[FAQ] Fees paid to a business rescue practitioner

[FAQ] Fees paid to a business rescue practitioner

• 08 July 2021
• Corporate Tax
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2021.

Background

Are the fees paid to a business rescue practitioner tax deductible?

Answer

You are reminded that The Tax Faculty's technical query system policy prescribes that only guidance should be provided in relation to requests submitted. Guidance implies that sources or references relevant to the request are provided, but that ultimately the tax practitioner’s own professional judgment is required to be applied to the specific circumstances.

The following guidance is relevant to the issue of whether deductions can be made:

The Tax Administration Act (not SARS) provides that the “taxpayer bears the burden of proving … that an amount or item is deductible …”

Judge Conradie in Warner Lambert SA (Pty) Ltd v Commissioner, SARS 2003 (5) SA 344 (SCA), stated the law in this regard when he said “Deductible expenditure has certain characteristics: it must be incurred in the production of income (s 11(a)) and will not be allowed as a deduction against gross income if it is not laid out or expended for the purposes of trade.”

The crucial requirement of section 11(a) is that deductions are only allowed, for the purpose of determining the taxable income derived by any person” from the income of that person derived from carrying on any trade.

Judge Dambuza, in African Banking Corporation of Botswana v Kariba Furniture Manufacturers & others, explained the purpose of the appointment of a business rescue practitioner as follows:

“As soon as practicable after appointment, the practitioner must investigate the affairs of the company and consider whether there is any reasonable prospect of the company being rescued. Within ten business days of being appointed the practitioner must convene and preside over the first meeting of creditors. A meeting of employees’ representatives must also be convened by the practitioner within ten business days of appointment. After consulting the creditors, other affected persons, and management of the company, the practitioner must prepare a business rescue plan for consideration and possible adoption at a meeting to be held in terms of S 151. In that meeting, the practitioner must introduce the proposed business plan for consideration by creditors and shareholders, inform the meeting whether he or she continues to believe that there is a reasonable prospect of the company being rescued, provide opportunity for employees’ representatives to address the meeting, invite discussion and conduct a vote on motions to amend the proposed plan or adjourn the meeting in order to revise the proposed plan for further consideration, and call for a vote for preliminary approval of the proposed plan. If the proposed plan is accepted it will be implemented; if it is not approved on a preliminary basis, the plan is rejected and may be considered further only in terms of s 153 of the Act.”

Judge Leach, for the minority in the same case, said:

“As its very name suggests, the purpose of a business rescue plan is to throw a lifeline to a company in financial distress to help keep it afloat in a manner that balances the rights and interests of all relevant stakeholders. The process involves the preparation of a rescue plan designed either to assist the company’s return to solvency or, should that goal be impossible, to provide a better return for creditors and shareholders than would be the case than were the company to be immediately wound up.”

It is the ‘in the production of income’ requirement that may prove problematic. The most important principle in this regard follows from a remark made by Judge Watermeyer in Port Elizabeth Electric Tramway Co v CIR when the Judge explained that “… income is produced by the performance of a series of acts and attendant upon them are expenses. Such expenses are deductible expenses provided that they are so closely linked to such acts as to be regarded as part of the cost of performing them ...” “The purpose of the act entailing expenditure must be looked to. If it is performed for the purpose of earning income, then the expenditure attendant upon it is deductible ...”

In Ticktin Timbers CC v Commissioner for Inland Revenue 1999 (4) SA 939 (SCA) Judge Hefer called the purpose for which expenditure was incurred, 'the decisive consideration in the application of 23 (g)'. So, the principle is, expenditure doesn’t have to lead to income directly. All that is required is that the purpose of the expense must be to produce income and not that income was actually produced.

Judge Ndita, in the recently reported SARS v Spur Group (Pty) Ltd (Judge Sher concurring), summed it up as follows:

“Accordingly, for the expenditure to meet the “in the production of income” test and satisfy the requirements of section 11(a) of the Act, there must be a sufficiently close connection or link between it and the income earning operations of the taxpayer. The degree of closeness required for the expenditure to be deductible is determined on the particular facts and circumstances of each taxpayer. It does not need to be shown that expenditure produced any part of the income in a particular year of assessment for it to be deductible for tax purposes. The critical enquiry is whether the expenditure was incurred for the purpose of earning income as defined in section 1 of the ITA, whether in the current or future year of assessment.”

Webinar Commentary

Refer to the following webinar: Monthly Tax Update - June 2021 here.

0 COMMENTS

LEAVE A COMMENT