Commissioner for the South African Revenue Service v Mobile Telephone Networks Holdings (Pty) Ltd

Mobile Telephone Networks Holdings (Pty) Ltd (MTN Holdings) was a holding company within the MTN Group, earning mainly exempt dividend income from subsidiaries and a smaller amount of taxable interest income from certain lending activities. For the 2001–2004 tax years, MTN Holdings incurred statutory audit fees and also paid KPMG fees related to the Hyperion computer system. MTN Holdings claimed full deductions of both the audit fees and the KPMG fee under s 11(a) of the Income Tax Act 58 of 1962. SARS disallowed the KPMG fee entirely and allowed only a small portion of the audit fees, apportioned according to the ratio of taxable interest income to total income. The Tax Court allowed only 50% of the audit fees and disallowed the KPMG fee as capital in nature. The High Court allowed a 94% deduction of audit fees and allowed the KPMG fee in full. SARS appealed to the Supreme Court of Appeal.

The appeal by SARS was upheld. The High Court’s order was set aside. The Tax Court’s order was amended to allow only 10% of the audit fees for the 2001–2004 tax years as deductible. The KPMG fee was disallowed in full. Costs were awarded against MTN Holdings, including the costs of two counsel.

The case is a leading authority on the apportionment of mixed or dual-purpose expenditure under s 11(a) read with ss 23(f) and (g) of the Income Tax Act. It clarifies that statutory audit fees may be deductible as general overheads but must be fairly apportioned where a taxpayer earns both taxable and exempt income. It also underscores the evidentiary burden on taxpayers to substantiate deductions, particularly where expenditure may be capital or incurred on behalf of other group entities.