In the tax proposals for 2012, the issue of contingent liabilities has once again been the subject of reconsideration. In the 2011 budget it was proposed that new explicit rules would be introduced to clarify circumstances in which a deduction may be claimed in the case of the transfer of contingent liabilities pursuant to a sale of business. This proposal followed the judgment delivered in the Ackermans Limited/Pep Stores (SA) Limited v the Commissioner case delivered on 1 October 2010. The Supreme Court of Appeal considered if the expenditure had been actually incurred and concluded that no liability had been actually incurred by Ackermans having regard to the particular facts of the case.

On 10 May 2011, the South African Revenue Service issued a binding class ruling BCR29 concerning the deductibility of contingent liabilities taken over when buying the assets and liabilities of another company within the same group of companies. The context in which the ruling was issued was where two companies formed part of the same group of companies and that proposed transaction was to be implemented in accordance with the amalgamation provisions contained in section 44 of the Income Tax Act.

The nature of the contingent liabilities included both employment related obligations such as leave pay and bonuses, sales related obligations such as warranty obligations and contract cost overruns. If the contingent liabilities were to materialise, they would ordinarily have been deductible. It was confirmed in the ruling that the purchaser will be entitled to deduct expenditure actually incurred in respect of the contingent liabilities transferred. The seller of the assets and liabilities will correspondingly not be entitled to a deduction of the contingent liabilities.

The approach in the ruling is consistent with the Ackermans case in that there is the necessity that the expenditure be actually incurred by the purchaser in order to qualify for the deduction of the contingent liabilities. There is the necessity of considering whether there has been an "undertaking of an obligation to pay" or "actual incurring of a liability" in order to satisfy the requirements of section 11(a) read together with section 23(g) of the Income Tax Act.

In the tax proposals for 2012 it is now indicated that after much debate no legislative provisions will be enacted. Rather, it is indicated that an interpretative approach will be favoured. Interpretative guidance, with legislative refinements, is expected later in the year. The question will be the form of such interpretative guidance and how the existing interpretation adopted in the Ackermans case and the ruling will be applied. It is of concern that there remains such degree of uncertainty with what appears to be an issue which is not uncommon.

Written by Natalie Napier, Director, Tax, Cliffe Dekker Hofmeyr