Clicks Retailers (Pty) Ltd v Commissioner for the South African Revenue Service (CC) (unreported case no CCT 07/20, 21-5-2021) (Theron J (Mogoeng CJ, Jafta J, Khampepe J, Madlanga J, Mathopo AJ, Mhlantla J, and Victor AJ concurring))

By Pierre van Ryneveld

In the recent matter of Clicks, before the Constitutional Court (CC), the issue at hand concerned the treatment of the loyalty and rewards programme of Clicks in terms of the provision in s 24C of the Income Tax Act 58 of 1962 (the Act) (as it read at the relevant time). The section was amended in 2016, but the amendment did not affect the principle of the provision.

Section 24C read at the relevant time:

‘24C Allowance in respect of future expenditure on contracts –

(1) For the purposes of this section, “future expenditure” in relation to any year of assessment means an amount of expenditure which the Commissioner is satisfied will be incurred after the end of such year –

(a) in such manner that such amount will be allowed as a deduction from income in a subsequent year of assessment; or

(b) in respect of the acquisition of any asset in respect of which any deduction will be admissible under the provisions of this Act.

(2) If the income of any taxpayer in any year of assessment includes or consists of an amount received by or accrued to them in terms of any contract and the Commissioner is satisfied that such amount will be utilised in whole or in part to finance future expenditure which will be incurred by the taxpayer in the performance of their obligations under such contract, there shall be deducted in the determination of the taxpayer’s taxable income for such year such allowance (not exceeding the said amount) as the Commissioner may determine, in respect of so much of such expenditure as in their opinion relates to the said amount.

(3) The amount of any allowance deducted under subsection (2) in any year of assessment shall be deemed to be income received by or accrued to the taxpayer in the following year of assessment’ (my italics).

The allowance provided for in s 24C creates an exception to the general provision in s 11(a) of the Act that provides that only expenditure actually incurred in the production of income in the current year of assessment will be deductible from the income of the taxpayer in that year.

At the time, Clicks invited the public to: ‘Join ClubCard’. The invitation goes on to read: ‘Swipe your ClubCard when you shop in store or enter it when you shop online. You earn points on all your Clicks shopping … .’

It further reads that: ‘For every R 5 spent at Clicks, … you earn 1 point [equals 10c]’ , and ‘ClubCard members … who earn at least 50 points by the qualification date will receive cashback loaded onto their ClubCard’, and ‘[c]ashback can be used for purchases in a Clicks, Claire’s or The Body Shop stores’.

The benefit are earned when shopping at Clicks stores or making online purchases, and at other stores referred to as ‘rewards partners’ or ‘affinity partners’. If goods are purchased by a ClubCard member from a rewards partner, the rewards partner pays Clicks a commission. The source of the income that accrues to Clicks is another party, other than the Clicks ClubCard member. The income is received in terms of a contract between Clicks and the rewards partner, and as such, is disqualified for purposes of the s 24C deduction. It is not clear to what extent, if any, Clicks claimed deduction under s 24C based on income received from rewards partners. The CC judgment appears to only deal with income derived from purchases from Clicks stores (para 9).

The decision was whether Clicks was entitled to the deduction it claimed in terms of s 24C in the relevant tax year came down to one matter, and the question whether the expense to be incurred by Clicks arose from an obligation in terms of the same contract as the contract in terms whereof the income was earned, as is prescribed in s 24C(2), or if it arose from two contracts, whether the two contracts are so inextricably linked that they may satisfy the requirement of sameness. It clearly arose from two contracts (or actually three contracts, namely, the ClubCard contract, the first purchase when points are earned, and a further purchase when the purchaser receives the actual financial benefit).

In an earlier judgment, in the matter between Commissioner, South African Revenue Service v Big G Restaurants (Pty) Ltd 2019 (3) SA 90 (SCA) the CC held that two contracts may be ‘so inextricably linked that they may satisfy this requirement of “sameness”’. The court did not in that case consider what would constitute such a link.

In the Clicks judgment, Theron J,  found that the obligation of Clicks to incur expenses, as alleged by Clicks, in order to reward its ClubCard members arises from what is referred to as the ClubCard contract, while the income referred to in s 24C arises from the contract when the customer purchases goods.

On behalf of Clicks it was argued that ‘the conclusion of the ClubCard contract does not itself generate any real obligations and that the obligation to award points, while governed by the terms of the ClubCard contract, is only triggered and given content when a qualifying purchase is made’.

On behalf of the South African Revenue Service (Sars) it was argued that: ‘Because a loyalty programme member can buy products at Clicks without presenting [their] ClubCard (and thus without earning loyalty points), and a person can become a loyalty programme member without making any qualifying purchases (again, without earning any loyalty points), each of the two contracts can stand on its own’ and are thus not inextricably linked.

With reference to Clicks’ obligation to finance future expenditure, the court found that ‘the actual obligation is sourced in the ClubCard contract and does not depend on the existence of a sale contract’, and it finds that ‘the sale contract does not owe its existence to the ClubCard contract’, and also that ‘the sale contract does not accrue to Clicks necessarily because it has undertaken an obligation to honour the redemption of loyalty points’. The court further found that ‘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 court does not analyse the content of the ClubCard contract in any detail. One may argue that the ClubCard contract is constituted by an offer from Clicks to a potential client that if you become a ClubCard member, you potentially become entitled to the stated rewards. To become entitled to the rewards, the ClubCard member has the obligation to make two purchases from Clicks and at those purchases present their ClubCard (I exclude purchases from the rewards partners).

Are the two purchases, one receives the points offered and one receives the actual reward, not simply the contractual obligations of the ClubCard member in terms of the ClubCard contract? Does the fact that an obligation in terms of a contract (which entitles the contracting party to the benefit contracted for) is that a contracting party enters into one or more further contracts changes the fact that entering into those further contracts is simply the performance of an obligation in terms of the first contract? If the ClubCard member performs their obligations in terms of the ClubCard contract they become entitled to the benefits undertaken by Clicks in terms of the ClubCard contract. How linked must two or more contracts then be to satisfy the requirement of sameness?

One may furthermore argue that it is probable that when a client makes a purchase and presents their ClubCard, they do so exactly because Clicks has offered them rewards should they present their ClubCard, and that the sale when the ClubCard is presented is not the same as a sale when a ClubCard is not presented.

But in fact, the purchase contracts are not obligations of the ClubCard member in terms of the ClubCard contract. Clicks cannot enforce purchase contracts in terms of the ClubCard contract. The ClubCard contract is rather of the nature of an option. The ClubCard member has the right to exercise the ‘option’ by making a purchase (or two), without being compelled to do so, and if the ClubCard member does so, Clicks is then bound in terms of the ClubCard contract to perform its obligation to reward the ClubCard member. The purchase contracts are the agreed manner of exercising the ‘option’. This relationship and process appears to define the link between the ClubCard contract and the purchase contracts.

The court, however, found that while the two contracts ‘in that sense are inextricably linked or connected’, the link is not sufficient to render the contracts the same for the purpose of s 24C.

Pierre van Ryneveld B Jur et Art LLB (NWU) LLM (UP) is a retired legal practitioner in Roodepoort.

This article was first published in De Rebus in 2021 (Sept) DR 30.