Warner Lambert SA (Pty) Ltd v Commissioner for the South African Revenue Service

The appellant, a South African subsidiary of a United States pharmaceutical company, incurred expenditure on so-called 'social responsibility projects' in South Africa pursuant to the Sullivan Code and later the US Comprehensive Anti-Apartheid Act. Compliance with these measures was effectively compulsory for US parent companies, failing which they faced sanctions in the United States. For the 1990–1993 years of assessment, Warner Lambert SA claimed deductions under s 11(a) read with s 23(g) of the Income Tax Act 58 of 1962 for certain social responsibility expenditure aimed at promoting social, economic and political justice. SARS initially allowed but later disallowed the deductions in revised assessments, contending that the expenditure was not incurred in the production of income. On appeal, the Cape Special Income Tax Court assumed the expenditure was incurred in the production of income but held it to be capital in nature and therefore not deductible. Warner Lambert appealed to the Supreme Court of Appeal.

The appeal was upheld with costs (including the costs of two counsel). The order of the Special Income Tax Court was set aside and replaced with an order allowing the deductions and directing the Commissioner to issue revised assessments for the 1990–1993 years of assessment permitting the expenditure as a deduction.

The case is a leading authority on the deductibility of expenditure incurred for commercial expediency, particularly where such expenditure is aimed at protecting an existing income-earning structure rather than producing immediate profit. It clarifies the distinction between purpose and consequence in applying s 23(g) and affirms that expenditure incurred to avert commercial risk can qualify as revenue expenditure even if it has social or political overtones.