SARS scores points in loyalty card case

Now this is something we don’t witness every day — a tax matter in the highest court of our country.

But the parameters of the Constitutional Court’s jurisdiction were entered in the matter between Clicks Retailers (Pty) Limited and Commissioner for The South African Revenue Service (CC) in that leave to appeal ought to have been granted based on section 167(3)(b)(ii) of the constitution — a matter of general public importance.

Retail loyalty programmes are well known as 75% of South Africans use them. Ad idem that this is a matter of public importance, since South Africans will be affected, albeit indirectly.

It all started with section 24C of the Income Tax Act, 58 of 1962 — whereby an exception is created to the general rule that expenditure is only deductible in the year of assessment in which the expenditure is actually incurred.

With application to Clicks (and her peers) section 24C can be construed as follows.

A loyalty programme member makes a purchase and presents her ClubCard at checkout. A contract of sale is manifested and Clicks receives income. Subsequently, the member earns loyalty points which can later be redeemed.

These loyalty points are now the contingent matter. Clicks must later give away stock to the value of the “points” accrued, without receiving any further consideration, when you claim your “free” shampoo. Therefore a deduction is claimed for this future financial expenditure to be incurred.

On this said day a second contract is concluded — the redemption contract.

Section 24C alludes to the fact that the same contract must create both the income and the obligation to finance future expenditure in order to claim a deduction of that expenditure in the current year of assessment.

Clicks wished to claim a deduction based on section 24C, as its way of thinking was that when a customer joins the loyalty programme a “composite contract” comes into existence — it constitutes an indivisible ClubCard contract and a contract of sale.

Needless to say, the SA Revenue Service (SARS) was of a different opinion. It held that the income from the contract of sale will be used to finance future expenditure (the giving away of stock at no monetary value), but arising from the redemption contract, a second obligation- creating contract.

Upon analysing section 24C, contractual sameness became a disputed element for which both the lower courts and the Constitutional Court turned to the recent Supreme Court of Appeal Big G case (Commissioner South African Revenue Service v Big G Restaurants (Pty) Ltd, 2018).

The crux of the case lies in the plain attributable meaning to the word “same”.

From Big G we gather that where the income accrues

YOU EARN POINTS WHEN SWIPING YOUR CLUBCARD AT ONE OF THESE PARTNERS. BUT, YOU REDEEM THE POINTS ONLY AT CLICKS and the future expenditure are contained in a single contract, the scope of section 24C poses no problem. However, when taxpayers seek to widen the ambit to cover arrangements where the income and future expenditure are in separate contracts, but inextricably linked, a little more mind needs to be applied to try to satisfy the “sameness” requirement.

An inextricable link indicates sameness, but its mere presence is not sufficient.

Important to note is that Clicks has affinity partners including Discovery, NetFlorist and Specsavers. This means you earn points when swiping your ClubCard at one of these partners. However, you are able to redeem the points only at Clicks. The income and future expenditure have a different source.

Whether this was the trying characteristic that set Clicks up for failure, as this is a distinction from other loyalty programmes, will have to be confirmed once we see another loyalty rewards programme challenge section 24C.


Take caution that the amount of the said deduction was not in dispute, but rather formed part of the dispute. In colloquial terms, either the deduction would be allowed wholly or not at all.

In conclusion, SARS won on the basis that Clicks could not satisfyingly prove sameness to the extent required by section 24C.

It is unclear what the exact consequences will be. But since a deduction is no longer applicable, companies will inevitably consider the viability of these rewards cards.

But one thing is for sure: your loyalty lies with SARS.