SARS wins R65.6 million tax deduction battle against South African company

SARS has won a tax dispute involving R65.6 million in deductions claimed by a South African company that paid expenses on behalf of an associated business.

The Johannesburg Tax Court upheld a decision from the South African Revenue Service (SARS) to disallow the deductions claimed by Olie Trading for expenditure incurred on behalf of a related mining company.

The judgment, delivered on 4 September 2026, showed the risks businesses face when paying the operational costs of other companies within the same corporate group.

This is according to Tax Consulting SA’s Team Lead of Tax Controversy and International Tax, Richan Schwellnus.

Olie Trading processed, marketed and sold chromite sand. It had an offtake agreement with an associated mining company under which it purchased chrome ore for processing and resale.

The agreement required Olie Trading to cover certain operational costs if the mine entered care and maintenance. That happened in August 2017, when the mining company suspended its operations.

Olie Trading continued to pay expenses, including electricity and security costs, to maintain the mining operation and protect its future ore supply.

It subsequently claimed approximately R25.1 million in production costs written off during the 2018 tax year and a further R40.5 million in operational expenditure incurred during the 2018, 2019 and 2020 tax years.

SARS disallowed the deductions and argued that the expenditure belonged to the mining company and did not meet the requirements of the Income Tax Act.

Olie Trading objected to the decision, but its objection was unsuccessful. The matter then proceeded to the Tax Court.

The court case

Olie Trading argued that the payments were commercially necessary to protect its future supply of chrome ore and, in turn, its income-generating activities.

However, the court found that the contractual obligation did not automatically mean the expenditure had been incurred by Olie Trading in producing its own income.

The invoices for the services were issued to the associated mining company, which held the contractual relationships with the relevant service providers.

“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 stated.

Schwellnus said this distinction is important for businesses that share costs, fund related companies or provide operational support within a corporate group.

Section 11(a) of the Income Tax Act allows deductions for expenditure and losses actually incurred in producing income, provided they are not capital in nature.

Section 23(g) also requires that expenditure be incurred for the purposes of the taxpayer’s own trade.

The court found that the disputed costs were directed at preserving the mining company’s operations, liquidity and mining rights.

They were not sufficiently connected to Olie Trading’s own income-producing activities to qualify for the claimed deductions.

As such, Schwellnus said the judgment shows that protecting a future commercial opportunity does not necessarily make a cost deductible as an ordinary business expense.

The court also rejected Olie Trading’s claim relating to approximately R25.1 million in production costs written off during the 2018 tax year.

The underlying expenditure had been incurred over several earlier years, which means that the company could not simply claim the entire amount as expenditure incurred in 2018.

The court also rejected its attempt to claim a bad debt deduction because the required conditions had not been met.

This shows the importance of distinguishing between accounting treatment and tax deductibility. Writing off an amount in a company’s accounts does not automatically entitle it to an income tax deduction.

The timing of the expenditure, its nature and the legal basis for the claim must still satisfy the tax rules, Schwellnus said.

Mining costs

The judgment also considered the treatment of expenditure incurred while the associated mine was under care and maintenance.

The court accepted the taxman’s position that the expenditure could not be claimed immediately as operational expenditure by the associated non-mining company.

Instead, this expenditure had to be treated under the mining company’s unredeemed capital expenditure framework.

Schwellnus said this shows the need for companies involved in mining-related transactions to consider the specialised tax provisions that apply to the sector, alongside the general deduction rules.

The identity of the company that incurred the expenditure, the purpose of the costs and the applicable tax framework can all affect whether a deduction is allowed.

The Tax Court dismissed Olie Trading’s appeal and confirmed the revenue service’s additional assessments for the 2018, 2019 and 2020 tax years, together with interest.

The company was also ordered to pay legal costs to SARS, including counsel’s costs. The R65.6 million figure refers to disallowed deductions, not the amount of tax the company was ordered to pay.

According to Schwellnus, the ruling demonstrates that businesses must consider the tax consequences of intercompany funding arrangements before claiming deductions.

A contractual obligation to pay another company’s expenses may serve a legitimate commercial purpose, but the paying company must still show that the expenditure meets the statutory requirements for a deduction.