No loyalty! Constitutional court rules against Clicks

Section 24C of the Income Tax Act was inserted in the Act as a relief measure to taxpayers that, because of the nature and special circumstances of the taxpayers’ businesses, receive advance income during a year of assessment but only incur related expenditure in a subsequent year of assessment. Section 24C creates an exception to the general rule in the Income Tax Act in that expenditure is only deductible in the year of assessment when the expenditure is actually incurred. It allows a taxpayer to defer paying tax on income if that income accrues in terms of a contract and will be used to finance future expenditure (that is, expenditure incurred in a subsequent tax year), which it is obliged to incur in terms of such contract.

On 21 May 2021 the Constitutional Court handed down judgment in an appeal by Clicks Retailers (Pty) Ltd (Clicks) against a refusal by the South African Revenue Service (“Commissioner”) to approve an allowance claimed by Clicks in terms of section 24C.

For the 2009 financial year, Clicks sought to claim an allowance in terms of section 24C. Clicks based its claim to an allowance on the operation of its loyalty programme, the ClubCard programme. In terms of the loyalty programme, a Clicks customer concludes a contract with Clicks (ClubCard contract) that renders the customer eligible to earn cash back vouchers in proportion to the value of purchases made at Clicks’ stores and those of Clicks’ affinity partners. Clicks argued that it uses the income it earns from individual contracts of sale concluded with loyalty programme members to finance its future obligation to redeem cash back vouchers. Clicks argued that both the income and the obligation to incur future expenditure arose from the same contract and therefore it was eligible to claim a section 24C allowance in respect of income it used to finance this future expenditure.

In its appeal, Clicks submitted that it could claim a section 24C allowance on either a “same-contract basis” or on a “sameness basis”. It contended, first, that entering into this contract of sale earns Clicks income and triggers its obligation to redeem loyalty programme vouchers. The contract of sale was therefore both income-producing and obligation-imposing. Clicks alternatively contended that it could claim an allowance on the basis that the income and obligation to incur expenditure arise from two inextricably linked contracts – namely, the contract of sale and the ClubCard contract. Overall, Clicks held that the contracts operate together – both in producing income for Clicks and in generating its obligation to finance future expenditure. Clicks emphasised that the conclusion of the ClubCard contract did not itself generate any real obligations and that the obligation to award points, while governed by the terms of the ClubCard contract, was only triggered and given content when a sale contract is entered into. This created a correlation between the income-generating contract and obligation-imposing contract.

The Constitutional Court dismissed the appeal because Clicks had not established the contractual sameness that is required by section 24C(2). The Court held that Clicks cannot claim an allowance on a same contract basis because Clicks generates income in terms of contracts of sale it concludes with its loyalty programme members, whereas its obligation to incur future expenditure arises from the ClubCard contract it concludes with its loyalty programme members. The ClubCard contract is the contract that entitles the customer to the discount and, if Clicks were to renege on its obligation to honour the redemption of points, the customer’s cause of action would be based on the ClubCard contract.

It is therefore important that where companies offer loyalty programs, they ensure that any claim to future expenditure meets the requirements as spelled out by the Court.

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