Ackermans Limited v Commissioner for the South African Revenue Service; Pep Stores (SA) Limited v Commissioner for the South African Revenue Service

Ackermans Limited sold its retail clothing business as a going concern to Pepkor Ltd with effect from 1 March 2004. The sale included business assets and all liabilities, including three contingent liabilities relating to post-retirement medical aid benefits, a long-term bonus scheme, and lease repair obligations, totalling R17 174 777. The purchase price was calculated as R800 million plus the value of all liabilities, which Pepkor assumed. Ackermans claimed a deduction under section 11(a) of the Income Tax Act 58 of 1962 for the value of the contingent liabilities, arguing that it had effectively incurred expenditure by accepting a reduced purchase price when Pepkor assumed those liabilities. The Commissioner for SARS disallowed the deduction, and the Tax Court upheld SARS’ assessment.

The appeals by Ackermans Limited and Pep Stores (SA) Limited were dismissed with costs, including the costs of two counsel, and the assessments by SARS were confirmed.

The case authoritatively clarifies the meaning of 'expenditure actually incurred' in section 11(a) of the Income Tax Act. It confirms that a mere reduction in a purchase price or the assumption of liabilities by another party does not constitute deductible expenditure, reinforcing a strict legal approach rather than an economic substance approach in this context. The judgment is important in transactions involving the sale of businesses as going concerns and the tax treatment of assumed liabilities.