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Tax Implications of Legal Fees Incurred as Part of Management Services
- 07 April 2025
- Accounting
- The Tax Faculty Tax Specialist
Question :
A company that provides managerial services (Company A) rendered such services to a fellow group entity (Company B) for a standard fee. These services included legal support aimed at defending Company B’s market position. The key questions are:
(1) Are the legal fees deductible for Company A?
(2) Is Company B required to isolate and capitalise the portion of the management fee relating to legal services?
Answer :
The Problem / Facts:
A company that provides managerial services (Company A) rendered such services to a fellow group entity (Company B) for a standard fee. These services included legal support aimed at defending Company B’s market position. The key questions are:
(1) Are the legal fees deductible for Company A?
(2) Is Company B required to isolate and capitalise the portion of the management fee relating to legal services?
Analysis of the Tax Issues:
Company A: The legal fees form part of the ordinary business activities in providing management services.
Company B: While the legal services relate to the protection of market position (typically capital in nature), they are included in a single, standardised management fee.
Tax Issues and Relevant Provisions:
- Company A: Deductibility of legal fees under section 11(a) of the Income Tax Act.
- Company B: Determination of whether the expenditure is capital or revenue in nature.
Applicable Law:
- Statute: Income Tax Act 58 of 1962, section 11(a)
- Case Law: CIR v George Forrest Timber Co Ltd 1924 AD 5
Application of Law to the Facts:
- Company A: The legal fees appear to meet the requirements of section 11(a) as they were incurred in the production of income and are not capital in nature from Company A’s perspective.
- Company B: Although the legal services benefit may be capital in nature, the expense may retain its revenue character due to being bundled within a general management fee. However, the South African Revenue Service (SARS) could contend that the legal service component be capitalised, particularly if it constitutes a material portion of the overall fee.