax Administration
• The Tax Faculty

Interpretation Note 54 Issue 3 and the prohibition of deductions for corrupt expenditure, unlawful-activity fines and penalties, and defined fruitless and wasteful expenditure.

At a glance

An income-producing purpose does not overcome a statutory prohibition on deduction. Interpretation Note 54 Issue 3 addresses expenditure on corrupt activities, fines and penalties, and fruitless and wasteful expenditure. The practitioner's task is to identify what the payment actually secures and whether it falls within the prohibition, rather than accept its accounting description as sufficient (SARS Interpretation Note 54, Issue 3, “Deductions Not Allowed – Corrupt Activities, Fines and Penalties, and Fruitless and Wasteful Expenditure”).

Two examples demonstrate the enquiry. One concerns a charitable donation linked to a sponsorship decision. The other traces a corrupt procurement arrangement through a supplier, an intermediary company and the individuals receiving the benefit. Each payment retains its own tax consequences.

The prohibition applies after the commercial explanation

Section 23 forms the negative part of the general deduction formula. A taxpayer may explain that expenditure was incurred in carrying on a trade and producing income, yet still fail to obtain a deduction because section 23 prohibits it. Section 23(o), and specifically section 23(o)(i), is relevant to corrupt expenditure (Income Tax Act, s 23(o), including s 23(o)(i); Prevention and Combating of Corrupt Activities Act of 2004, Chapter 2).

The first category concerns expenditure where payment, an agreement to pay, or an offer to pay constitutes an activity contemplated in Chapter 2 of the Prevention and Combating of Corrupt Activities Act of 2004.

The second category concerns a fine or penalty imposed because of unlawful activity in South Africa, or activity in another country that would have been unlawful if undertaken in South Africa. The third concerns fruitless and wasteful expenditure as defined in section 1 of the Public Finance Management Act. That statutory definition must govern the enquiry; commercial disappointment or an unsuccessful payment should not simply be equated with the defined category.

Practice point: Where a client seeks a deduction for expenditure connected with procurement, sponsorship or a penalty, establish the conduct and arrangement underlying the payment. The name assigned to an expense is not the complete enquiry described by the note.

The cricket sponsorship example

Company A wishes to sponsor cricket team B in exchange for exclusive marketing and advertising rights. A director approaches the chairperson of the team's board and proposes that Company A will donate cricket kits to a charity supported by the chairperson if the chairperson uses influence to secure the sponsorship to the exclusion of competitors. The sponsorship is announced a month later. Six months later, Company A purchases and donates kits costing R50 000.

On these facts, the offer constitutes corruption under section 3 of the Prevention and Combating of Corrupt Activities Act. The kits provide gratification for another person's benefit in return for the chairperson's dishonest exercise of duties and influence. Routing the benefit to a charity does not remove the corrupt inducement described in those facts.

The expenditure examined is the R50 000 cost of the kits. Company A's marketing objective does not secure a deduction for that expenditure. Any separate payment under the sponsorship arrangement would require its own analysis; the treatment of the kits does not determine every other payment.

This is also not a proposition that charitable support linked to every sponsorship is corrupt. The decisive fact in the example is the arrangement to procure a dishonest exercise of influence. The practitioner must understand that arrangement before characterising the expense.

Practice point: For sponsorships accompanied by donations, establish whether a benefit was offered to influence a decision improperly. Review the connection between the sponsorship award, the recipient charity and the person exercising influence.

The coal procurement example

The second example concerns Company C's requirement for 500 tons of coal. Company D wishes to secure the supply contract. E, a director and authorised representative of D, approaches F, C's chief financial officer. E is given R8 million to secure the result and agrees to pay F R5 million. E is also the sole director and shareholder of Company G.

Company C pays Company D R52 million for the coal. E, acting for D, arranges payment of R8 million to G. G pays R5 million to F and declares a R3 million dividend. The amounts explain the movement of the R8 million; they do not constitute a calculation of G's final tax liability or distributable profits after tax.

E and F act as agents within the relevant legislation. Their acceptance of gratification to abuse their positions engages section 6, while D and G participate in the corrupt activity under section 3. The R8 million constitutes gratification within section 1.

The payment to G does not become deductible merely because it is made through a separate company. Nor does G obtain a deduction for the R5 million paid onwards to F. The example follows the character of the expenditure through the arrangement.

Practice point: Where an intermediary receives a substantial procurement-related payment, trace its role and the onward beneficiaries. The tax treatment cannot be determined by examining only the first invoice or the first recipient.

Taxable receipts remain part of the analysis

The denial of a deduction and the inclusion of a receipt are separate enquiries. In the example, D includes R52 million in gross income and G includes R8 million, despite D's inability to deduct the payment to G. F must include the R5 million received from G in gross income. The unlawful origin of a receipt does not, in this example, exclude it from gross income.

The R3 million dividend is treated separately. G obtains no deduction for a dividend and must address its dividends-tax obligation. Section 10(1)(k) is relevant to E's dividend exemption for income-tax purposes. E would have to pay the dividends tax if G failed to withhold it. The exemption and the dividends-tax obligation must therefore be considered separately; the R3 million distribution is not itself a calculation of the tax payable.

Company C's purchase of coal must also be considered separately. On these facts, that purchase does not itself constitute unlawful activity. Its deduction falls to be considered under section 11(a), together with the trading-stock provisions in section 22. The timing and amount of any deduction depend on the stock facts.

Practice point: Review each participant and each payment independently. A denied deduction for one party neither resolves the recipient's income treatment nor determines the treatment of every other payment in the transaction.

Fines and penalties require attention to their basis

The fines-and-penalties enquiry extends to tax penalties, including those associated with the Fourth Schedule and section 35A, and penalties under other legislation. Examples include competition and consumer-protection legislation, traffic laws and municipal by-laws. The relevant question remains whether the fine or penalty arises from unlawful activity within the statutory prohibition.

A payment commercially labelled a penalty requires classification on its own terms. The treatment of statutory fines should not be extended automatically to contractual damages or charges. For a foreign penalty, the comparison with unlawfulness in South Africa remains material.

Practice point: Obtain the basis on which the fine or penalty was imposed. For a foreign matter, determine whether the activity would have been unlawful in South Africa.

Practitioner action checklist

The examples require a transaction-level enquiry. A payment may pursue a commercial objective and still fall within a prohibition; a recipient may remain taxable on the corresponding receipt. Both sides must be addressed without treating the wider arrangement as a single undifferentiated tax result.

0 COMMENTS

LEAVE A COMMENT