A recent Tax Court judgment has delivered a multimillion-rand reminder to South African businesses that paying another company's expenses, does not automatically entitle the paying company to claim an income tax deduction, even under a binding commercial agreement.

Taxpayer Olie Trading (Pty) Ltd found this out the hard way when the Johannesburg Tax Court upheld a decision by the South African Revenue Service (SARS) to disallow approximately R65.6-million in deductions claimed for expenditure incurred on behalf of its associated company.

The judgment in Taxpayer Olie Trading (Pty) Ltd v Commissioner for the South African Revenue Service (Case No. IT 76811), delivered on 4 September 2026, highlights the tax risks associated with intercompany funding arrangements, particularly where companies within the same corporate group assume responsibility for one another's operational expenses.

Corporate taxpayers should take note that commercial necessity and contractual obligations do not, on their own, establish tax deductibility.

The R65-million Dispute: When Commercial Arrangements Meet Tax Law

The taxpayer operated a business processing, marketing and selling chromite sand. It had concluded an offtake agreement with an associated mining company, under which it purchased chrome ore for processing and resale.

Importantly, the agreement contained a provision requiring the taxpayer to cover the mining company's operational costs should the mine enter a period of care and maintenance.

That eventuality materialised in August 2017, when the mining company suspended operations. To preserve the mining operations and secure its future supply of chrome ore, the taxpayer continued funding various expenses, including security and electricity costs.

The taxpayer subsequently claimed deductions relating to two categories of expenditure: 

• Approximately R25.1-million in previously incurred production costs, written off during the 2018 year of assessment; and
• Approximately R40.5-million in operational expenditure incurred during the 2018, 2019 and 2020 years of assessment.

SARS disallowed the deductions, maintaining that the expenditure belonged to the associated mining company and did not satisfy the requirements of the general deduction formula under section 11(a), read with section 23(g), of the Income Tax Act.

Following an unsuccessful objection, the dispute proceeded to the Tax Court.

A Binding Contract Does Not Guarantee a Tax Deduction

Central to the taxpayer's argument was its contractual obligation to fund the mining company's operational expenditure.

The taxpayer maintained that these payments were commercially necessary to protect its future supply of chrome ore and, consequently, its income-generating activities.

However, the Court was not persuaded. In considering whether the expenditure had been actually incurred by the taxpayer, the Court emphasised that the underlying invoices were issued to the mining company, which maintained the contractual relationships with the relevant service providers.

At paragraph 26, the Court observed:

“A taxpayer may pay another person’s expenses, but that does not mean the taxpayer 'incurred' them in the production of its own income.”

The Court further rejected the proposition that the offtake agreement could override the statutory requirements governing tax deductions.

Although the agreement imposed a commercial obligation on the taxpayer, the Court found that this did not establish that the underlying expenditure qualified for deduction in its hands.

This distinction is important for corporate groups that routinely enter into cost-sharing, funding and operational support arrangements. While such arrangements may serve legitimate commercial objectives, their tax treatment must still be determined independently under the applicable legislation.

The General Deduction Formula: Whose Business Is Being Funded?

Section 11(a) of the Income Tax Act permits the deduction of expenditure and losses actually incurred in the production of income, provided they are not of a capital nature.

Section 23(g) further restricts deductions to expenditure laid out or expended for the purposes of the taxpayer's trade.

In applying these provisions, the Court distinguished between the taxpayer's own income-producing activities and those of its associated mining company.

Although the taxpayer continued conducting business during the relevant period, the disputed expenditure was directed towards preserving the mining company's operations, keeping it liquid and solvent to retain its mining right. 

The Court concluded that these costs were not incurred in producing the taxpayer's income or carrying on its trade.

Of particular significance was the evidence that the expenditure constituted holding costs intended to preserve the mine's operational capacity. The judgment therefore reinforces an important distinction: expenditure incurred to protect a future commercial opportunity is not necessarily deductible as an ordinary expense of the taxpayer's existing trade.

For businesses operating through multiple legal entities, this distinction can have substantial financial consequences.

A R25-million Write-Off That Failed the Tax Test

The taxpayer also encountered difficulties concerning approximately R25.1-million in production costs written off during the 2018 year of assessment.

The Court found that the underlying expenditure had been incurred over several preceding years. Consequently, it could not simply be claimed as expenditure incurred during 2018.

The Court also rejected the taxpayer's attempt to obtain a bad debt deduction, finding that the necessary requirements had not been established. Importantly, the judgment illustrates that an accounting write-off does not automatically translate into a permissible income tax deduction.

The timing, nature and legal basis of the expenditure remain decisive. This is particularly relevant where businesses attempt to recover historical losses through subsequent tax returns without adequately considering the statutory requirements applicable to the deduction.

Mining Companies Face Additional Tax Considerations

The judgment also addressed the treatment of expenditure incurred while mining operations are suspended.

The Court accepted SARS's position that the care and maintenance expenditure in question should be treated as capital expenditure within the mining company's unredeemed capital expenditure framework, rather than claimed as immediately deductible operational expenditure by the associated non-mining company.

The Court was particularly critical of the attempt to obtain an immediate deduction through the intercompany arrangement, highlighting the importance of considering the specialised income tax provisions applicable to mining operations, alongside the general deduction formula.

For mining groups, the identity of the entity incurring expenditure, the nature of the underlying costs and the applicable mining tax provisions require careful consideration before deductions are claimed.

The Cost of Getting It Wrong

The Tax Court dismissed the taxpayer's appeal and confirmed SARS's additional assessments for the 2018, 2019 and 2020 years of assessment, together with interest. The taxpayer was also ordered to pay SARS's legal costs, including counsel's costs. 

The outcome demonstrates that the financial consequences of an unsuccessful tax dispute can extend considerably beyond the original deduction.

For businesses, this judgment is a reminder that tax exposure frequently originates not from deliberate non-compliance, but from commercial arrangements whose tax consequences have not been adequately considered. A commercially sound agreement is not necessarily a tax-efficient agreement. 

Why Specialist Tax Advice Matters

The judgment reinforces the importance of ensuring that intercompany arrangements are structured, documented and implemented with their tax consequences firmly in mind.

Where SARS challenges deductions involving related-party expenditure, taxpayers must be able to demonstrate not only that the expenditure was paid, but also that the relevant statutory requirements for deductibility have been satisfied.

This requires a careful examination of contractual obligations, supporting documentation, the purpose of the expenditure and its connection to the taxpayer's income-producing activities.

The distinction between a defensible commercial arrangement and a legally sustainable tax deduction can become decisive during objection, appeal and litigation proceedings.

Engaging an experienced tax attorney at an early stage can assist businesses in identifying potential weaknesses, developing an appropriate evidentiary strategy and protecting their position when disputes with SARS should arise.

As this judgment demonstrates, the consequences of overlooking these distinctions can run into tens of-millions of rand.

Issued by Tax Consulting SA