Connected company expenses: no deduction

Paying a connected company’s costs: when the deduction belongs nowhere on your return

27 October 2026
Corporate Tax
Dr Stiaan Klue

Source: Monthly Tax Update, Professor Jackie Arendse, October 2026. Webinar-on-Demand: Monthly SARS Update with Prof Jackie Arendse - October 2026

At a glance

Issue	Finding in Taxpayer Olie	Consequence for practice
Payment of another entity’s costs	The payer had not established deductible expenditure actually incurred by it.	Trace the legal obligation, rather than relying on the bank payment.
Income production and trade	The required connection to the claimant’s income-producing trade was not established.	Analyse the claimant’s activity separately from the group’s commercial interests.
Capital and timing	Preservation expenditure and historical costs raised additional obstacles.	Test character and year independently.
Bad debt	The claimed deduction failed; prior income inclusion was absent.	An accounting write-off is not sufficient under section 11(i).
Outcome	Appeal dismissed, assessments confirmed and costs awarded.	Each deduction needs a complete statutory case.

Group businesses frequently support one another through direct supplier payments, advances and funding of essential operating costs. Taxpayer Olie v Commissioner for the South African Revenue Service demonstrates why commercial necessity does not itself identify the company entitled to an income-tax deduction. Payment, incurral, income production, trade, capital character and timing remain separate enquiries.

The case is particularly relevant where one entity holds a mining right or productive asset and another processes or markets its output. The economic connection may be obvious. The tax consequences still depend on the obligations and activities of each legal entity.

Two categories of expenditure, different problems

Olie processed, marketed and sold chromite sand. Clarisse Mining Limited, a connected company, held the mining right. Under the commercial arrangement, Olie paid certain production costs on Clarisse’s behalf, expecting recovery through future purchases. Mining entered care and maintenance from 31 August 2017.

Category 1 comprised R25,140,766 of earlier production costs, written off in the 2018 year. Category 2 comprised care-and-maintenance operating costs paid in 2018, 2019 and 2020: R11,775,057, R14,683,877 and R14,019,378 respectively, totalling R40,478,312.

Category	Period or treatment	Amount
1: earlier production costs	Written off in 2018	R25,140,766
2: care-and-maintenance costs	2018	R11,775,057
2: care-and-maintenance costs	2019	R14,683,877
2: care-and-maintenance costs	2020	R14,019,378
Category 2 total	Editorial sum of the three annual amounts	R40,478,312

Care and maintenance means a temporary cessation with the mine preserved for possible restart; it does not necessarily mean permanent closure. But preserving a supplier’s future ability to produce is not the same enquiry as incurring expenditure in the claimant’s present income-producing operations. The court rejected the deductions on multiple grounds, rather than a single technical defect in the invoices.

Client conversation trigger: Where a client funds a connected supplier during a shutdown, classify each payment as an expense, advance, loan or capital contribution when it occurs and document the legal basis.

Cash paid is not necessarily expenditure incurred by the payer

Section 11(a), read with section 23(g), requires the claimant to establish the general deduction requirements. In Olie, supplier invoices were directed to Clarisse and the court found that Olie was paying Clarisse’s liabilities. The commercial agreement did not convert those liabilities into qualifying expenditure actually incurred by Olie for section 11(a).

This is not a rule that the name printed on an invoice is the only possible evidence of liability. Contracts, novations, agency arrangements and actual performance may all matter. It is a warning against treating a payment entry as conclusive. The accountant should identify the creditor, the debtor, the obligation discharged, any right of reimbursement and the accounting treatment in both entities.

If the payment creates a recoverable advance, the payer’s asset and the recipient’s liability must be considered. If there is no recoverable advance, that fact requires explanation; it does not automatically turn the payment into a deductible operating cost. The court’s refusal of Olie’s deduction also does not prove that Clarisse was entitled to an immediate deduction. Its own trade, capital and mining-tax requirements would need separate examination.

Client conversation trigger: Review intercompany clearing accounts for payments posted to expenses without evidence that the paying entity incurred the underlying liability.

Purpose, capital character and the correct year

The court considered whether the expenditure was sufficiently connected with Olie’s income-producing operations and trade. It also treated the preservation of the mine’s income-producing structure as capital in character in the circumstances. Category 1 raised a further timing problem because the underlying expenditure related to earlier years.

These findings should be applied carefully. An absence of current receipts does not, in every business, prevent a deduction for expenditure incurred in producing income. Temporary inactivity does not automatically decide whether a trade continues. Equally, describing a cost as necessary to secure future supply does not answer the capital/revenue distinction. The nature of the advantage sought, the taxpayer’s operations and the asset or structure preserved require analysis.

Unredeemed capital expenditure for mining companies must be kept within its context. It is not a direction to capitalise every shutdown payment into a deductible mining pool, nor a finding that Olie could claim another entity’s mining allowance. Any alternative allowance requires its own statutory basis and qualifying taxpayer.

A disciplined working paper should therefore reach a conclusion on each requirement, even where one already defeats the claim. That makes the tax treatment reproducible in subsequent years and prevents an unsuccessful section 11(a) claim from being relabelled without further analysis.

Client conversation trigger: For clients with dormant or temporarily suspended operations, prepare a separate trade-continuity and capital/revenue memorandum before using “care and maintenance” as a tax classification.

An impairment does not manufacture a bad-debt deduction

Section 11(i) is the relevant bad-debt provision. It requires, among other things, a qualifying debt due to the taxpayer that has become bad during the year and the necessary prior inclusion in income. The court rejected the claimed bad-debt treatment and recorded that the relevant amount had not been included in Olie’s income.

A genuine trading debtor of R100,000 previously included in income may qualify for section 11(i) when it becomes bad, provided all requirements are met. By contrast, a R100,000 advance used to pay another company’s supplier does not become deductible under section 11(i) merely because recovery now appears impossible. The existence and character of the debt, prior income inclusion and year of badness must all be established. Any separate capital consequence is a further enquiry.

Accounting impairment evidence remains useful, but it serves a different purpose. Board minutes, recovery correspondence, financial information and legal advice should explain when and why a debt became bad; the ledger must then establish whether it entered taxable income. An impairment journal alone answers neither question.

Client conversation trigger: Before claiming a connected-party write-off, reconcile the original advance or debtor to prior tax returns and document why the debt became bad in the claimed year.

Practitioner action checklist

#	Area	Finding or requirement	Clients affected	Action required	Deadline
1	Legal liability	Paying another entity’s debt did not establish incurral.	Groups paying shared costs	Match each payment to the obligation and debtor.	When posted and at year-end
2	Trade and purpose	Group benefit did not establish the claimant’s deduction.	Integrated operating groups	Record the connection to the claimant’s own operations.	Before return sign-off
3	Capital	Preservation of structure raised capital concerns.	Mining and shutdown businesses	Analyse capital treatment and any separate allowance.	Before claiming
4	Timing	Historic costs cannot simply migrate into the write-off year.	Clients with accumulated advances	Identify original incurral and relevant tax year.	At reconstruction
5	Bad debts	Section 11(i) requires more than impairment.	Clients writing off receivables	Prove debt, badness, year and income inclusion.	Before deduction

Official source: Income Tax Act 58 of 1962 (South African Government).

Frequently asked questions

Can a company deduct costs it pays for a connected company?

Not merely because it paid them. In Olie, supplier invoices were directed to the connected company and the court found the payer was settling that company’s liabilities, not incurring its own section 11(a) expenditure.

Is commercial necessity enough for a deduction?

No. Payment, incurral, income production, trade, capital character and timing remain separate enquiries for each legal entity.

Can historic costs be claimed as a bad debt when written off?

An impairment does not create a section 11(i) deduction merely because recovery appears impossible. Historic costs cannot simply migrate into the write-off year.

Build your expertise: to apply these principles in practice, explore The Tax Faculty’s Short Course in the Fundamentals of Corporate Income Tax.

About the author

Dr Stiaan Klue is Executive Dean and CEO of The Tax Faculty. He was the founding CEO of the South African Institute of Taxation (SAIT) and is the founding author of Silke on Tax Administration (LexisNexis).

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