In layman’s terms, the general rule is that taxpayers who carry on a trade only pay tax on “profit” (taxpayers registered for turnover tax being one obvious exception to this rule) and not on all amounts received by or accrued to the taxpayer (or “gross income”). Situations however arise from time to time where a taxpayer may be faced with paying tax on gross income as opposed to “profit”. An example of this is where a taxpayer receives an amount in advance from a client.
Where a taxpayer receives an amount in advance from a client, the taxpayer will typically utilise those funds to settle expenses concomitant to the relevant service or product to be supplied to such client. Where some, or all of these expenses will only be incurred in a tax year other than the one in which the amounts were received, that taxpayer may end up paying tax on the total receipt, despite the fact that the profit of the taxpayer may be significantly less.
To remedy this departure from the general rule, the legislature introduced a special allowance or “tax deduction” colloquially referred to as the “future expenditure allowance”. In principle, this special provision allows a taxpayer to claim a “tax deduction” against the amount received in advance and in respect of expenditure to be incurred at a later stage. The net effect of which is that, over time, the taxpayer only pays tax on “profit”.
However, as with all special tax provisions, there are several requirements that must be satisfied before taxpayers may avail themselves of this special relief. As the taxpayer in the recent judgement of XYZ (Pty) Ltd v Commissioner for the South African Revenue Service (ITI13772)  ZATC 7 (4 November 2016) came to learn, non-compliance with these requirements may have devastating consequences – in this case the taxpayer had to pay SARS an additional R2 881 172 in taxes and penalties as a result of non-compliance with the requirements of this special provision.
Taxpayers who receive funds in advance would be well advised to seek assistance from a tax professional to ensure they pay tax only on “profit” and to guide them through the legal complexities of the provisions that allow for this result to be achieved.
Author: N Theron