The Commissioner of South African Revenue Services v BP South Africa (Pty) Ltd

Supreme Court of Appeal -269/05 Hearing date: 03 May 2006
  Judgment date: 25 May 2006

Income tax – s 11(a) of Income Tax Act 68 of 1962 – interest paid by company in respect of loan granted at time dividend declared – loan obtained not to pay dividend but to produce income – rental paid in advance in respect of long leases – expenditure of capital nature.

Media Summary of Judgment

The Supreme Court of Appeal today dismissed an appeal by the Commissioner of the South African Revenue Service against a judgment in the Cape Tax Court in terms of which the Cape Tax Court held that interest paid on a loan by British Petroleum Company plc to BP Southern Africa (Pty) Ltd constituted expenditure incurred in the production of income and thus had to be treated as expenses deductible from BPSA’s income for the relevant year of assessment.

The loan had been agreed to at the time that a dividend was declared by BPSA. The issue to be decided was whether the purpose of the loan was to fund the dividend or whether its purpose was to fund BPSA’s income producing activities. On the facts the SCA agreed with the finding of the Tax Court that the latter was the case.

The SCA at the same time, to a limited extent, upheld the appeal of the Commissioner against the judgment of the Tax Court in respect of rental payments by BPSA in respect of long term leases. The Tax Court held that rental paid in advance in respect of 20 year leases of filling station sites constituted revenue expenditure. The SCA held that in the light of the nature of the payments, being lump sums, the nature of the advantage obtained, being security that BPSA’s products would be sold from the leased premises, and the substantial periods involved, the rental expenditures were of a capital nature. The SCA concluded that the rental payments were therefore not deductible during the year that they were incurred but that they were deductible over the duration of the leases in proportionate instalments.