On 21 July 2020, the Constitutional Court clarified that businesses registered as taxpayers would benefit from temporary tax relief when claiming future costs from current income received under contracts that are inextricably linked. The Future Expenditure Tax Allowance essentially grants a business temporary relief by reducing its tax payable to SARS if the income received upfront will be wholly or partially used to fund future costs.

In the case of Big G Restaurants versus SARS, Big G applied to make use of the tax relief by claiming a deduction on its future costs of refurbishing/upgrading its restaurant premises. Big G owns and operates numerous Spur and Panarottis restaurants as a franchisee and these costs were incurred because of the requirements of the franchise agreements. SARS disagreed and did not grant Big G access to the tax relief. Big  G took the matter to the Tax Court who handed down a judgement in favour of their request for access to the tax relief. SARS appealed the judgement and won. 

The case was eventually heard by the Constitutional Court who upheld SARS’s claim.

Although Big G lost its case in the Constitutional Court, it remains a relevant and helpful judgment because it clarified that two or more contracts that are inextricably linked can satisfy the requirements for the tax relief.

Previously, if an IT network support business, for example, sold a set of hardware (PC machines) to a client under one contract; but entered into a different but linked maintenance contract to maintain the machines, run the necessary software updates and so on, that business would not have access to tax relief as the contracts would be viewed as separate.

The judgement has changed this. It means that businesses won’t be deprived of the opportunity to access the tax relief just because of the way contracts are formulated. Of course, not all businesses will have access to the fund as this will be based on the legal and factual interpretation of the contracts, how they are worded and the specific circumstances of the case. 

This is one of the reasons why Big G was unsuccessful in its appeal.

Businesses should therefore carefully review and update their income-generating contracts. This will helpensure that when they apply for the tax relief, the link between contracts can be proven to SARS.

Written by Madelein Grobler, an EY Senior Tax Manager