PROOF OF PAYMENT OF EXPENDITURE BEFORE DEDUCTION

Since the promulgation of the Income Tax Act in 1962, the South African tax courts have confirmed on numerous occasions that to claim the deduction of expenditure in the calculation of the taxpayers income tax liability, he, or she, or it, is, amongst other things, obliged to prove that it incurred an unconditional liability to pay that expense in that particular year of assessment, even if the expense is paid in a later year of assessment. It is safe to say that this is settled tax law.

Such expenditure is then “actually incurred”, as required by the deduction provisions of the Income Tax Act. As far back as 1975, in the case of Caltex Oil (SA) Limited v Secretary for Inland Revenue, the Appeal Court confirmed that “actually incurred”, does not mean “actually paid”.

However, in recent years it appears that  SARS has chosen to ignore this legislation, and similar decisions of our highest court, by demanding that taxpayers must produce a bank statement,  which proves that the taxpayer has indeed paid that expenditure.

There is no legal basis for this demand from SARS, and consequently, it must be invalid. SARS' demand for proof of payment of expenditure becomes even more bizarre when we consider the provisions of the Value-Added Tax Act, Act 89 of 1991.

This act simply prescribes that a vendor must be in possession of a valid tax invoice, when it claims the deduction of input tax, in its prescribed value-added tax declaration.

In a recent case, SARS has disallowed an input tax deduction of a  property developer, because he failed to provide a copy of the deed of transfer, and the bank statement, which proves payment of the purchase price. Once again, there is simply no legal basis for this decision. SARS can only ask for a copy of the relevant tax invoice on which the input deduction is based.

Hopefully, the objection will end in the tax court where he would no doubt be entitled to the appropriate costs order.