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28 Jun 2021
BY Arnaaz Camay

Inextricably linked contracts do not necessarily give rise to a "sameness" between them

In the recent case of Clicks Retailers (Pty) Limited vs. Commissioner for the South African Revenue Service, the Constitutional Court had to determine whether Clicks could claim an allowance under section 24C of the Income Tax Act (“ITA”) in respect of income it earns in terms of its loyalty programme.

Section 24C has become an increasingly popular section as regards litigation, with the Clicks judgment shortly following the Constitutional Court judgment in Big G Restaurants (Pty) Ltd vs. Commissioner, South African Revenue Service.

Section 24C of the ITA

Section 24C allows a taxpayer to defer paying tax on income that 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.

The tax on such income is deferred until the year of assessment in which the future expenditure is actually incurred”. This expenditure then becomes deductible from the taxpayer’s taxable income under the general deduction formula of section 11(a) of the ITA.

Section 24C(2) has three requirements. There must be:

  • income earned by a taxpayer in terms of a contract (the income-producing contract);
  • an obligation on the taxpayer under a contract that requires future expenditure, which will be financed by this income (the obligation-imposing contract); and
  • contractual sameness.

In the Big G case, this third requirement can be achieved either on a:

  • same contract basis (when the income-producing contract and obligation-imposing contract are literally the same contract); or
  • sameness basis (when the income and obligation to finance expenditure is sourced in two or more contracts that are so inextricably linked that they meet the requirement of sameness).

Clicks contended that it could claim a section 24C allowance on either a same-contract basis or a sameness basis.

Clicks loyalty programme

In terms of the Clicks ClubCard loyalty programme participating customers receive loyalty points that can be translated into cash back vouchers, which may be off-set against the cost of Clicks merchandise. A ClubCard contract between Clicks and the customer comes into existence when the customer completes and submits the enrolment form. To qualify for loyalty points, at least ZAR10 must be spent by the customer in a single purchase transaction. A customer, thereafter, earns one loyalty point for every ZAR5 spent.

In practice, Clicks sought to deduct from its taxable income the cost of the merchandise that will be provided to customers on redemption of their cash back vouchers. Clicks returns 2% of the value of all qualifying purchases (ie, purchases where the customer presents their ClubCard and earns loyalty points) to customers.

For the 2009 tax year, 2% of all qualifying purchases equated to ZAR58.5-million, in respect of which Clicks, if successful, would be entitled to claim a deduction of approximately ZAR36.18-million. Thus, the deduction is the cost (calculated based on a cost of sales percentage of approximately 75%) of 2% of the value of qualifying purchases.

Following the Constitutional Court’s decision in Big G, a section 24C allowance may be claimed either when the traditional same-contract requirement is met or when the income and the obligation to finance expenditure arise from two or more contracts that are so inextricably linked that they meet the requirement of “sameness”.

The finding

The Constitutional Court noted that Clicks did not engage with the meaning of “sameness” and why the loyalty programme contracts do meet the sameness requirement. It rather focused on whether the loyalty programme contracts are inextricably linked.

This approach, the Constitutional Court stated, misunderstands the Big G case. The taxpayer must show that the inextricable link between two contracts is such that the contracts meet the section 24C(2) sameness requirement. This does not render the “inextricable link” factor irrelevant. If the contracts are not inextricably linked to each other, the criterion of sameness is not likely to be satisfied. Also, logically, one cannot ascertain whether there is sameness between two contracts until the links between them are examined.

A finding that the sale contract and ClubCard contract are inextricably linked will not constitute “sameness” in that the determinative question is whether the two contracts are so inextricably linked that they satisfy the “sameness” requirement.

There is an “inextricable link” when an issue, claim, contract, or conduct cannot be determined or assessed without another, or the legal consequence of the one cannot be understood or measured without reference to another.

The Constitutional Court held that there is an inextricable link between the sale contract and the ClubCard contract to the extent that both contracts operate together to give effect to Clicks’ loyalty programme. Clicks undertakes to honour a redemption of loyalty points and hand over discounted merchandise to a loyalty programme member only if the member has spent enough money at Clicks. Only once there is qualifying purchase does Clicks’ obligation under the ClubCard contract have any practical consequence, ie, while it is true that the ClubCard contract is the foundation of the contractual arrangement that gives effect to Clicks’ loyalty programme, it is the contract of sale that lends specificity and content to the terms of the ClubCard contract, effectively establishing the specific ambit of the obligation incurred by Clicks.

Consequently, within the context of the loyalty programme, the two contracts are inextricably linked to the extent that:

  • obligations under the ClubCard contract are triggered by the sale contracts;
  • Clicks’ obligation to finance expenditure when ClubCard points are redeemed is determined with reference to the amount of income earned in terms of one or more contracts of sale; and
  • there is a significant factual overlap and nexus between them.

But do the links between the two contracts give rise to a “sameness” between them?

The Constitutional Court pronounced on the meaning of “sameness” and held as follows:

“Whatever the outer limits of the concept of sameness in this context may be, at a minimum both the earning of income and the obligation to finance future expenditure must depend on the existence of both contracts. If either contract can be entered into[,] and exist[,] without the other, they can hardly achieve sameness.” (our emphasis added)

It was apparent, in the Constitutional Court’s view, that the concomitant contracts of the loyalty programme did not meet this “minimum requirement” of “sameness”.

First, the earning of income depends on, and is the result of, the contract of purchase and sale. Second, the obligation to finance future expenditure depends on the ClubCard contract, although contingent on the member (customer) entering into a self-standing contract of purchase and sale. The obligation, in law, to finance is sourced in the ClubCard contract. The contingent nature of the need for a customer to enter into a contract of purchase and sale does not mean that the requirement of “sameness” is met, because the customer can enter into the contract of purchase and sale independently from the ClubCard contract. In other words, the income can be earned independently from the obligation to finance future expenditure.

The Constitutional Court held that, even though the accrual of income under a sale contract “triggers and quantifies Clicks’ obligation to finance future expenditure”, the obligation, in law, found its existential source in the ClubCard contract and does not depend on the existence of a sale contract. Likewise, the sale contract does not owe its existence to the ClubCard contract. Of course, the existence of a ClubCard contract may drive sales of Clicks merchandise, but income that accrues, in legal terms, is attributable to the relevant contract of sale. Clicks would earn the income regardless of whether there is a ClubCard contract in place.

The Constitutional Court continued and held that there are many other respects in which the contracts function independently. “Each contract of sale constitutes a complete contract on its own, with terms that are different from the ClubCard contract. In fact, the terms of each sale contract are the same regardless of whether the purchaser is a loyalty programme member and regardless of whether a ClubCard is presented. The generation of income is not regulated by the ClubCard contract and no aspect of the sale contract is dictated by the ClubCard contract”.

Although, it may seem that no loyalty programme qualifies for an allowance under section 24C, upon closer scrutiny, it becomes clear that a loyalty programme with an acute and cogent understanding of the intricacies and nuances associated with section 24C can provide a taxpayer with the requisite grounds to successfully claim a section 24C allowance.


Arnaaz Camay

Tax | Executive

+27 82 787 9771